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The airline industry has experienced considerable merger and acquisition activity since its early years; especially immediately following deregulation in 1978. Figure 1 provides a timeline of mergers and acquisitions for the four largest surviving airlines, assuming an American-US Airways merger, based on passengers served. A flurry of mergers and acquisitions occurred during the 1980s, when Delta and Western Airlines merged, United acquired Pan Am's Pacific routes, Northwest acquired Republic Airlines, and American and Air California merged. In 1988, merger and acquisition review authority was transferred from DOT to DOJ. Since 2000, American acquired the bankrupt airline TWA in 2001, America West acquired US Airways in 2005, while the latter was in bankruptcy; Delta acquired Northwest in 2008; United acquired Continental in 2010; and Southwest acquired AirTran in 2011. Certain other attempts at merging since 2000 failed because of opposition from DOJ or employees and creditors. For example, in 2000, an agreement was reached that allowed Northwest to acquire a 50 percent stake in Continental (with limited voting power) to resolve the antitrust suit brought by DOJ against Northwest's proposed acquisition of a controlling interest in Continental. A proposed merger of United and US Airways in 2000 also resulted in opposition from DOJ, which found that in its view, the merger would violate antitrust laws by reducing competition, increasing air fares, and harming consumers on airline routes throughout the United States. Although DOJ expressed its intent to sue to block the transaction, the parties abandoned the transaction before a suit was filed. In 2006, the proposed merger of US Airways and Delta fell apart because of opposition from Delta's pilots and some of its creditors, as well as its senior management. Since deregulation in 1978, the financial stability of the airline industry has become a considerable concern for the federal government due, in part, to the level of financial assistance it has provided to the industry through assuming terminated pension plans and other forms of assistance. From 1979 through 2012, there have been at least 194 airline bankruptcies, according to Airlines for America (A4A), an airline trade group. While most of these bankruptcies affected small airlines that were eventually liquidated, 4 of the more recent bankruptcies prior to American's (Delta, Northwest, United, and US Airways) are among the largest corporate bankruptcies ever, excluding financial services firms. During these bankruptcies, United and US Airways terminated the defined benefit pension plans for their labor groups and $9.7 billion in claims were shifted to the Pension Benefit Guarantee Corporation (PGBC). Further, to respond to the financial shock to the industry from the September 11, 2001, terrorist attacks, the federal government provided airlines with $7.4 billion in direct assistance and authorized $1.6 billion (of $10 billion available) in loan guarantees to six airlines. Although the airline industry has experienced numerous mergers and bankruptcies since deregulation, growth of existing airlines and the entry of new airlines have contributed to a steady increase in capacity, as measured by available seat miles. Previously, we reported that although one airline may reduce capacity or leave the market, capacity returns relatively quickly through new airline entry and expansion of the remaining airlines. However, in recent years this dynamic may be changing. Domestic capacity growth stalled in 2008 owing to the recession and high fuel prices and has not rebounded despite a strengthening economy and demand for air travel (see fig. 2). In recent years, a key factor limiting capacity growth has been high fuel prices, according to industry analysts. In the early part of the last decade while network airlines were restructuring their costs through bankruptcy, low cost airlines like Southwest and JetBlue expanded owing to lower costs, especially for labor (see fig. 3). As a result, while in 2002, network airlines offered 67 percent of domestic seat capacity versus 23 percent for low cost airlines, by October 2012, network airlines share of domestic seats had fallen to 52 percent and low cost airline's share had risen to 33 percent. However, the expansion of low cost airlines in recent years may have slowed owing to higher fuel costs that diminished their relative cost advantage over network airlines. With fuel costs consuming a greater proportion of airline operating costs for all airlines, any cost advantage that low cost airlines had with respect to labor costs over network airlines is diluted. Finally, DOJ and DOT's analysis of merger impacts have relied on an expectation that entry by low cost airlines, especially Southwest, would check airline fare increases following a merger. However, that practice might erode as Southwest expansion has slowed and it recently merged with a key low cost rival, reducing the number of low cost airlines that might challenge post merger fare increases. In 1993, DOT published a report entitled the The Southwest Effect that concluded that low cost airlines like Southwest lowered fares in markets they entered and that DOT policy should be to encourage the growth of Southwest and airlines like it. Congressional action and DOT policy in subsequent years, especially in the award of operating rights called "slots" at congested airports like Washington Reagan and New York LaGuardia, favored new entrant airlines like Southwest. Similarly, DOJ cited the relinquishment of 36 slots by Continental to Southwest at Newark Liberty International Airport as alleviating its principle concerns in determining not to object to the United-Continental merger in 2010. A November 2008 paper by Goolsbee and Syverson, found that even the threat of entry by Southwest in a market helped to lower fares in that market, but only if Southwest already operated at one of the market endpoints. More recently though, a 2013 study suggests that the Southwest Effect may not be as prominent following a merger. This study found that Southwest raised fares in markets following the mergers of Delta-Northwest and US Airways- America West more than average fare increases overall, unless another low cost airline was already in that market. The merger of Southwest with a key rival in 2011 could further lessen the potential that Southwest would deter or counteract higher fares in markets following a merger. The DOJ's review of airline mergers and acquisitions is a key step for airlines hoping to consummate a merger. For airlines, as with other industries, DOJ uses an analytical framework set forth in the Horizontal Merger Guidelines (the Guidelines) to evaluate merger proposals. In addition, DOT plays an advisory role for DOJ and, if the combination is consummated, may conduct financial and safety reviews of the combined entity under its regulatory authority. Finally, because American has been under Chapter 11 bankruptcy protection since 2011, the merger also required federal bankruptcy court approval. Most proposed airline mergers or acquisitions must be reviewed by DOJ as required by the Hart-Scott-Rodino Antitrust Improvements Act (Act). In particular, under the Act, an acquisition of voting securities or assets above a set monetary amount must be reported to DOJ (or the FTC for certain industries) so the department can determine whether the merger or acquisition poses any antitrust concerns. To analyze whether a proposed merger or acquisition raises antitrust concerns--whether the proposal will likely create, enhance, or entrench "market power" or facilitate its exercise--DOJ follows an analytical process set forth in the Guidelines. The commentary to the Guidelines identifies five factors that the department considers in reviewing a merger but notes that their importance varies according to the nature of the industry and the scope of the merger. The five factors considered by DOJ are: the relevant product and geographic markets in which the companies operate and whether the merger is likely to significantly increase concentration in those markets, which in the case of airlines principally applies to city-pair markets; the extent of potential adverse competitive effects of the merger, such as whether the merged entity will be able to charge higher prices or restrict output for the product or service it sells; whether other competitors are likely to enter the affected markets and whether they would counteract any potential anticompetitive effects that the merger might have posed; the verified "merger specific" efficiencies or other competitive benefits that may be generated by the merger and that cannot be obtained through any other means; and whether, absent the merger or acquisition, one of the firms is likely to fail, causing its assets to exit the market. In making the decision whether the proposed merger is likely anticompetitive, DOJ considers the particular circumstances of the merger as it relates to the Guidelines' five-part analysis. The greater the potential anticompetitive effects, the greater the offsetting verifiable efficiencies for DOJ to clear a merger must be. However, according to the Guidelines, efficiencies almost never justify a merger if it would create a monopoly or near monopoly. If DOJ concludes that a merged airline threatens to deprive consumers of the benefits of competitive air service, then it will seek injunctive relief in a court proceeding to block the merger from being consummated. For example, a proposed merger of United Airlines and US Airways was opposed by DOJ, which found that, in its view, the merger would violate antitrust laws by reducing competition, increasing air fares, and harming consumers on airline routes throughout the United States. In some cases, the parties may agree to modify the proposal to address anticompetitive concerns identified by DOJ--for example, selling airport assets or giving up slots at congested airports--in which case DOJ ordinarily files a complaint with the court along with a consent decree that embodies the agreed-upon changes. DOT conducts its own analyses of airline mergers and acquisitions. While DOJ is responsible for upholding antitrust laws, DOT reviews the merits of any airline merger or acquisition and submits its views and relevant information in its possession to DOJ. DOT also provides some essential data--for example, the airlines' routes and passenger traffic--that DOJ uses in its review. In addition, presuming the merger moves forward after DOJ's review, DOT can undertake several other reviews if the situation warrants. Before commencing operations, any new, acquired, or merged airlines must obtain separate authorizations from DOT--"economic" authority from the Office of the Secretary and "safety" authority from the Federal Aviation Administration (FAA). The Office of the Secretary is responsible for deciding whether applicants are fit, willing, and able to perform the service or provide transportation. To make this decision, the Secretary assesses whether the applicants have the managerial competence, disposition to comply with regulations, and financial resources necessary to operate a new airline. FAA is responsible for certifying that the aircraft and operations conform to the safety standards prescribed by the Administrator, for instance, that the applicants' manuals, aircraft, facilities, and personnel meet federal safety standards. Also, if a merger or other corporate transaction involves the transfer of international route authority, DOT is responsible for assessing and approving all transfers to ensure that they are consistent with the public interest. In addition, American has been under federal bankruptcy protection since November 2011. In May 2013, the federal judge overseeing the bankruptcy approved American's merger with US Airways as part of the reorganization. Shareholders of US Airways must also approve the merger for it to be consummated. On February 13, 2013, American and US Airways announced an agreement to merge the two airlines. The airlines have also notified DOJ of their intent to merge. The new airline would retain the American name and headquarters in Dallas-Fort Worth while the current US Airways Chief Executive Officer would keep that title with the new airline, and the current American CEO would become Chairman of the new American. The proposed merger will be financed exclusively through an all stock transaction with a combined equity value of $11 billion split roughly with 72 percent ownership to American shareholders and 28 percent to US Airways shareholders. The airlines have not announced specific plans for changes in their networks or operations that would occur if the combination is consummated, but the airlines' conservatively estimate that the merger will result in $1.4 billion in annual benefits to shareholders of the new airline as outlined in table 1. A key financial benefit that airlines consider in a merger is the potential for increased revenues through additional demand (generated by more seamless travel to more destinations), increased market share, and higher fares on some routes. As we reported in May 2010, mergers may generate additional demand by providing consumers more domestic and international city-pair destinations. Airlines with expansive domestic and international networks and frequent flier benefits particularly appeal to business traffic, especially corporate accounts. The American-US Airways merger is estimated by airline executives to generate $1.12 billion in revenue synergies from improved network connectivity, increased corporate and frequent flier loyalty, and optimization in the use of their aircraft. At the same time, capacity reductions in certain markets from a merger or acquisition could also serve to generate additional revenue through increased fares on some routes. Some studies of airline mergers and acquisitions during the 1980s showed that prices were higher on some routes from the airline's hubs soon after the combination was completed. Several studies have also shown that increased airline dominance at an airport results in increased fare premiums, in part, because that dominance creates competitive barriers to entry. At the same time, though, even if the combined airline is able to increase prices in some markets, the increase may be transitory if other airlines enter the markets with sufficient presence to counteract the price increase. In an empirical study of airline mergers and acquisitions up to 1992, Winston and Morrison suggest that being able to raise prices or stifle competition does not play a large role in airlines' merger and acquisition decisions. The other key financial benefit that airlines consider when merging with or acquiring another airline is the cost reduction that may result from combining complementary assets, eliminating duplicative activities, and reducing capacity. As we reported in May 2010, a merger or acquisition could enable the combined airline to reduce or eliminate duplicative operating costs, such as duplicative service, labor, and operations costs--including inefficient (or redundant) hubs or routes--or to achieve operational efficiencies by integrating computer systems and similar airline fleets. By increasing the fleet size, airlines can increase their ability to match the size of aircraft with demand and adjust to seasonal shifts in demand. Other cost savings may stem from facility consolidation, procurement savings, and working capital and balance sheet restructuring, such as renegotiating aircraft leases. Airlines may also pursue mergers or acquisitions to more efficiently manage capacity--both to reduce operating costs and to generate revenue--in their networks. Given recent economic pressures, particularly increased fuel costs, the opportunity to lower costs by reducing redundant capacity may be especially appealing to airlines seeking to merge. In the case of the American-US Airways merger, airline executives estimate that the merger will allow $640 million in cost savings from reducing overlapping facilities at airports and in combining purchasing, technology, and corporate activities. Despite these benefits, there are several potential barriers to successfully consummating a merger, potentially reducing the benefits and increasing the costs. As we reported in July 2008, the most significant operational challenges involve the integration of workforces, organizational cultures, aircraft fleets, and information technology systems and processes, challenges that can be difficult, disruptive, and costly as the airlines integrate. For example, in the case of the American-US Airways merger, with unions supporting the merger, pilots' and others' pay will increase by $360 million annually if the merger is completed. However, merging workforces can take time-for example, US Airways' pilot seniority lists have not been resolved following their merger with America West in 2005. Integrating technology, especially reservation systems, can also be difficult and costly. For example, United has struggled to integrate computer and reservation systems following its merger with Continental in 2010. If approved by DOJ, the merged American-US Airways would surpass United as the largest U.S. passenger airline. Table 2 shows that combining American and US Airways Airlines would create the largest U.S. airline based on data for the four quarters ending October 2012, as measured by capacity (available seat miles) and operating revenues. The combined airline would also have the largest workforce among U.S. airlines based on February 2013 employment statistics, with a combined 101,197 full-time equivalent employees (table 3). The airlines' workforces are represented by different unions, except dispatchers (table 4). Some of American's unions have already signed memorandums of understanding for future contracts if the airlines are merged. The combined airline would need to integrate 1,215 aircraft (table 5). American has a predominantly Boeing fleet, while US Airways has a largely Airbus fleet. In addition, in July 2011, American placed a $40 billion order for 200 Boeing 737 series and 260 Airbus A320 series aircraft. Despite its bankruptcy, the bankruptcy court allowed the order to proceed. American has also been trying to sell its regional airline, American Eagle, and its fleet of almost 280 aircraft. If approved by DOJ, the airlines would combine two distinct networks supported by different hubs, where the airlines connect traffic feeding from smaller airports. American's major hubs are in Chicago O'Hare (ORD), Dallas (DFW), New York (JFK), Los Angeles (LAX), and Miami (MIA), and US Airways has hubs in Charlotte (CLT), Philadelphia (PHL), Phoenix (PHX), and Washington D.C. (DCA), as shown in figures 4 and 5. A key concern for DOJ in reviewing an airline merger is the loss of a competitor on nonstop routes. The loss of a competitor that serves a market on a nonstop basis is significant from a competitive perspective because nonstop service is typically preferred by most passengers and routes that only have nonstop service do not benefit from the availability of alternative, albeit lower valued, connecting service. Based on October 2012 traffic data, the two airlines overlap on 12 nonstop airport-pair routes, which are listed in figure 6. For 7 of these 12 nonstop overlapping airport-pairs (generally between an American hub and a US Airways hub) there are currently no other competitors on a nonstop basis and in only one instance is a low cost airline (Southwest) present. And unlike the United--Continental merger, where most of the endpoint cities had other airports in the region, fewer of these airport pairs have significant other airports in the region. This is especially true for the Charlotte (CLT)--Dallas (DFW) and Phoenix (PHX)--DFW pairs where few alternate options are available at either endpoint. The amount of overlap in airport-pair combinations is far more when considering all connecting traffic; however, on most of the overlapping airport-pair markets, there is at least one other competitor. Based on 2011 and 2012 ticket sample data, for 13,963 airport-pairs with a minimum level of passenger traffic per year, there would be a loss of one effective competitor in 1,665 airport pair markets affecting more than 53 million passengers by merging these airlines (see fig. 7). As the figure shows, compared to the last major airline merger in 2010 between United and Continental, there would be 530 more airport pairs losing an effective competitor. This would affect 18 million more passengers compared to the merger between United and Continental. In addition, any effect on fares may be dampened by the presence of a low cost airline in 473 of the 1,665 airport pairs losing a competitor. The combination of the two airlines would also create a new effective competitor with at least a combined 5 percent market share in 210 airport-pairs affecting 17.5 million passengers. If approved by DOJ, the combined airline could be expected to rationalize its network over time, including where it maintains hubs. The two airlines do not share any airport hubs; therefore, the amount of airport market share overlap that currently exists at these hubs is relatively small but could grow at some hubs while contracting at others under a merger (see table 6). For example, New York could serve as a better hub and international gateway than Philadelphia in the Northeast, while Miami could be a better hub than Charlotte in the Southeast. In addition, 59 out of 116 domestic airports served by US Airways from Charlotte are also served by American from Miami (MIA). Closing hubs is not unprecedented, following the American acquisition of TWA in 2001, St Louis ceased to be an American hub and following the Delta-Northwest merger, service at Delta's hub in Cincinnati and Northwest's hub in Memphis has been greatly reduced. Three of the airports noted in table 6 are slot-controlled airports with restricted access for new entrants or expanded service. As we reported last year, slot-controlled airports have more limited competition and tend to have higher fares compared to other hub airports. Based on February 2012 slot holdings, a combined American and US Airways would control one-third of the slots at LaGuardia and two-thirds of the slots at Washington Reagan as noted in Table 7. Both American and US Airways have worldwide networks and serve many international destinations. Between the two airlines, they serve 107 international cities from airports in the United States, 37 of them in common, according to published February 2013 schedules. However, the two airlines do not directly compete on any of the same international city pair markets, though both serve slot-controlled London Heathrow airport with more than 830,000 passengers over the last year. For international routes, U.S. airlines aggregate traffic from many domestic locations at a hub airport where passengers transfer onto international flights. In other words, at Philadelphia, where US Airways has a large hub, passengers traveling from many locations across the U.S. transfer onto US Airways' international flights. Likewise, American aggregates domestic traffic at New York's JFK for many of its international flights to some of the same destinations. As such, a passenger traveling from, for example Nashville, may view these alternative routes to a location in Europe as substitutable. Whether service to international destinations from different domestic hubs will be viewed as a competitive concern will likely depend on a host of factors, such as the two airlines' market share of traffic to that destination and whether there are any barriers to new airlines entering or existing airlines expanding service at the international destination airports. US Airways is part of the larger Star Alliance, and American is a member of the smaller oneworld alliance. US Airways has announced it will leave the Star Alliance and join American in oneworld as part of the merger. The DOT has authority to approve antitrust immunity applications, but DOJ may also comment if it has antitrust concerns. According to a 2011 paper prepared by DOJ economists, "Over the past 17 years, DOT granted immunity to over 20 international alliance agreements, permitting participants in these alliances to collude on prices, schedules, and marketing." They found that in granting immunity to larger groups of airlines in the three major international alliances, the number of independent competitors over the North Atlantic was significantly reduced adversely affecting consumers through higher fares. Because both airlines are already part of immunized alliances it is unclear what effect, if any, this merger might have on competition in international service. According to DOT officials responsible for reviewing and approving the immunity requests, the agency has analyzed and documented the impact of immunized alliances in its many public orders and has concluded that in its experience, integrated airline alliances enable a number of valuable consumer benefits, including lower prices for many travelers. Chairman Cantwell, Ranking Member Ayotte, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions that you may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D. at (202) 512-2834 or by email at [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 include Paul Aussendorf (Assistant Director); Amy Abramowitz; Susan Fleming; Dave Hooper; Delwen Jones; Brooke Leary; Dominic Nadarski; Josh Ormond; Gretchen Snoey; and Carrie Wilks. Airline Mergers: Issues Raised by the Proposed Merger of United and Continental Airlines. GAO-10-778T. Washington, D.C.: May 27, 2010. April 21, 2009. Commercial Aviation: Airline Industry Contraction Due to Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, and Federal Government Revenues. GAO-09-393. Washington, D.C.: April 21, 2009. Airline Industry: Potential Mergers and Acquisitions Driven by Financial Competitive Pressures. GAO-08-845. Washington, D.C.: July 31, 2008. Airline Deregulation: Reregulating the Airline Industry Would Likely Reverse Consumer Benefits and Not Save Airline Pensions. GAO-06-630. Washington, D.C.: June 9, 2005. Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues. GAO-05-945. Washington, D.C.: Sept. 30, 2005. Commercial Aviation: Preliminary Observations on Legacy Airlines' Financial Condition, Bankruptcy, and Pension Issues. GAO-05-835T. Washington, D.C.: June 22, 2005. Private Pensions: Airline Plans' Underfunding Illustrates Broader Problems with the Defined Benefit Pension System. GAO-05-108T. Washington, D.C.: Oct. 7, 2004. Transatlantic Aviation: Effects of Easing Restrictions on U.S.-European Markets. GAO-04-835. Washington, D.C.: Jul. 21, 2004. Commercial Aviation: Despite Industry Turmoil, Low-Cost Airlines Are Growing and Profitable. GAO-04-837T. Washington, D.C.: June 3, 2004. Commercial Aviation: Legacy Airlines Must Further Reduce Costs to Restore Profitability. GAO-04-836. Washington, D.C.: August 11, 2004. Commercial Aviation: Financial Condition and Industry Responses Affect Competition. GAO-03-171T. Washington, D.C.: Oct. 2, 2002. Commercial Aviation: Air Service Trends at Small Communities since October 2000. GAO-02-432. Washington, D.C.: March 29, 2002. Proposed Alliance Between American Airlines and British Airways Raises Competition Concerns and Public Interest Issues. GAO-02-293R. Washington, D.C: Dec. 21, 2001. Aviation Competition: Issues Related to the Proposed United Airlines-US Airways Merger. GAO-01-212. Washington, D.C: Dec. 15, 2000. 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 February 2013, American and US Airways announced plans to merge the two airlines and entered into a merger agreement. Valued at $11 billion, the merged airline would retain the American name and be headquartered in Dallas-Fort Worth. This follows the mergers of United Airlines and Continental Airlines in 2010 and the acquisition of Northwest Airlines by Delta Air Lines (Delta) in 2008. This latest merger, if not challenged by DOJ, would surpass these prior mergers in scope to create the largest passenger airline in the United States. The passenger airline industry has struggled financially over the last decade and these two airlines believe a merger will strengthen them. However, as with any merger of this magnitude, this proposal will be examined by DOJ to determine if its potential benefits for consumers outweigh the potential negative effects. This testimony focuses on (1) the role of federal authorities in reviewing merger proposals, (2) key factors motivating airline mergers in recent years, and (3) the implications of merging American and US Airways. To address these objectives, GAO drew from its previous reports on the potential effects of prior airline mergers and the financial condition of the airline industry issued from July 2008 through May 2010. GAO also analyzed DOT's airline operating and financial data, airline financial documents, and airline schedule information since 2002. The Department of Justice's (DOJ) antitrust review will be a critical step in the proposed merger between American Airlines (American) and US Airways. DOJ uses an integrated analytical framework set forth in the Horizontal Merger Guidelines to determine whether the merger poses any antitrust concerns. Under that process, DOJ assesses, among other things, the extent of likely anticompetitive effects of the proposed merger in the relevant markets, in this case, airline city-pair markets, and the likelihood that other airlines may enter these markets and counteract any anticompetitive effects, such as higher fares. DOJ also considers efficiencies that a merger or acquisition could bring--for example, consumer benefits from an expanded route network. The Department of Transportation (DOT) aids DOJ's analysis. Airlines seek mergers to reduce costs and improve revenues. GAO has previously reported that mergers can result in increased revenues by offering improved network connections and schedules, but also through higher fares on some routes. Cost savings can be generated by eliminating redundancies and operational efficiencies, including reducing service, but can be muted by problems in combining different aircraft, technologies, and labor forces. In the case of US Airways and American, they estimate that a merger would yield $1.4 billion in annual benefits from increased revenues and reduced costs. If not challenged by DOJ, the merged American would surpass United to become the largest U.S. passenger airline by several measures. While US Airways and American overlap on only 12 nonstop routes, no other nonstop competitors exist on 7 of those 12. Our analysis of 2011 and 2012 ticket data also showed that combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total airport-pair traffic) in 1,665 airport-pair markets affecting more than 53 million passengers while creating a new effective competitor in 210 airport-pairs affecting 17.5 million passengers. However, the great majority of these markets also have other effective competitors.

DOD relies on its science and technology community--DOD research laboratories, test facilities, industry, and academia--to identify, pursue, and develop new technologies that address military needs. The DOD SBIR program is one mechanism through which DOD attempts to accomplish its science and technology goals and develop technologies that contribute to weapon systems or transition directly to warfighters for use in the field. Within DOD, the Office of Small Business Programs oversees the department's SBIR program activities, develops policy, and manages program reporting. This office generally relies on the agencies, such as the Army, Air Force, and Navy, to oversee and execute their own SBIR program activities. Each agency has flexibility to tailor its SBIR program to meet its needs, including determining what type of research to pursue, which projects to fund, and how to monitor ongoing projects. To initiate the project award process, SBIR programs work with the science and technology and acquisition communities to generate and prioritize research and development topics. These topics describe technical areas of interest and capability needs, which the programs use in their solicitations for proposals from small businesses. DOD conducts three solicitations each year where small businesses compete for Phase I contract awards that are expected to respond to the needs identified in each topic. Once awarded, SBIR projects are managed through a three- phase program structure, which is outlined in table 1. The number of Phase I and Phase II projects varies from year to year based on technology needs and funding availability. Table 2 shows the budgets and project awards reported for the military department SBIR programs in fiscal year 2012. We and others have previously found that DOD and its technology development programs, such as the SBIR program, have encountered challenges to transitioning their technologies to acquisition programs or directly to the warfighter for use in the field. For instance, in our past work we found several reasons why technologies may not transition, including insufficient maturity, inadequate demonstration or recognition by users of a technology's potential, and unwillingness or inability of acquisition programs to fund final stages of development. To address SBIR technology transition challenges, DOD, the Small Business Administration, and Congress have established additional program provisions, incentives, and reporting requirements. For example, the Commercialization Readiness Program was initiated to accelerate the transition of SBIR funded technologies to Phase III, especially those that lead to acquisition programs and high priority military requirements, such as fielded systems. military departments to use up to 1 percent of SBIR funding for administrative activities that facilitate transition. This funding is used to support program staff and contractors who provide assistance to SBIR awardees, including efforts to enhance networking and build relationships among small businesses, prime contractors, and DOD science and technology and acquisition communities. The National Defense Authorization Act for Fiscal Year 2006 authorized the Commercialization Pilot Program under the Secretary of Defense and the Secretary of each military department. Pub. L. No. 109-163, SS 252. The National Defense Authorization Act for Fiscal Year 2012 continued the program and renamed it the Commercialization Readiness Program. Although the program may support any Phase III awards, such as technology transition to commercial products, DOD is required to provide goals to increase the number of Phase II SBIR contracts that lead to technology transition into programs of record or fielded systems and to use incentives to meet those goals. Pub. L. No. 112-81, SS 5122(a). Requires DOD to set a goal to increase the number of Phase II contracts awarded that lead to technology transition into acquisition programs or fielded systems, and use incentives to encourage program managers and prime contractors to meet the goal. Requires that DOD report specific transition-related information to the Administrator of the Small Business Administration for inclusion in an annual report to designated congressional committees. This includes reporting the number and percentage of Phase II contracts that led to technology transition into acquisition programs or fielded systems, information on the status of each project that received funding through the Commercialization Readiness Program and efforts to transition those projects, and a description of each incentive used to meet the department's transition goal. Authorizes DOD to establish goals for the transition of Phase III technologies in subcontracting plans for contracts of $100 million or more, and to require prime contractors on such contracts to report the number and dollar amount of contracts entered into by prime contractors for Phase III projects. Sets the ceiling for discretionary technical assistance that can be provided annually for all Phase I and Phase II projects at $5,000 per project. Programs can use this funding to assist awardees in making technical decisions on projects, solving technical problems, minimizing technical risks, and commercializing projects. Establishes a pilot effort to allow DOD SBIR programs to use not more than 3 percent of their SBIR budgets for, among other things, program administration, technical assistance, and the implementation of commercialization and outreach initiatives. The military department SBIR programs use several management practices and tools to support technology transition efforts. We identified some common transition elements across the programs, but also found some differences in how each program approaches its technology transition efforts. The programs' technology transition efforts are supported through use of administrative funds coming from their SBIR budgets and other funds provided by their respective military department. The transition facilitation practices, tools, and funds used to promote the transition of SBIR technologies include the following: Early focus on transition through topic generation and project selection: Technology transition efforts begin with topic generation and project selection processes that emphasize the pursuit of projects for which there is a demonstrated military need and potential transition opportunities. To do this, the military department programs formally engage stakeholders from the science and technology and acquisition communities in generating and endorsing topics for SBIR solicitations. In proposing topics and selecting projects, programs have to balance their desire for technological innovation with meeting pressing warfighter needs. SBIR officials stated that projects that pursue incremental improvements generally are more likely to deliver the technical capability expected for technology transition to occur. In contrast, they noted that projects that focus more on "leap-forward" technology innovations that can support future warfighting needs tend to require more long-term development and have greater technical and transition risks. DOD policy requires that at least 50 percent of military department topics are endorsed by the acquisition community, such as program executive offices. This helps ensure that the acquisition community is engaged with the SBIR programs and that a significant portion of projects are dedicated to addressing specific needs identified by military users. Phase II transition initiatives: Transition-focused activities increase as Phase II projects progress, commensurate with an increasing technology maturity and understanding of a project's potential opportunities for use. In particular, the military department SBIR programs target transition opportunities through their Commercialization Readiness Programs and other initiatives that provide additional support to select Phase II projects. In some cases, the SBIR programs require formal technology transition agreements or matching funding as a condition to receiving additional Phase II funding. Technology transition agreements, which Air Force and Navy officials reported using, help manage project expectations and formalize stakeholder commitments by outlining cost, schedule, and performance expectations for transition to occur. Matching funds from intended users, which are required by the Navy for some projects, can help create greater buy-in for transition because the intended users have a monetary stake in the project. Transition facilitators: Each military department SBIR program has a network of transition facilitators who manage the Commercialization Readiness Program and other enhancement efforts, as well as broader SBIR activities that support technology transition. The facilitators are located at military labs, acquisition centers, and program executive offices to work directly with government stakeholders and help ensure projects are responsive to warfighter needs. They also help small businesses identify and position themselves for opportunities to transition their SBIR technologies. Although the roles and responsibilities vary somewhat across the programs, in general, transition facilitators assist with topic generation and prioritization; foster communication among small businesses, research laboratories, and the acquisition community in support of transition opportunities; and monitor project progress, including outcomes. Navy Transition Assistance Program: The Navy established an additional program over a decade ago to prepare its SBIR participants for technology transition opportunities. The Transition Assistance Program is a voluntary 11-month program with, on average, about two-thirds of Phase II recipients participating each year. It provides consulting services focused on improving the small businesses' abilities to transition their SBIR products, including assistance in transition planning and developing marketing tools. Under the program, profiles are used to describe the expected capability, level of technology maturity, and potential technology transition opportunities for each project. These profiles are available in electronic form through a web-based portal called the Navy Virtual Acquisition Showcase, and support the annual Navy Opportunity Forum conference. The conference provides Transition Assistance Program participants with direct exposure and one-on-one opportunities to interact with prospective transition partners in the government and industry. Other transition facilitation tools: SBIR programs also use technology roadmaps and formal relationship-building activities, such as conferences and workshops, to support transition efforts. Technology roadmaps are schedule-based planning documents used to identify opportunities for SBIR technology insertion into acquisition programs or direct use by the warfighter. Conferences and workshops, such as the annual Beyond Phase II conference hosted by the Office of Small Business Programs, are used by the programs to provide opportunities for SBIR Phase II companies to interact directly with prospective government and industry users and showcase their projects. Administrative funds: The technology transition practices and tools used by the programs are supported by administrative funds provided through their SBIR budgets as well as non-SBIR sources from their respective agencies. The Commercialization Readiness Program and discretionary technical assistance provisions enable programs to use portions of their SBIR budgets to fund administrative activities, including transition support. For fiscal year 2012, this funding totaled about $12 million across the three military departments. The fiscal year 2012 SBIR reauthorization included a new provision--which DOD officials advocated--that allows the programs to use up to 3 percent of their funds to support administrative activities, which is in addition to funds available through the Commercialization Readiness Program and discretionary technical assistance. SBIR officials stated that although this additional funding allowance is in the initial stages of being used, they believe these funds will help enhance transition facilitation measures for their programs going forward. Additional agency funding outside of the SBIR budget is also used to manage programs and support transition activities, but the amount of such funding is not readily identifiable because the military departments do not all require that the amount of funding used to support associated administrative efforts be documented. We were unable to assess the extent of technology transition associated with the military department SBIR programs because comprehensive and reliable technology transition data are not collected. Tracking mechanisms used by DOD--Company Commercialization Reports (CCR) and the Federal Procurement Data System-Next Generation (FPDS- NG)--provide some information on SBIR Phase III activities, but these mechanisms have significant gaps in coverage and data reliability concerns that limit their transition tracking capabilities. The military departments have additional measures through which they have identified a number of successful SBIR transitions to DOD acquisition programs and directly to fielded systems, but these efforts capture a limited amount of transition information. DOD is assessing how to comply with the new transition reporting requirements directed by Congress, but has yet to develop a plan that will support identification and annual reporting of the extent to which SBIR technologies transition to DOD acquisition programs or to fielded systems. The military department SBIR programs rely, to varying degrees, on two data systems--CCR and FPDS-NG--as well as their own agency-specific data collection activities to identify transition results. Table 3 more fully describes the data sources used and their limitations. Although the CCR and FPDS-NG data systems do not capture complete data on the transition of SBIR technologies, they do provide high-level commercialization information that the SBIR programs use to track progress in achieving program goals. Because the data help support program management efforts, the Office of Small Business Programs and the military departments, to varying degrees, take steps to verify the quality of CCR and FPDS-NG data. For example, the Army assesses and validates CCR data for its projects on an ongoing basis. This process involves comparing recent updates to the database with FPDS-NG contract data and internal Army tracking data to confirm the accuracy of commercialization funding reported by the small businesses. The Navy SBIR program uses FPDS-NG as its primary source of commercialization data and employs similar validation techniques to improve the accuracy of commercialization data tracked through this system. By comparing contracts in FPDS-NG flagged as SBIR-related to DOD contract management systems, the Navy is able to verify the accuracy of Phase III awards data tied to government contracts. Both the Army and Navy officials acknowledged, however, that even with their data validation efforts, problems persist because of the limitations of the Company Commercialization Reports and FPDS-NG. The military department programs have developed some internal capabilities to track certain projects and provide insight into the types of capabilities enabled by them. Like Company Commercialization Reports and FPDS-NG, these capabilities do not provide comprehensive transition information, but may help the departments to gain more insight into transition outcomes for some technologies developed within SBIR programs and to respond to DOD and congressional inquiries about program results. In particular, the programs identify transition success stories for a limited number of projects, ranging from Phase III awards for additional research and development to transition to major acquisition programs or fielded systems. Information on these success stories can come from SBIR program officials, acquisition program officials, prime contractors, or directly from the small businesses. The Air Force's database of identified transition successes includes 95 transition stories dating back to 2004. The Army's program produces an annual report describing transition outcomes for 20-30 successful projects. The Navy's program maintains a searchable database of SBIR projects that includes profiles on select transitioned projects as well. Table 4 provides examples of transition outcomes for projects identified through our review of these reporting mechanisms. SBIR program officials within the military departments emphasized that, in addition to their broader program efforts to identify transition outcomes, some acquisition organizations have implemented their own practices to track transition. For example, the Navy Program Executive Office for Submarines tracks the transition of SBIR technologies to its acquisition programs by managing a list of companies, the value of contract awards, the specific program office associated with each contract award, and the SBIR technology associated with the award. The office indicated that 20 active Phase III awards associated with its acquisition program efforts are being tracked. The National Defense Authorization Act for Fiscal Year 2012 mandated that DOD report new transition-related information to the Administrator of the Small Business Administration who will report this information annually to designated congressional committees. This reporting will include information on the number and percentage of Phase II projects that transition into acquisition programs or to fielded systems, the efficacy of steps taken by DOD to increase the number of transitioned projects, and additional information specific to the transition of projects funded through Commercialization Readiness Programs. In order to provide more complete and accurate transition data to support the new reporting requirements, DOD recognizes it may need to modify its existing data systems or develop new tools to better capture the transition results for SBIR projects. According to the Office of Small Business Programs, DOD's response to the new reporting requirements is still being evaluated, in part because there are several challenges to compiling complete and accurate technology transition data. One such challenge we found was variation across the military departments in their definitions of technology transition. Specifically, transition definitions ranged from any commercialization dollars applied to a project, to only when a technology is actually incorporated into a weapon system or in direct use by the warfighter. The Office of Small Business Programs acknowledged that a standard DOD SBIR definition of technology transition must be ensured before the congressionally-required reporting begins. Standards for internal control state that management should establish procedures to ensure that it is able to achieve its objectives, such as being able to compile and report consistent, complete, and accurate data.according to SBIR officials, tracking transition outcomes can be Additionally, challenging because the sometimes lengthy period between SBIR project completion and transition to a DOD user can obscure a project's SBIR linkages. Time lags can occur because of delays in transition funding availability, additional development or testing needs before transition, or schedule delays encountered by intended users. During the time between project completion and transition, personnel associated with projects may change and technologies may evolve. This increases the likelihood that transitions associated with SBIR technologies go unacknowledged. SBIR officials within the military departments also stated that limited resources for administrative activities constrain their ability to effectively follow up on the transition outcomes for completed projects. Although the Office of Small Business Programs acknowledges the limitations of CCR data, the initial plan is to use this data source--viewed by DOD as the best available--as the primary means for beginning to address the new transition reporting requirements. Additionally, in an effort to improve DOD's future technology transition reporting and its understanding of transition results in general, the Office of Small Business Programs has initiated an assessment of different options for enhancing transition data. For example, as part of this assessment, DOD is examining whether CCR could be modified to improve reporting. Additionally, existing DOD reporting mechanisms, such as Selected Acquisition Reports--annually required for major defense acquisition programs--are being considered as potential vehicles for supporting SBIR technology transition reporting. Opportunities to build more SBIR awareness directly into acquisition activities are being considered as well, such as including provisions in acquisition strategy documents or formal program reviews. According to the Office of Small Business Programs, DOD intends to issue a policy directive in fiscal year 2014 that will provide guidance for implementing overall SBIR program requirements. However, SBIR officials indicated that addressing technology transition reporting requirements is viewed as a longer-term effort because of the challenges we have discussed, and no specific plan including a time line has been established for when DOD will be able to support those requirements. Without a plan that establishes a time line, it is unclear how and when DOD will begin to provide the technology transition information expected by Congress. Although Congress did not specify when reporting was to begin, it expects DOD to report new transition-related information to the Administrator of the Small Business Administration to meet the National Defense Authorization Act for Fiscal Year 2012 requirement. However, as stated above, DOD expects this to be a longer-term effort and designated congressional committees may not be aware of when DOD will likely have developed the capability to provide comprehensive and accurate data. Further, unless DOD communicates its plan and accompanying time line, these committees may be unaware that the transition-related information DOD plans to provide in the near-term to address the National Defense Authorization Act for Fiscal Year 2012 requirements has data quality issues. Standards for internal control emphasize the need for federal agencies to establish plans to help ensure goals and objectives can be met, including compliance with applicable laws and regulations. Further, communicating internal control efforts on a timely basis to external stakeholders, such as congressional committees, helps ensure that effective oversight can take place. The SBIR program efforts within DOD provide opportunities for small businesses to develop new technologies that may improve current U.S. military capabilities and provide innovative solutions to address future needs of the warfighter. However, information on technology transition outcomes for SBIR projects is limited. Consequently, DOD cannot identify the extent to which the program is supporting military users. The Office of Small Business Programs is taking steps to respond to new technology transition reporting requirements, but has not yet determined how and when it will more completely and reliably track and report on the extent of transition for SBIR technologies. While initial reporting efforts are expected to use existing data systems, such as CCR, DOD will need to overcome the inherent limitations of data collected through those systems if it expects to provide a comprehensive picture of transition outcomes. To improve tracking and reporting of technology transition outcomes for SBIR projects, we recommend that the Secretary of Defense direct the Office of Small Business Programs to take the following three actions: 1. Establish a common definition of technology transition for all SBIR projects to support annual reporting requirements; 2. Develop a plan to meet new technology transition reporting requirements that will improve the completeness, quality, and reliability of SBIR transition data; and 3. Report to Congress on the department's plan for meeting the new SBIR reporting requirements set forth in the program's fiscal year 2012 reauthorization, including the specific steps for improving the technology transition data. We provided a copy of a draft of this report to DOD for review and comment. Written comments from the department are included in appendix II of this report. DOD partially concurred with our recommendations. In its response, DOD stated that it has established a working group that is currently working with all stakeholders to develop a common definition of technology transition for all SBIR projects. DOD also agreed that it is important to improve the completeness, quality, and reliability of SBIR transition data, but noted that it has significant concerns related to the difficulty in actually capturing the data. The department indicated that the full scope of data collection challenges and associated resource needs is unknown at this time. While we recognize there are challenges to improving transition data, we believe there are avenues already available that DOD could pursue to improve transition data that may not require extensive resource commitments. For example, DOD's SBIR program could work more closely with its acquisition community to track transition outcomes. As outlined in this report, some acquisition organizations have developed their own practices to track transition outcomes, which the program may be able to leverage for use on a broader scale. In addition, DOD could consider greater use of contracting provisions to require contractors to report on SBIR project activities, or use existing program reporting mechanisms, such as Selected Acquisition Reports, to capture additional transition information. We believe that collection of better data is not only needed to support the congressional reporting requirements, but also to help DOD assess the efficacy of existing transition efforts and the benefits the program yields for the warfighter. DOD stated it will continue with initiatives that seek to improve the collection of SBIR technology transition data. However, it did not specify if or when it intends to develop a plan for meeting the transition reporting requirements. We continue to believe a plan that includes a time line for when DOD will begin to support reporting requirements should be provided to the designated congressional committees in the near term to make clear the limitations of reported transition data and the department's approach to improving the data over time. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense. In addition, this 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 by email at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To identify what processes are used by the Department of Defense (DOD) to facilitate transition for Small Business Innovation Research (SBIR) technologies, we reviewed prior reports by GAO, DOD and other organizations, such as the National Research Council and the Rand Corporation, as well as reviewed DOD policies, procedures, and funding information. Using this information, we scoped our work to focus on the SBIR activities conducted by the Air Force, Army, and Navy. These three organizations typically receive about three-fourths of the annual SBIR funding that supports the 13 participating DOD organizations. With the military department SBIR programs as our focus, we interviewed DOD officials from the Office of Small Business Programs and the SBIR program offices at the Air Force, Army, and Navy on practices and tools used to facilitate technology transition. In addition, we interviewed and collected documentation from DOD officials within the acquisition community concerning their use of and interactions with the SBIR program. Specifically, we interacted with officials at the Air Force Life Cycle Management Center and Air Force Research Laboratory; the Army Aviation and Missile, Research, Development, and Engineering Center; the Naval Sea Systems Command; and the F-35 Joint Program Office. This included interviewing SBIR program management and transition facilitation personnel at each location, as applicable. Similarly, to assess the extent to which SBIR technologies are transitioning to DOD users, we met with officials in the Office of Small Business Programs, military department SBIR program offices, and the aforementioned military acquisition organizations to discuss what data are available to measure transition of SBIR technologies to acquisition programs, or directly to warfighters in the field. We determined that DOD uses two primary data systems--Company Commercialization Reports and the Federal Procurement Data System-Next Generation. We discussed with DOD officials what data are collected by these systems, how the data are validated and used, and whether there are limitations to the data collected. We also reviewed available documentation on the systems. In assessing data limitations, we discussed with SBIR officials whether the systems provide accurate, reliable, and comprehensive data on SBIR projects that transition to military users. In addition, we interviewed military department officials about other data collection practices they may have implemented to track SBIR projects and results. Any limitations that were identified for the data collection practices and data systems used to identify technology transition outcomes for SBIR projects are discussed in this report. We conducted this performance audit from April 2013 to December 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, John Oppenheim, Assistant Director; Danielle Greene; Victoria Klepacz; Sean Merrill; Scott Purdy; and Sylvia Schatz also made key contributions to the report.

To compete in the global economy, the United States relies heavily on innovation through research and development. The Small Business Innovation Development Act of 1982 initiated SBIR programs across federal agencies in an effort to stimulate innovation through small businesses. DOD spends over $1 billion annually to support SBIR awards. The Conference Report accompanying the National Defense Authorization Act for Fiscal Year 2013 mandated that GAO assess the transition of technologies developed through the DOD SBIR program. This report examines (1) practices the military department SBIR programs use to facilitate the transition of SBIR technologies, and (2) the extent to which SBIR technologies are transitioning to DOD users, including major weapon system acquisition programs. GAO reviewed SBIR program documentation and data. GAO also interviewed officials from DOD's Office of Small Business Programs and the military departments to determine the practices used to facilitate technology transition and assess SBIR transition outcome data. The Small Business Innovation Research (SBIR) programs within the military departments use a variety of practices and tools to facilitate technology transition--the act of passing technologies developed in the science and technology environment on to users such as weapon system acquisition programs or warfighters in the field. GAO identified some common transition practices and tools across SBIR programs. For example, specific initiatives, such as the Commercialization Readiness Program, are used by each SBIR program and focus resources on enhancing technology transition opportunities. Transition facilitators are also used by each program to provide a network of personnel who manage SBIR activities that support technology transition. GAO also found some different practices and tools used to support technology transition efforts, such as the Navy Transition Assistance Program, which provides consulting services and helps showcase SBIR projects in an effort to improve small businesses' abilities to transition their projects. Transition facilitation efforts are supported by administrative funds provided through each program's SBIR budget and from other funds received from their respective military department. A recent increase in the amount of administrative funding that can come from SBIR budgets is expected to help the programs enhance their transition facilitation efforts. GAO was unable to assess the extent of technology transition associated with the military department SBIR programs because comprehensive and reliable technology transition data for SBIR projects are not collected. Transition data systems used by DOD provide some transition information but have significant gaps in coverage and data reliability concerns. The military departments have additional measures through which they have identified a number of successful technology transitions, but these efforts capture a limited amount of transition results. SBIR transition reporting requirements recently established by Congress have led DOD to evaluate its options for providing transition data. GAO identified several challenges to attaining complete and accurate technology transition data. For instance, the lack of a common definition for technology transition across SBIR programs could cause reporting inconsistencies. Additionally, tracking transition can be challenging because of the sometimes lengthy period between SBIR project completion and transition to a DOD user. DOD initially plans to use transition data from Company Commercialization Reports--viewed by DOD as the best available source--to meet the new transition reporting requirements. However, SBIR officials indicated that addressing transition reporting requirements is a longer-term effort, and there is no specific plan including a time line for when DOD will be able to support those requirements. Without a plan that establishes a time line, it is unclear how and when DOD will begin to provide the technology transition information expected by Congress. Although Congress did not specify when reporting was to begin, it expects DOD to report new transition-related information to the Administrator of the Small Business Administration to meet the new reporting requirements. However, unless DOD communicates its plan and accompanying time line, the congressional committees to whom the Small Business Administration reports may be unaware of the data quality issues with the transition-related information DOD plans to use to support reporting in the near term. GAO recommends that DOD establish a common definition of technology transition for SBIR projects, develop a plan to track transition that will improve the completeness, quality, and reliability of transition data, and report to Congress its plan for meeting new SBIR technology transition reporting requirements. DOD partially concurred with these recommendations, but cited challenges to improving transition data. GAO believes options are available to address the challenges.

For the purposes of this report, we use the term deadline suit to mean a lawsuit in which an individual or entity sues because EPA has allegedly failed to perform any nondiscretionary act or duty by a deadline established in law. A nondiscretionary act or duty is an act or duty required by law. This report examines deadline suits that seek to compel EPA to either (1) issue a statutorily required rule when that rule has a deadline in law or (2) issue a statutorily required rule or make a determination that issuing such a rule is not appropriate or necessary pursuant to the relevant statutory provision, when issuing that rule or making that determination has a deadline in law. For example, a deadline suit may involve a person suing EPA because EPA failed to issue a rule by a date established in statute. Similarly, a person may sue EPA because it missed a recurring deadline to review and revise, as necessary or appropriate, an existing rule. In August 2011, we reported that the number of new environmental litigation cases--of all types--filed against EPA each year from fiscal year 1995 through fiscal year 2010 averaged 155 cases per year. Before filing a deadline suit, a person generally must file a Notice of Intent to Sue (NOI) with EPA. Among other things, a NOI generally must identify the provision(s) of the law that requires EPA to perform an act or duty and a description of the action taken or not taken by EPA that is claimed to constitute a failure to comply with the provision. Sixty days after filing the NOI, the filer may initiate a deadline suit seeking a court order requiring EPA to complete the statutorily required action. A settlement takes the form of either a settlement agreement or a consent decree. For purposes of this report, the term settlement refers to both settlement agreements and consent decrees. Both are negotiated agreements between EPA and the plaintiff. A settlement agreement is not subject to court approval but can result in a stay of the lawsuit. If EPA fails to meet the terms of the settlement agreement, then the plaintiff can ask the court to lift the stay in order to proceed with the lawsuit. A consent decree is entered as a court order. If EPA fails to meet the terms of a consent decree, the court can enforce or modify the consent decree, including citing EPA for contempt of court. Unless a more specific statute governs, when EPA or any other federal agency promulgates a rule, whether or not in conjunction with a deadline suit, it generally follows procedures prescribed in the Administrative Procedures Act (APA). Among other things, the APA governs the process by which federal agencies develop and issue regulations. It includes requirements for publishing notices of proposed and final rules in the Federal Register and for providing opportunities for the public to comment on notices of proposed rulemaking. Many rules promulgated under the authority of the Clean Air Act do not follow the procedures prescribed in the APA, but rather follow similar but more specific procedures set forth in the act. GAO identified seven key environmental laws that allow individuals to file a deadline suit to compel EPA to issue a statutorily required rule, or perform a statutorily required review of a rule to determine whether to revise the rule. EPA works with DOJ to consider several factors in determining whether or not to settle the deadline suit and the terms of any settlement. GAO identified seven key environmental laws for which EPA has primary regulatory authority that allow citizens to file a deadline suit. Table 1 lists the seven laws. With the exception of the Emergency Planning and Community Right-to- Know Act (EPCRA), the key environmental laws allow citizens to file deadline suits to compel EPA to perform any act or duty required by the respective law, including issuing any required rules. For example, the provision in the Clean Air Act states: "ny person may commence a civil action on his own behalf - ... against the Administrator where there is alleged a failure of the Administrator to perform any act or duty under this chapter which is not discretionary with the Administrator." The provision in EPCRA that allows citizens to file deadline suits is different from the other key environmental laws because citizen suits may only be filed to compel certain actions listed in the law. Within EPA, the Office of General Counsel is responsible for handling deadline suits. It works with the appropriate program offices in EPA, such as the Office of Air and Radiation (OAR) or the Office of Water, when negotiating settlements for deadline suits. EPA's Office of General Counsel also coordinates with DOJ's Environmental and Natural Resources Division. According to EPA and DOJ officials, when a deadline suit is filed, the agencies work together to determine how to respond to the lawsuit, including whether or not to negotiate a settlement with the plaintiff or allow the lawsuit to proceed. In making this decision, EPA and DOJ consider several factors to determine which course of action is in the best interest of the government. According to EPA and DOJ officials, these factors include: (1) the cost of litigation, (2) the likelihood that EPA will win the case if it goes to trial, and (3) whether EPA and DOJ believe they can negotiate a settlement that will provide EPA with sufficient time to complete a final rule if required to do so. EPA and DOJ officials told us that they often choose to settle deadline suits when EPA has failed to fulfill a mandatory duty because it is very unlikely that the government will win the lawsuit. In many such cases, the only dispute is over the appropriate remedy, i.e., fixing a new date by which EPA should act. Additionally, in such cases, officials may believe that negotiating a settlement is the course of action most likely to create sufficient time for EPA to complete the rulemaking if it is required to issue a rule. EPA and DOJ have an agreement under which both must concur in the settlement of any case in which DOJ represents EPA. See 28 C.F.R. SSSS 0.160-0.163. duty. Thus, in general, this policy restricts DOJ from entering into a settlement if it commits EPA to take an otherwise discretionary action, such as including specific substantive content in the final rule unless an exception to this restriction is granted by the Deputy Attorney General or Associate Attorney General of the United States. According to EPA and DOJ officials, to their knowledge, EPA has been granted only one exception to the general restriction on creating mandatory duties through settlements--a 2008 settlement in a suit related to water quality criteria for pathogens and pathogen indicators. The Meese memo also provides that DOJ should not enter into a settlement agreement that interferes with the agency's authority to revise, amend, or promulgate regulations through the procedures set forth in the APA.stated that they have not, and would not agree to settlements in a deadline suit that finalizes the substantive outcome of the rulemaking or declare the substance of the final rule. The terms of settlements in deadline suits that resulted in EPA issuing major rules in the last 5 years established a schedule to either promulgate a statutorily required rule or to promulgate a statutorily required rule or make a determination that doing so is not appropriate or necessary pursuant to the relevant statutory provision. EPA received public comments on all but one of the draft settlements in these suits. EPA issued 32 major rules from May 31, 2008 through June 1, 2013 (see app. II). According to EPA officials, the agency issued 9 of these rules following settlements in deadline suits. They were all Clean Air Act rules. The 9 rules stem from seven settlements. Two of the settlements established a schedule to complete 1 or more rules, and five established a schedule to complete 1 or more rules or make a determination that such a rule was not appropriate or necessary in accordance with the relevant statute. Some of the schedules included interim deadlines for conducting rulemaking tasks, such as publishing a notice of proposed rulemaking in the Federal Register. Appendix III provides information on the schedules contained in each settlement. In addition to schedules, the seven settlements also included, among other things, provisions that allowed deadlines to be modified (including the deadline to issue the final rule) and specified that nothing in the settlement can be construed to limit or modify any discretion accorded EPA by the Clean Air Act or by general principles of administrative law. Consistent with DOJ's 1986 Meese memorandum, none of the settlements we reviewed included terms that required EPA to take an otherwise discretionary action or prescribed a specific substantive outcome of the final rule. The seven settlements, committing EPA to issue the 9 statutorily required rules, were finalized between about 10 months and more than 23 years after the applicable statutory deadlines. For each of the 9 rules, figure 1 shows the date the regulation was due, the date the settlement was filed with the court, and the date the final rule was published in the Federal Register. The Clean Air Act requires EPA, at least 30 days before a settlement under the act is final or filed with the court, to publish a notice in the Federal Register intended to afford persons not named as parties or interveners to the matter or action a reasonable opportunity to comment in writing. EPA or DOJ, as appropriate, must then review the comments and may withdraw or withhold consent to the proposed settlement if the comments disclose facts or considerations that indicate consent to the settlement is inappropriate, improper, inadequate, or inconsistent with Clean Air Act requirements. The other six key environmental laws with provisions that allow citizens to file deadline suits do not have a notice and comment requirement for proposed settlements. According to an EPA official, with the exception of the agency's pesticide program, EPA generally does not ask for public comments on defensive settlements if the agency is not required to do so by statute. The 9 major rules EPA issued from May 31, 2008 to June 1, 2013 following seven settlements in deadline suits were Clean Air Act rules. For each settlement, EPA published a notice in the Federal Register providing the public the opportunity to comment on a draft of the settlement. EPA received between one and 19 public comments on six of the draft settlements. No comments were received on one of the draft settlements. Based on EPA summaries of the comments, the comments concerned the reasonableness of the deadlines contained in the settlements or supported or objected to the settlements. For example, some comments supported the deadline or asserted that the deadlines should be accelerated, others comments stated that EPA would have difficulty meeting the deadlines. EPA determined that none of the comments on any of the draft settlements disclosed facts or considerations that indicated that consent to the settlement in question would be inappropriate, improper, inadequate, or inconsistent with the act. Table 2 shows the number of public comments EPA received on each draft settlement. According to EPA officials, settlements in deadline suits primarily affect a single office within EPA--the Office of Air Quality Planning and Standards (OAQPS)--because most deadline suits are based on provisions of the Clean Air Act for which that office is responsible. According to EPA's Office of General Counsel, provisions in the Clean Air Act that authorize the National Ambient Air Quality Standards (NAAQS) program and Air Toxics program account for most deadline suits. These provisions have recurring deadlines requiring EPA to set standards and to periodically review--and revise as appropriate or necessary--those standards. OAQPS sets these standards through the rulemaking process. For example, the Clean Air Act requires EPA to review and revise as appropriate NAAQS standards every 5 years and to review and revise as necessary technology standards for numerous air toxics generally every 8 years. The effect of settlements in deadline suits on EPA's rulemaking priorities is limited. OAQPS officials said that deadline suits impact the timing and order in which rules are issued by the NAAQS program and the Air Toxics program, but not which rules are issued. The officials also noted that the impact of deadline suits on the two programs differs because of the different characteristics of the programs. Regarding the NAAQS program, the Clean Air Act requires EPA to review and revise as appropriate the NAAQS standards for six pollutants--called criteria pollutants--at 5-year intervals. NAAQS standards limit the allowable concentrations of criteria pollutants in the ambient air. There is more than one standard for each criteria pollutant. EPA establishes the required standards through the rulemaking process and recently conducted seven NAAQS reviews to review the standards and revise as appropriate. According to an OAQPS official, prior to 2003, EPA did not review NAAQS on a regular cycle. Beginning in 2003, EPA faced four deadline suits for failure to complete NAAQS reviews for the six criteria pollutants. EPA settled two of these suits and was subject to a court order regarding the other two suits after it failed to successfully negotiate settlements with the plaintiffs. The settlements and court orders led EPA to perform the statutorily required reviews of the NAAQS standards for the six criteria pollutants and to promulgate seven rules--one for each NAAQS review. The last of these seven rules was promulgated in April 2012. According to officials, the deadline suits addressing the NAAQS standards did not affect which NAAQS standards were reviewed since EPA reviewed all of the standards. According to officials, the deadline suits did affect the timing and order in which EPA conducted the reviews to accommodate the time frames in the settlements and court orders. Additionally, according to officials, as a result of the experience in responding to the deadline suits, the agency is striving to maintain the 5- year statutory review cycle for criteria pollutants going forward. However, officials noted that it is difficult for EPA to complete its NAAQS reviews every 5 years. From April 2012 through September 2014, EPA has promulgated one rule following a NAAQS review after it settled a deadline suit and has missed the statutory deadline for reviewing the standards of two other criteria pollutants, one of which EPA is under court order to complete by October 2015 following a deadline suit. Regarding the Air Toxics program, OAQPS officials said that the impact of deadline suits on the Air Toxics program is different from that of the impact on the NAAQS program because of the large number of rules that the Air Toxics program promulgates. For example, the Clean Air Act establishes a schedule under which EPA established 120 standards to reduce the emissions of 187 hazardous air pollutants. These National Emission Standards for Hazardous Air Pollutants (NESHAP) apply to certain categories of sources of these pollutants, such as cement manufacturing, municipal solid waste landfills, and semiconductor manufacturing. Generally, the act requires EPA, no less often than every 8 years, to review the standard, and revise as necessary. It makes any necessary revisions through the rulemaking process. The review must take into account developments in practices, processes, and control technologies. For sources subject to Maximum Achievable Control Technology (MACT) standards promulgated pursuant to section 112(d)(2) of the Clean Air Act, EPA must also conduct a residual risk assessment within 8 years after the initial promulgation of the standard. EPA refers to these two reviews together as the risk and technology review (RTR). As of October 2014, EPA has completed 28 RTRs (27 of these reviews following deadline suits) and has not completed 57 RTRs for which the statutory deadline has passed and 36 RTRs for which the statutory deadline has not passed. Additionally, officials report that, currently, most of the resources available to complete RTRs are focused on a 2011 settlement. This settlement listed 27 NESHAPs for which RTRs were overdue. OAQPS officials said that they have been unable to meet all of the time frames contained in the 2011 settlement and, as a result, have negotiated amendments to the settlement extending the time frames. Officials said that they intend to complete all of the overdue RTRs but are focused on fulfilling the terms of the 2011 settlement and several other settlements to which EPA has entered into that address a smaller number of reviews. Additionally, in September 2013, EPA received a NOI concerning 43 additional NESHAPs for which a RTR is overdue. EPA officials said that they are engaged in settlement discussions over one of these reviews for which EPA has been sued. Additionally, we discussed with EPA budget officials the potential impact of budget allocation decisions associated with deadline suits on EPA offices that are not subject to deadline suits. According to the budget officials, EPA accounts for anticipated workload arising out of litigation in its budgeting cycle for affected programs but does not make changes in existing budget allocations specifically to address settlements in deadline suits. Thus, according to the official, the resources available to EPA offices not subject to these settlements are not directly impacted by the settlements. We provided a draft of this report to EPA and DOJ for review and comment. In written comments from EPA, reproduced in appendix IV, the agency generally concurs with our analysis and states that the report accurately describes EPA's approach to deadline suit litigation brought against it. EPA also provided technical comments, which we incorporated as appropriate. In addition, in an e-mail received November 24, 2014, the DOJ Audit Liaison stated that the DOJ concurs with our report and has no additional comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Attorney General, the Administrator of the EPA, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix V. The objectives of this report are to examine (1) key environmental laws that allow citizens to file deadline suits that may compel the Environmental Protection Agency (EPA) to conduct a rulemaking and the factors EPA and the Department of Justice (DOJ) consider in determining whether or not to settle these lawsuits, (2) the terms of settlements in deadline suits that led EPA to promulgate major rules in the last 5 years and the extent to which the public commented on the terms of the settlements, and (3) the extent to which settlements in deadline suits have affected EPA's rulemaking priorities. To examine the key environmental laws that allow citizens to file deadline suits that may compel EPA to conduct a rulemaking, we identified through legal research nine key environmental laws for which EPA has primary regulatory authority. Through additional legal research, we determined that two of these laws do not include provisions that permit citizens to file deadline suits. These laws are the Federal Insecticide, Fungicide, and Rodenticide Act and related provisions of the Federal Food, Drug, and Cosmetic Act. To understand the factors that EPA considers in determining whether or not to settle deadline suits, we held discussions with officials from EPA's Office of General Counsel and DOJ because both agencies are involved in making these determinations. We also discussed the processes and procedures that EPA follows when settling citizen deadline suits. To examine the terms of settlements in deadline suits that led EPA to promulgate major rules in the last 5 years, we developed a list of major rules EPA issued from May 31, 2008 through June 1, 2013 by searching a database that GAO maintains to help implement the Congressional Review Act. We determined that the data were sufficiently reliable for the purpose of identifying major rules issued by EPA. EPA officials then identified which major rules EPA issued following a settlement in a deadline suit. We relied on EPA because neither EPA nor DOJ maintains a database that links settlements to rules, and there is no comprehensive public source of such information. For the purposes of this report, we use the term deadline suit to mean a lawsuit in which an individual or entity sues because EPA has allegedly failed to perform any nondiscretionary act or duty by a deadline established in law. A nondiscretionary act or duty is an act or duty required by law. This report only examines deadline suits that seek to compel EPA to either (1) issue a statutorily required rule when that rule has a deadline in law or (2) issue a statutorily required rule or make a determination that issuing such a rule is not appropriate or necessary pursuant to the relevant statutory provision, when issuing that rule or making that determination has a deadline in law. We did not review other types of suits against EPA. We obtained the settlements by accessing court records through the Public Access to Court Electronic Records. We then analyzed the content of each settlement and summarized the results. To examine the extent to which the public commented on the terms of the settlements, we obtained from EPA legal memoranda summarizing the number and content of public comments EPA received on drafts of the settlements. Because each of the major rules issued following settlements in deadline suits were Clean Air Act rules, EPA solicited public comments on drafts of the settlements as required by the Clean Air Act. The act also requires EPA or DOJ to consider any public comments provided on settlements and authorizes them to withdraw or withhold consent to the proposed settlement if the comments disclose facts or considerations that indicate consent to the settlement is inappropriate, improper, inadequate, or inconsistent with the Clean Air Act requirements. EPA made these determinations and documented its decisions in legal memoranda that it provided to us. We analyzed the contents of these memoranda to determine the extent and nature of the public comments EPA received on draft settlements. To examine the extent to which settlements in deadline suits have affected EPA's rulemaking priorities, we obtained from EPA's Office of General Counsel data on deadline suits it had settled from January 2001 through July 2014 and the EPA office(s) responsible for implementing the terms of the settlements. We assessed the reliability of the data by interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. The data showed that one office was responsible for implementing the terms of most of the settlements. We spoke with officials from this office to understand the extent to which settlements in deadline suits had affected the timing and order of the rules they promulgated, as well as which rules they promulgated. We also spoke with EPA budget officials to understand the extent to which settlements in deadline suits affected budget allocation decisions for EPA offices not subject to settlements in deadline suits. We also interviewed individuals from academia, an environmental group, industry, and a state official from Oklahoma, to obtain their perspectives on deadline suits. We chose these individuals because they had experience or knowledge related to deadline suits and could provide the perspective of different stakeholder groups. For example, one interviewee provided legal representation for an environmental group that filed a deadline suit, and another interviewee authored a report critical of how EPA responds when faced with a deadline suits. The views of these individuals cannot be generalized to those with whom we did not speak. We conducted this performance audit from September 2013 to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Environmental Protection Agency (EPA) issued 32 major rules from May 31, 2008 to June 1, 2013. According to EPA officials, the agency issued 9 of these rules following settlements in deadline suits and issued 5 of the 32 rules to comply with court orders following deadline suits in which plaintiffs and EPA were unable to reach a settlement. The remaining 18 rules, according to agency officials, were not associated with a deadline suit. Table 3 lists the 32 major rules EPA issued from May 31, 2008 to June 1, 2013. The Environmental Protection Agency (EPA) issued 9 major rules from May 31, 2008 to June 1, 2013 following seven settlements in deadline suits. Each of the seven settlements established a schedule to either issue a statutorily required rule or make a determination that such a rule is not appropriate or necessary pursuant to the relevant statutory provision. EPA negotiated extensions to the deadlines to issue the final rules in five of the seven settlements. Table 4 summarizes the contents of the seven settlements. In addition to the individual named above, Vincent P. Price, Assistant Director; Rodney Bacigalupo; Elizabeth Beardsley; John Delicath; Charles Egan; Cindy Gilbert; Tracey King; and Kathryn Smith made key contributions to this report.

Laws, such as the Clean Air Act, require EPA to issue rules by specific deadlines. Citizens can sue EPA for not issuing rules on time. These lawsuits are sometimes known as deadline suits. EPA sometimes negotiates a settlement to issue a rule by an agreed upon deadline. Some have expressed concern that the public is not involved in the negotiations and that settlements affect EPA rulemaking priorities. GAO was asked to review EPA settlements in deadline suits. This report examines (1) key environmental laws that allow deadline suits and the factors EPA and DOJ consider in determining whether to settle these suits, (2) the terms of settlements that led EPA to issue major rules in the last 5 years and the extent to which the public commented on the settlements, and (3) the extent to which settlements in deadline suits have affected EPA's rulemaking priorities. GAO identified key laws allowing deadline suits through legal research and interviewed agency officials to understand the factors considered in determining whether to settle these suits. EPA identified the major rules it issued following settlements and GAO examined the text of those settlements. GAO examined EPA documentation to determine the extent to which the public commented on the settlements. Through data from EPA's Office of General Counsel and discussions with officials, GAO determined the extent to which settlements affected EPA's rulemaking priorities. GAO identified seven key environmental laws that allow citizens to file a deadline suit against the Environmental Protection Agency (EPA) (see table) and EPA and the Department of Justice (DOJ) consider several factors in determining whether or not to settle these suits. The seven key environmental laws include, among others, the Clean Air Act and the Clean Water Act. EPA works with DOJ--which represents EPA in litigation --to decide whether to settle a deadline suit. EPA and DOJ officials stated that the factors they consider include (1) the cost of litigation, (2) the likelihood that EPA will win the case if it goes to trial, and (3) whether EPA and DOJ believe they can negotiate a settlement that will provide EPA with sufficient time to complete a final rule if required to do so. Of the total number of major rules EPA promulgated from May 31, 2008 to June 1, 2013, nine were issued following seven settlements in deadline lawsuits, all under the Clean Air Act. The terms of the settlements in these deadline suits established a schedule to issue a statutorily required rule(s) or to issue a rule(s) unless EPA determined that doing so was not appropriate or necessary pursuant to the relevant statutory provision. None of the seven settlements included terms that finalized the substantive outcome of a rule. The Clean Air Act requires EPA to solicit public comments on drafts of settlements. The nine major rules were Clean Air Act rules, and EPA solicited public comments on all of the drafts. EPA received between 1 and 19 comments on six of the settlements and no comments on one settlement. EPA determined that none of the comments disclosed facts or other considerations compelling it to withdraw or withhold consent for the settlement. The effect of settlements in deadline suits on EPA's rulemaking priorities is limited. According to EPA officials, settlements in deadline suits primarily affect a single office within EPA--the Office of Air Quality Planning and Standards (OAQPS)--because most deadline suits are based on provisions of the Clean Air Act for which that office is responsible. These provisions have recurring deadlines requiring EPA to set standards and to periodically review--and revise as necessary--those standards. OAQPS sets these standards through the rulemaking process. OAQPS officials said that deadline suits affect the timing and order in which rules are issued but not which rules are issued. Source: GAO. | GAO-15-34 GAO is not making any recommendations in this report. DOJ and EPA concur with GAO's findings.

Inventory shipped for repair or in support of repairs typically involves the following types of material: Manager-directed material, which item managers direct to be shipped to a contractor for repair, alteration, or modification. Government-furnished material, which contractors requisition in support of repairs, alterations, or modifications. Generally, this material is incorporated into or attached onto deliverable end items (final products such as aircraft) or consumed or expended in performing the contract. For fiscal year 2000, Air Force logistics records for all inventory control points showed the following number, value, and type of material had been shipped to contractors (see table 1). Table 2 shows a breakdown of all shipments to contractors in fiscal year 2000 by the security type, number of items, and dollar value of shipments. Department of Defense (DOD) policy contains specific internal control procedures to help ensure that shipped inventory is accounted for. When an item is shipped, a shipping notification should be sent to the receiving contractors. The intended recipient of the material is responsible for notifying the inventory control point once the item has been received or if a discrepancy exists (e.g., the item was not received or the quantity received was less than expected). The notification of receipt and discrepancy reporting processes are internal controls designed to account for all shipped assets. If within 45 days of shipment the inventory control point has not been notified that a shipment has arrived, it is required to follow up with the intended recipient. The rationale behind this requirement is that until receipt is confirmed, the exact status of the shipment is uncertain and therefore vulnerable to fraud, waste, and abuse. As a result of departures from required procedures or ineffective procedures, the Air Force's shipped inventory is vulnerable to loss or theft. First, the Air Force has allowed repair contractors access to government- furnished material not needed to fulfill the repair contract. Second, inventory control points have not provided property administrators with the required government-furnished material status reports to use in verifying contractor records of government-furnished material received. Third, contractors have not adequately recorded receipt of items and reported receipt to inventory control points. Fourth, contractors have not routinely reported discrepant shipments to the designated shipping activity. Fifth, Air Force procedures for following up on shipments that contractors have not confirmed as received are ineffective. Sixth, the Air Force has not provided adequate oversight of shipments to contractors. DOD requires inventory control points to establish one or more internal control systems (i.e., management control activities) to restrict contractor access to government-furnished material. Among other things intended, the control systems are to screen all repair contractor requisitions for validation and approval and to restrict contractor access to government- furnished material to the specific items and quantities listed in the repair contract. However, the inventory control points' systems generally screen and restrict access to government-furnished material by a federal stock class or stock group rather than by stock number and quantity. Also, the contracts we reviewed generally did not specify, as required, both the items and the quantities of material that the inventory control points had agreed to furnish to contractors. As long as contractors requisition items within an authorized federal stock class or stock group, government- furnished material is automatically provided whether or not it is needed to fulfill the repair contract. In a July 1997 memorandum, the Air Force Materiel Command reiterated the requirement that the inventory control points screen all repair contractor requisitions by stock number and quantity for validation and approval, and it developed procedures for an automated method of loading stock numbers and quantities into the control systems. Air Force officials indicate that the major obstacle now is that the procedures for the automated method of loading stock numbers do not work as designed. For this reason, the Air Force Materiel Command waived the requirement for screening by stock number and quantity and allowed inventory control points to continue to screen contractor requisitions for government- furnished material at the federal stock class or stock group level. The following example illustrates the weakness in the current screening process. A contract we reviewed listed 14 specific, stock-numbered parts--from seven different stock classes--that were required to repair the end item (an electronic countermeasures system for the B-52H aircraft). However, because the inventory control point's system screened and restricted the contractor's access to government-furnished material by federal stock class, the contractor could requisition any item from the seven different stock classes in which the 14 parts are grouped. The seven stock classes contain over 502,900 other stock-numbered parts that are not needed to repair the end item. The contractor could requisition any of these parts, in any quantity, and the improper requisition could pass through the inventory control point's screening system and be approved. We did not determine whether contractors had obtained unauthorized material as a result of their access to material by federal stock class or group. However, these control weaknesses are the same as those identified in earlier reports as having allowed contractors to obtain unneeded and unauthorized material. For example, in a 1998 report on the adequacy of government oversight over government-furnished material to a contractor, the Air Force Audit Agency reported 2,978 of the 5,569 validated requisitions were not needed to accomplish the contract. The unneeded requisitions included 1,090 stock numbers valued at $17.4 million. Similarly, a 1995 DOD inspector general report on management access to the DOD supply system concluded that granting contractors access to government-furnished material in the DOD supply system by federal stock class continued to be a material internal control weakness that placed DOD material at undue risk. To independently verify that contractors have accounted for all government-furnished material received, DOD policy requires inventory control points to provide to property administrators at the Defense Contract Management Agency quarterly status reports showing all shipments of Air Force material to contractors. Inventory control point officials responsible for distributing the reports to property administrators told us that the reports have not been sent. We found that existing Air Force procedures governing distribution of the quarterly status reports do not assign responsibility for distributing these reports to officials at inventory control points and are outdated (e.g., the systems for generating the reports no longer exist). Air Force officials acknowledge that the procedures are not current and stated that they are in the process of updating them. Proper distribution of government-furnished material status reports has been a long-standing issue. For example, a 1995 Department of Defense inspector general audit report on management access to the DOD supply system stated that the Air Force should take the distribution of its status report more seriously, ensuring that the report is issued each quarter. The audit report asserts that property administrators are the last line of defense in protecting material resources and, as such, they need an independent record of the government-furnished material shipped to contractors. The Air Force's quarterly status report provides such a record; without it, property administrators must rely entirely on contractors' records. Department of Defense and Air Force policies contain specific procedures governing the notifications that contractors should send to their inventory control points when they receive shipped inventory. The policies state that, upon receipt of an item, a receiving contractor must enter the shipment into its inventory records and notify the inventory control point of material receipt. To accomplish notification of receipt, the Air Force requires contractors to enter receipts into a reporting system at the appropriate inventory control point. The notification of receipt is an internal control designed to account for all shipped assets. During fiscal year 2000, the Air Force shipped thousands of items with a reported value at about $2.6 billion to contractors. As part of our review, we sought to determine whether items reportedly shipped to repair contractors had in fact been received and entered into both the contractors' records and the inventory control points' reporting systems. Our review indicated that contractors are not following policies governing receipt notification. Of the $2.6 billion of inventory shipped to contractors in fiscal year 2000, we judgmentally selected and reviewed 9,003 items valued at $814.2 million. We found that contractors had not always properly posted material receipts for these items into their records or into the inventory control points' reporting systems. Specifically, 48 percent of these items had been received and properly posted by contractors to the inventory control points' reporting systems; 19 percent of the shipped items had been received but were either improperly posted or not posted by contractors to their records and/or the inventory control points' reporting systems; and 33 percent of items reportedly had not been received by contractors or lacked sufficient documentation to prove that they had been accounted for by the contractors. The items unaccounted for included those that warrant a high degree of protection and control because of their high value and/or their security classification, such as circuit card assemblies and navigation set control units. This lack of documentation is in itself an internal control weakness. For example, the federal acquisition regulation requires that contractors' property control records provide a complete, current, and auditable record of all transactions involving government property. Table 3 presents more detailed information on the items in our review. No dominant cause for these failures to properly account for shipment receipts emerged in our discussions with contractor officials. However, in our interviews with contractor personnel, they identified a number of factors: inadequate training/instruction on how to use and enter information into the reporting system, lack of awareness of reporting procedures, data transmission problems (e.g., transactions entered by the contractors did not show up in the reporting system), data input errors made while attempting to enter information into the data deleted from the reporting system because of data storage constraints. In addition, two contracts in our review did not contain a reporting requirement. Because of these reporting problems, the inventory control points' reporting systems contained inaccurate information on large numbers of shipment receipt notifications, thus reducing the value of the information as a means of accurately and adequately accounting for all shipped assets. Inventory control point personnel indicated that they are often forced to work around the reporting systems, and they expend considerable time and effort to collect, maintain, and analyze receipt information that should be readily available to them in these automated systems. Visibility over shipped material depends in part on accurate contractor reporting of material receipts; without adequate reporting, the Air Force cannot readily account for shipped material, making it vulnerable to theft or loss. Air Force policy also requires contractors to notify the shipping activity if a discrepancy exists between items shipped and items received. The purpose of discrepancy reporting is to determine the cause of discrepancies, effect corrective action, and prevent recurrence. Such reports also provide (1) support for adjustment of property and financial inventory accounting records, (2) information as a basis for claims against contractors, and (3) information for management evaluations. As table 3 shows, 1,829 of the items (valued at about $24.2 million) we reviewed had reportedly not been received, but only 8 of the items were reported as discrepancies and resolved. For the remaining 1,821 items, we found a number of problems in discrepancy reporting. Contractor personnel did not report the discrepancies. According to most contractor personnel, this situation occurred primarily because the shipping activity did not notify them of impending shipments, thus they did not expect the shipment and could not monitor its status. Others indicated that they simply never report any discrepancies. Contractor personnel reported the discrepancies, but they did not route the discrepancy reports to the appropriate shipping activity personnel who could investigate and resolve the discrepancies. Although we found that contractor personnel did not properly route shipping discrepancies to the appropriate shipping activity, they were under the impression that they had. Contractor personnel reported the discrepancies, but did not follow up when no response was received from the shipping activity. They did not follow up because they planned to reorder the material that they had not received. Contractor personnel reported the discrepancies, but when they later determined that the materials had been received, they did not cancel the discrepancy reports. This failure to comply with Air Force procedures undermines the Air Force's ability to determine the cause of discrepancies, effect corrective action, and prevent recurrence. This situation can also result in loss of control over material, lost recovery rights, and material remaining in a questionable status for long periods of time. To ensure proper reporting and accounting of material receipts, DOD policy requires that inventory control points follow up with the contractor within 45 days from the date of shipment if they have not been notified that a shipment has arrived. The rationale behind this requirement is that until receipt is confirmed, the exact status of the shipment is uncertain and therefore vulnerable to fraud, waste, and abuse. At present, Air Force procedures do not ensure adequate follow-up on unconfirmed receipts. According to Air Force officials, inventory control points send electronic inquiries to contractors to follow up on all shipments. However, the Air Force has not yet established a system by which (1) the inventory control points can reconcile material shipped to contractors with material received by contractors to determine unconfirmed receipts and (2) contractors can respond to the follow-up inquiries to confirm receipts or discrepancies. Consequently, inventory control points assume that all material shipped to contractors is received by them, and they close the record on the shipments without contractor confirmation of material receipt. The inventory control point does not become aware that material has not been received unless the contractor inquires about the shipment. The result is a situation in which unconfirmed receipts are officially considered delivered, an assumption that, in turn, places this material at risk of fraud, waste, abuse, and theft. The following example illustrates how the lack of adequate follow-up on unconfirmed receipts places this material at risk. In June 2000, the Defense Distribution Depot in Warner Robins, Georgia, reportedly issued and delivered 85 electron tubes to an Air Force repair contractor, but, according to contractor personnel, the shipment was never received and the contractor never reported the discrepancy to the inventory control point. In January 2002, we requested proof of issuance and delivery from the Warner Robins depot. The depot provided proof of issuance but could not confirm delivery. According to depot personnel, a delivery signature was not obtained from the contractor's receiving personnel at the time of delivery. Nevertheless, the inventory control point closed the record on this $3.5 million shipment, assuming the electron tubes had been received. The electron tubes remain unaccounted for. To address its deficiencies relating to proper reporting and accounting of material receipts, the Air Force plans to transition to the Department of Defense Commercial Asset Visibility System (CAV II). This will require a 2-year scheduled transition starting in fiscal year 2003 and ending in fiscal year 2004. Another weakness preventing effective accountability over shipped inventory relates to the Air Force's financial management system. The Chief Financial Officers Act of 1990 requires a plan for the integration of agency financial management systems. The Federal Financial Management Improvement Act of 1996 built upon the 1990 act and required agencies to maintain an integrated system (i.e., an integrated general ledger controlled system). With such a system, accounting records and logistics records (i.e., records from the supply and repair side of inventory control points) should be updated automatically when inventory items are purchased and received. Any differences between these two sets of records should be identified periodically and research conducted to alert management at the inventory control points to possible undetected loss or theft of shipped items. As part of the its latest efforts to reform its financial operations, the Department of Defense has stated that it will develop Defense-wide integrated systems. If effectively designed and implemented, these systems will be integral to ensuring effective accountability over the Air Force's shipped inventories. To evaluate and improve supply operations and reporting performance, Air Force policy requires shipping activities to record, summarize, and report to Air Force headquarters the volume and dollar value of shipment discrepancies, and headquarters is required to analyze this data to identify the causes, sources, and magnitude of discrepancies so that corrective actions can be taken. This policy is consistent with federal government standards for internal controls that require ongoing oversight to assess the quality of performance over time and to ensure that findings of audits and other reviews are promptly resolved. Air Force headquarters acknowledges that it has not requested nor collected contractor shipment discrepancy data, and, as of February 2002, had not developed a definite plan of action or a target date for full implementation. The lack of program oversight may represent inadequate management emphasis. Even if the Air Force were collecting the contractor shipment discrepancy data, it would not be meaningful because, as shown earlier, contractors are not reporting discrepancies accurately. The lack of this information impedes the Air Force's ability to evaluate and improve supply operations as well as its ability to determine which activities are responsible for lost or misplaced items. Inventory worth billions of dollars has been vulnerable to fraud, waste, and abuse because the Air Force either did not adhere to control procedures or did not establish effective procedures. Because of these control weaknesses, repair contractors have access to items and quantities of items not specified in their contracts, and the Defense Contract Management Agency does not have the quarterly reports on shipment status that it needs to independently verify that contractors have accounted for shipments of government-furnished material. In addition, contractor receipt posting and discrepancy reporting practices produce incomplete and inaccurate information, impairing the ability of the Air Force to monitor shipments. Even if contractor records on shipment receipts were accurate, the Air Force's system cannot reconcile material shipped to contractors with material received by contractors, so the Air Force cannot readily identify shipments with unconfirmed receipts. Consequently, the Air Force cannot readily account for these shipments, which include classified, sensitive, and pilferable items. Finally, the Air Force has not exercised the required extent of program oversight by collecting data on contractor shipment discrepancies and using it to assess practices for safeguarding shipped inventory; as a result, it cannot identify the extent and cause of contractor shipment discrepancies or take corrective action. To improve the control of inventory being shipped, we recommend that the Secretary of Defense direct the Secretary of the Air Force to undertake the following: Improve processes for providing contractor access to government- furnished material by listing specific stock numbers and quantities of material in repair contracts (as they are modified or newly written) that the inventory control points have agreed to furnish to contractors; demonstrating that automated internal control systems for loading and screening stock numbers and quantities against contractor requisitions perform as designed; loading stock numbers and quantities that the inventory control points have agreed to furnish to contractors into the control systems manually until the automated systems have been shown to perform as designed; and requiring that waivers to loading stock numbers and quantities manually are adequately justified and documented based on cost- effective and/or mission-critical needs. Revise Air Force supply procedures to include explicit responsibility and accountability for generating quarterly reports of all shipments of Air Force material to distributing the reports to Defense Contract Management Agency property administrators. Determine, for the contractors in our review, what actions are needed to correct problems in posting material receipts. Determine, for the contractors in our review, what actions are needed to correct problems in reporting shipment discrepancies. Establish interim procedures to reconcile records of material shipped to contractors with records of material received by them, until the Air Force completes the transition to its Commercial Asset Visibility system in fiscal year 2004. Comply with existing procedures to request, collect, and analyze contractor shipment discrepancy data to reduce the vulnerability of shipped inventory to undetected loss, misplacement, or theft. In written comments on a draft of this report (see app. II), the Department of Defense concurred with six of the recommendations, non-concurred with one recommendation, and partially concurred with three recommendations. DOD did not concur with our second recommendation--to improve processes for controlling contractor access to government-furnished material by developing automated internal control systems for loading stock numbers and quantities and screening them against contractor requisitions. DOD states that the Air Force Special Support Stock Control system already has the recommended capability in place. Although the Air Force Special Support Stock Control system may be capable of loading stock numbers and quantities and screening them against contractor requisitions, we found that in practice the system was not able to carry out this function as designed. A January 2002 software change implemented to address the issue did not resolve it, and Air Force officials acknowledged in April 2002 that this system was still not working properly. To correct the weakness in its current automated internal control systems, Air Force officials stated that in April 2002 the Air Force Materiel Command planned to revise its existing procedures for an automated method of loading stock numbers into the current control systems. We believe that the Air Force's actions to correct its internal control systems deficiencies are a step in the right direction, and, if the revised procedures do work as designed, they will improve the process for controlling contractor access to government-furnished material. Based on DOD's comments, we modified our recommendation to emphasize the need to demonstrate that automated internal control systems for loading and screening stock numbers and quantities against contractor requisitions perform as designed. DOD partially concurred with the recommendation to load stock numbers and quantities for items requisitioned by contractors into the control systems manually until the automated system is implemented. DOD again stated that the Air Force Materiel Command's current control systems already provide the capability for loading and screening national stock numbers and quantities against contractor requisitions. However, DOD directed the Air Force to determine the feasibility of establishing an interim capability until all repair contracts are written in compliance with Air Force policies and procedures. We continue to believe our recommendation will be valid until the previously discussed automated internal control system for loading stock numbers and quantities and screening them against contractor requisitions is proven to work as designed. DOD partially concurred with the recommendation to require that waivers to loading stock numbers and quantities manually are adequately justified and documented based on cost-effective and/or mission-critical needs. DOD reiterated that the current Air Force control systems already provide the capabilities for loading stock numbers and quantities and screening them against contractor's requisitions. DOD further states that it will direct Headquarters, Air Force Installations and Logistics, to ensure that future decisions affecting validation of contractor orders involving government-furnished materiel or equipment are based on cost- effectiveness and/or mission-critical needs and that requests are processed in accordance with DOD policies and procedures. We agree with DOD that any future waivers should be justified and documented. However, we continue to believe our recommendation will be valid until the waiver is rescinded, because the waiver allows for the inventory control point to continue to load and screen contractor requisitions at the federal stock class or stock group levels rather than loading contracts at the required national stock number level. Finally, DOD partially concurred with the recommendation to comply with existing procedures to request, collect, and analyze contractor shipment discrepancy data to reduce the vulnerability of shipped inventory to undetected loss, misplacement, or theft. DOD stated that in February 2001, Headquarters, Air Force Installations and Logistics, directed all Air Force major commands to collect and analyze these types of supply discrepancies for possible trends. DOD added that each major command was tasked to provide Air Force Installations and Logistics a semi-annual report of its findings (negative reports were not required). DOD recently directed Headquarters, Air Force Installations and Logistics, to re- emphasize this requirement to all major commands and to require that all major commands submit a report on their findings for the last 12 months. Moreover, a negative report will be required if no supply discrepancies were received. While we believe this is a step in the right direction, we also believe the DOD response to our recommendation does not address the contractor discrepancy reporting issues raised in this report. Although some Air Force major commands may actually be collecting and analyzing shipment discrepancies at their Air Force bases, we found that similar contractor shipment discrepancy data has not been requested nor collected. As we stated in this report, Air Force headquarters acknowledges that it has neither requested nor collected these contractor discrepancy report data for shipments, and, as of February 2002, had not developed a definite plan of action or a target date for full implementation. We continue to believe the conditions we reported on and our recommendation are still valid and should be addressed by DOD. Based on DOD's comments, we have made it clear that the shipment discrepancy data referred to in this report and in the related recommendation was provided by the contractors. Appendix I contains the scope and methodology for this report. DOD's written comments on this report are reprinted in their entirety in appendix II. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretary of the Air Force; the Director, Office of Management and Budget; and the Director, Defense Logistics Agency. We will also make copies available to others upon request. Please contact me at (202) 512-8412, or Lawson Gist, Jr. (202) 512-4478, if you or your staff have any questions concerning this report. Other GAO staff acknowledgments are listed in appendix III. To assess the Air Force's and its repair contractors' adherence to procedures for controlling shipped inventory, we took the following steps: To identify criteria for controlling shipped inventory, we reviewed Department of Defense and Air Force policies and procedures, obtained other relevant documentation related to shipped inventory, and discussed inventory management procedures with officials at the following locations: Headquarters, Department of the Air Force, Washington, D.C.; the Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; the Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma; the Ogden Air Logistics Center, Hill Air Force Base, Utah; the Warner Robins Air Logistics Center, Robins Air Force Base, Georgia; the Defense Contract Management Agency, Alexandria, Virginia; and the Defense Logistics Management Standards Office, Fort Belvoir, Virginia. To identify the number, value, and types of shipped inventory, we obtained computerized supply-side records of all government-furnished material shipments and manager-directed material shipments between October 1999 and September 2000 from the Air Force Materiel Command at Wright- Patterson Air Force Base, Ohio. The records contained descriptive information about each shipment, including the document number, national stock number, and quantity shipped. We excluded broken items shipped from end-user activities to contractor repair facilities and repaired material returned from a contractor repair facility to a storage activity or end user because the Air Force Materiel Command could not readily identify and provide the descriptive information. To determine the security type of selected shipments in fiscal year 2000, we identified the national stock number for all shipments of government-furnished material and manager-directed material. We then matched the national stock number with security classification codes in the Department of Defense Federal Logistics Information System. To select contractors and items shipped to them, we used computerized shipment data obtained from the Air Force Materiel Command. To develop our methodology, we conducted a preliminary review using three judgmentally selected contractors; two contractors were chosen on the basis of their proximity to the inventory control points, and the third was selected because of the substantial volume of shipments between it and all of the inventory control points. For these initial contractors, we selected 214 government-furnished material items and 1,159 manager-directed material items, based on such factors as the national stock number of the items and the number of items and/or dollar value of the shipments. Subsequently, we judgmentally selected an additional nine repair contractors, three for each inventory control point, that had either the largest dollar value or the largest number of government-furnished and manager-directed items shipped to them. For these contractors, we then selected 188 government-furnished material items and 7,442 manager- directed material items based on the military sensitivity of the items in the shipments and the unit price and/or dollar value of the shipments. Because the number of selected contractors and shipments was limited and judgmentally selected, the results of our analysis cannot be projected to all Air Force repair contractors and shipments. To assess whether shipments had been received and entered into the inventory control points' repair-side reporting system, we obtained from the inventory control points their computer-generated shipment receipt histories. The receipt histories contained descriptive information about each shipment, including the document number, national stock number, and quantity reported as received. We did not independently verify the overall accuracy of the databases for which we obtained data, but used them as a starting point for selecting shipments that we then tracked back to records and documents on individual transactions. Because our conclusions are based only on those shipments for which we tracked back to documents, use of this data is reasonable for our purposes. To determine whether contractors had accounted for our selected shipments, we then matched the Air Force Materiel Command supply-side records of shipments to inventory control points' repair-side receipt histories. When we identified discrepancies, we followed up with the repair contractors and inventory control points by tracking items back to contractor inventory records and by holding discussions with officials at the following locations: BAE Flight Systems, Mojave, California; Boeing, San Antonio, Texas; Boeing Electronic Systems, Heath, Ohio; Heroux, Inc., Quebec, Canada; ITT Avionics, Clifton, New Jersey; Lockheed Martin, Marietta, Georgia; Lockheed Martin, San Antonio, Texas; Lockheed Martin Lantirn, Warner Robins, Georgia; Northrop Grumman, Baltimore, Maryland; Northrop Grumman, Warner Robins, Georgia; PEMCO Aeroplex, Birmingham, Alabama; Teledyne Electronic Technologies, Warner Robins, Georgia; and the Defense Distribution Depots (located in Warner Robins, Georgia, and Oklahoma City, Oklahoma). To determine what happened to selected items that had reportedly not been received by contractors, our Office of Special Investigations followed up with commercial carriers by obtaining proof of delivery information and by holding discussions with officials at the following locations: ABF Freight Systems, Inc., Fort Smith, Arkansas; Associated Global Systems, Inc., New Hyde Park, New York; CorTrans Logistics, LLC, Wooddale, Illinois; Emery Worldwide, Ontario, California; Federal Express Corporation, Somerset, New Jersey; and United Parcel Service, Washington, D.C. To learn whether issues associated with unaccounted-for shipments were adequately resolved, we reviewed Department of Defense, Air Force, and Air Force Materiel Command implementing guidance. Such information provided the basis for conclusions regarding the adherence to procedures for controlling shipped inventory. To determine whether the Air Force had emphasized shipped inventory as part of its assessment of internal controls, we reviewed assessments from the Department of the Air Force, the Oklahoma City Air Logistics Center, the Ogden Air Logistics Center, and the Warner Robins Air Logistics Center for fiscal years 1999 and 2000. Our work was performed from May 2001 through April 2002 in accordance with generally accepted government auditing standards. We conducted our other investigative work during March 2002 and April 2002 in accordance with investigative standards established by the President's Council on Integrity and Efficiency. Key contributors to this report include Sandra F. Bell, George Surosky, Susan Woodward, Jay Willer, David Fisher, Norman M. Burrell, and John Ryan. Performance and Accountability Series: Major Management Challenges and Program Risks--Department of Defense. GAO-01-244. Washington, D.C.: January 2001. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. Defense Inventory: Plan to Improve Management of Shipped Inventory Should Be Strengthened. GAO/NSIAD-00-39. Washington, D.C.: February 22, 2000. Department of the Navy: Breakdown of In-Transit Inventory Process Leaves It Vulnerable to Fraud. GAO/OSI/NSIAD-00-61. Washington, D.C.: February 2, 2000. Defense Inventory: Property Being Shipped to Disposal Is Not Properly Controlled. GAO/NSIAD-99-84. Washington, D.C.: July 1, 1999. DOD Financial Management: More Reliable Information Key to Assuring Accountability and Managing Defense Operations More Efficiently. GAO/T-AIMD/NSIAD-99-145. Washington, D.C.: April 14, 1999. Defense Inventory: DOD Could Improve Total Asset Visibility Initiative With Results Act Framework. GAO/NSIAD-99-40. Washington, D.C.: April 12, 1999. Defense Inventory: Navy Procedures for Controlling In-Transit Items Are Not Being Followed. GAO/NSIAD-99-61. Washington, D.C.: March 31, 1999. Performance and Accountability Series: Major Management Challenges and Program Risks--Department of Defense. GAO/OCG-99-4. Washington, D.C.: January 1999. High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1999. Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious Financial Management Problems. GAO/T- AIMD/NSIAD-98-158. Washington, D.C.: April 16, 1998. Department of Defense: In-Transit Inventory. GAO/NSIAD-98-80R. Washington, D.C.: February 27, 1998. Inventory Management: Vulnerability of Sensitive Defense Material to Theft. GAO/NSIAD-97-175. Washington, D.C.: September 19, 1997. Defense Inventory Management: Problems, Progress, and Additional Actions Needed. GAO/T-NSIAD-97-109. Washington, D.C.: March 20, 1997. High-Risk Series: Defense Inventory Management. GAO/HR-97-5. Washington, D.C.: February 1997. High-Risk Series: Defense Financial Management. GAO/HR-97-3. Washington, D.C.: February 1997.

GAO has considered Department of Defense (DOD) inventory management to be a high-risk area since 1990 because inventory management systems and procedures are ineffective. This report evaluates the Air Force's inventory control procedures for material shipped to contractors for repair or for use in repair. The Air Force and contractor personnel have not complied with DOD and Air Force inventory control procedures designed to safeguard material shipped to contractors, placing items worth billions of dollars at risk of fraud, waste, and abuse. The Air Force's three inventory control points have not restricted repair contractors' access to the specific items and quantities of government-furnished material needed to accomplish the contract. Quarterly reports on the status of shipped material have not been sent to property administration officials at the Defense Contract Management Agency. Contractors receiving shipped material have not (1) properly entered the receipt of shipments into their records and into the inventory control points' reporting systems or (2) routinely reported shipment discrepancies. Air Force procedures for following up on shipments that contractors have not confirmed as received are ineffective, leaving the status of the shipments uncertain. The Air Force has not provided adequate program oversight because it does not request and analyze data on contractor shipment discrepancies to identify their extent and cause so that corrective action may be taken.

In August 1993, the Congress enacted the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993, P.L. 103-66), which established the EZ/EC program. The act specified that an area to be selected for the program must meet specific criteria for characteristics such as geographic size and poverty rate and must prepare a strategic plan for implementing the program. The act also authorized the Secretary of Housing and Urban Development and the Secretary of Agriculture to designate the EZs and ECs in urban and rural areas, respectively; set the length of the designation at 10 years; and required that nominations be made jointly by the local and state governments. The act also amended title XX of the Social Security Act to authorize the special use of Social Services Block Grant (SSBG) funds for the EZ program. The use of SSBG funds was expanded to cover a range of economic and social development activities. Like other SSBG funds, the funds allotted for the EZ program are granted by the Department of Health and Human Services (HHS) to the state, which is fiscally responsible for the funds. HHS' regulations covering block grants (45 C.F.R. part 96) provide maximum fiscal and administrative discretion to the states and place full reliance on state law and procedures. HHS has encouraged the states to carry out their EZ funding responsibilities with as few restrictions as possible under the law. After the state grants the funds to the EZ or the city, the EZ can draw down the funds through the state for specific projects over the 10-year life of the program. The Clinton administration announced the EZ/EC program in January 1994. The federal government received over 500 nominations for the program, including 290 nominations from urban communities. On December 21, 1994, the Secretaries of Housing and Agriculture designated the EZs and ECs. All of the designated communities will receive federal assistance; however, as established by OBRA 1993, the EZs are eligible for more assistance through grants and tax incentives than the ECs. After making the designations, HUD issued implementation guidelines describing the EZ/EC program as one in which (1) solutions to community problems are to originate from the neighborhood up rather than from Washington down and (2) progress is to be based on performance benchmarks established by the EZs and ECs, not on the amount of federal money spent. The benchmarks are to measure the results of the activities described in each EZ's or EC's strategic plan. When we issued our December 1996 report, all six of the urban EZs had met the criteria defined in OBRA 1993, developed a strategic plan, signed an agreement with HUD and their respective states for implementing the program, signed an agreement with their states for obtaining the EZ/EC SSBG funds, drafted performance benchmarks, and established a governance structure. However, the EZs differed in their geographic size, population, and other demographic characteristics, reflecting the selection criteria. In addition, the local governments had chosen different approaches to implementing the EZ program. Atlanta, Baltimore, Detroit, New York, and Camden had each established a nonprofit corporation to administer the program, while Chicago and Philadelphia were operating through the city government. At the state level, the types of agencies involved and the requirements for drawing down the EZ/EC SSBG funds differed. HHS awarded the funds to the state agency that managed the regular SSBG program unless the state asked HHS to transfer the responsibility to a state agency that dealt primarily with economic development. Consequently, the funds for Atlanta and New York pass through their state's economic development agency, while the funds for the other EZs pass through the state agency that manages the regular SSBG program. Each urban EZ also has planned diverse activities to meet its city's unique needs. All of them have planned activities to increase the number of jobs in the EZ, improve the EZ's infrastructure, and provide better support to families. However, the specific activities varied, reflecting decisions made within each EZ. According to HUD, the EZs had obligated over $170 million as of November 1996. However, the definition of obligations differed. For example, one EZ defined obligations as the amount of money that had been awarded under contracts. Another EZ defined obligations as the total value of the projects that had been approved by the city council, only a small part of which had been awarded under contracts. As of September 30, 1997, the six EZs had drawn down about $30 million from the EZ/EC SSBG funds for administrative costs, as well as for specific activities in the EZs. We interviewed participants in the urban EZ program and asked them to identify what had and had not gone well in planning and implementing the program. Our interviews included EZ directors and governance board members, state officials involved in drawing down the EZ/EC SSBG funds, contractors who provided day-to-day assistance to the EZs, and HUD and HHS employees. Subsequently, we surveyed 32 program participants, including those we had already interviewed, and asked them to indicate the extent to which a broad set of factors had helped or hindered the program's implementation. While the survey respondents' views cannot be generalized to the entire EZ/EC program, they are useful in understanding how to improve the current EZ program. In the 27 surveys that were returned to us, the following five factors were identified by more than half of the survey respondents as having helped them plan and implement the EZ program: community representation on the EZ governance boards, enhanced communication among stakeholders, assistance from HUD's contractors (called generalists), support from the city's mayor, and support from White House and cabinet-level officials. Similarly, the following six factors were frequently identified by survey respondents as having constrained their efforts to plan and implement the EZ program: difficulty in selecting an appropriate governance board structure, the additional layer of bureaucracy created by the state government's involvement, preexisting relationships among EZ stakeholders, pressure for quick results from the media, the lack of federal funding for initial administrative activities, and pressure for quick results from the public and private sectors. From the beginning, the Congress and HUD have made evaluation plans an integral part of the EZ program. OBRA 1993 required that each EZ applicant identify in its strategic plan the baselines, methods, and benchmarks for measuring the success of its plan and vision. In its application guidelines, HUD amplified the act's requirements by asking each urban applicant to submit a strategic plan based on four principles: (1) creating economic opportunity for the EZ's residents, (2) creating sustainable community development, (3) building broad participation among community-based partners, and (4) describing a strategic vision for change in the community. These guidelines also stated that the EZs' performance would be tracked in order to, among other things, "measure the impact of the EZ/EC program so that we can learn what works." According to HUD, these four principles serve as the overall goals of the program. Furthermore, HUD's implementation guidelines required each EZ to measure the results of its plan by defining benchmarks for each activity in the plan. HUD intended to track performance by (1) requiring the EZs to report periodically to HUD on their progress in accomplishing the benchmarks established in their strategic plans and (2) commissioning third-party evaluations of the program. HUD stated that information from the progress reports that the EZs prepare would provide the raw material for annual status reports to HUD and long-term evaluation reports. HUD reviews information on the progress made in each EZ and EC to decide whether to continue each community's designation as an EZ or an EC. At the time that we issued our December 1996 report, all six of the urban EZs had prepared benchmarks that complied with HUD's guidelines and described activities that they had planned to implement the program. In most cases, the benchmarks indicated how much work, often referred to as an output, would be accomplished relative to a baseline. For example, a benchmark for one EZ stated that the EZ would assist businesses and entrepreneurs in gaining access to capital resources and technical assistance through the establishment of a single facility called a one-stop capital shop. The associated baseline was that there was currently no one-stop capital shop to promote business activity. The performance measures for this benchmark included the amount of money provided in commercial lending, the number of loans made, the number of consultations provided, and the number of people trained. Also by December 1996, HUD had (1) defined the four key principles, which serve as missions and goals for the EZs; (2) required baselines and performance measures for benchmarks in each EZ to help measure the EZ's progress in achieving specific benchmarks; and (3) developed procedures for including performance measures in HUD's decision-making process. However, the measures being used generally described the amount of work that would be produced (outputs) rather than the results that were anticipated (outcomes). For example, for the benchmark cited above, the EZ had not indicated how the outputs (the amount of money provided in commercial lending, the number of loans made, the number of consultations provided, and the number of people trained) would help to achieve the desired outcome (creating economic opportunity, the relevant key principle). To link the outputs to the outcome, the EZ could measure the extent to which accomplishing the benchmark increased the number of businesses located in the zone. Without identifying and measuring desired outcomes, HUD and the EZs may have difficulty determining how much progress the EZs are making toward accomplishing the program's overall mission. HUD officials agreed that the performance measures used in the EZ program were output-oriented and believed that these were appropriate in the short term. They believed that the desired outcomes of the EZ program are subject to actions that cannot be controlled by the entities involved in managing this program. In addition, the impact of the EZ program on desired outcomes cannot be isolated from the impact of other events. Consequently, HUD believed that defining outcomes for the EZ program was not feasible. Concerns about the feasibility of establishing measurable outcomes for programs are common among agencies facing this difficult task. However, because HUD and the EZs have made steady and commendable progress in establishing an output-oriented process for evaluating performance, they have an opportunity to build on their efforts by incorporating measures that are more outcome-oriented. Specifically, HUD and the EZs could describe measurable outcomes for the program's key principles and indicate how the outputs anticipated from one or more benchmarks will help achieve those outcomes. Unless they can measure the EZs' progress in producing desired outcomes, HUD and the EZs may have difficulty identifying activities that should be duplicated at other locations. In addition, HUD and the EZs may not be able to describe the extent to which the program's activities are helping to accomplish the program's mission. Madam Chairman, this concludes our prepared remarks. We will be pleased to respond to any questions that you or other Members of the Subcommittee might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO discussed the Empowerment Zone and Enterprise Community (EZ/EC) program, focusing on: (1) the status of the program's implementation in the six urban empowerment zones, which are located along the east coast and in the mid-west regions of the United States; (2) the factors that program participants believe have either helped or hindered efforts to carry out the program; and (3) the plans for evaluating the program. GAO noted that: (1) all six of the urban EZs had met the criteria defined in the program's authorizing legislation, developed a strategic plan, signed an agreement with the Department of Housing and Urban Development (HUD) and their respective states for implementing the program, signed an agreement with their states for obtaining funds, drafted performance benchmarks, and established a governance structure; (2) however, the EZs differed in their geographic and demographic characteristics, reflecting the selection criteria in the authorizing legislation; (3) many officials involved in implementing the program generally agreed on factors that had either helped or hindered their efforts; (4) for example, factors identified as helping the program's implementation included community representation within the governance structures and enhanced communication among stakeholders; (5) similarly, factors identified as hindering the program's implementation included preexisting relationships among EZ stakeholders and pressure for quick results; (6) from the beginning, the Congress and HUD made evaluation plans an integral part of the EZ program by requiring each community to identify in its strategic plan the baselines, methods, and benchmarks for measuring the success of its plan; and (7) however, the measures being used generally describe the amount of work that will be produced (outputs) rather than the results that are anticipated (outcomes).

DOD oversees a worldwide school system to meet the educational needs of military dependents and others, such as the children of DOD's civilian employees overseas. The Department of Defense Education Activity (DODEA) administers schools both within the United States and overseas. In school year 2006-07, DODEA had schools within 7 states, Puerto Rico, Guam, and in 13 foreign countries. DOD has organized its 208 schools into three areas: the Americas (65), Europe (98), and Pacific (45). Almost all of the domestic schools are located in the southern United States. The overseas schools are mostly concentrated in Germany and Japan, where the U.S. built military bases after World War II. Given the transient nature of military assignments, these schools must adapt to a high rate of students transferring into and out of their schools. According to DOD, about 30 percent of its students move from one school to another each year. These students may transfer between DOD schools or between one DOD school and a U.S. public school. Although DOD is not subject to the No Child Left Behind Act of 2001 (NCLBA), it has its own assessment and accountability framework. Unlike public schools, DOD schools receive funding primarily from DOD appropriations rather than through state and local governments or Department of Education grants. U.S. public schools that receive grants through the NCLBA must comply with testing and reporting requirements designed to hold schools accountable for educating their students and making adequate yearly progress. DOD has adopted its own accountability framework that includes a 5-year strategic plan, an annual report that measures the overall school system's progress, and data requirements for school improvement plans. The strategic plan sets the strategic direction for the school system and outlines goals and performance measures to determine progress. In annual reports, DOD provides a broad overview of its students' overall progress, including the results of standardized tests. On DOD's Web site, DOD publishes more detailed test score results for each school at each grade level. DOD also requires each school to develop its own improvement plan that identifies specific goals and methods to measure progress. School officials have the flexibility to decide what goals to pursue but must identify separate sources of data to measure their progress in order to provide a more complete assessment. For example, if a school chooses to focus on improving its reading scores, it must identify separate assessment tests or other ways of measuring the progress of its students. DOD is subject to many of the major provisions of IDEIA and must include students with disabilities in its standardized testing. However, unlike states and districts subject to NCLBA, DOD is not required to report publicly on the academic achievement of these students. States and public school districts that receive funding through IDEIA must comply with various substantive, procedural, and reporting requirements for students with disabilities. For example, they must have a program in place for evaluating and identifying children with disabilities, developing an individualized education program (IEP) for such students, and periodically monitoring each student's academic progress under his or her IEP. Under IDEIA, children with disabilities must be taught, to the extent possible, with non-disabled students in the least restrictive environment, such as the general education classroom, and must be included in standardized testing unless appropriate accommodations or alternate assessments are required by their IEPs. Although DOD schools do not receive funding through IDEIA, they generally are subject to the same requirements concerning the education of children with disabilities. However, unlike states and districts that are subject to NCLBA, DOD schools are not required to report publicly on the performance of children with disabilities on regular and alternate assessments. Definitions of dyslexia vary from broad definitions that encompass almost all struggling readers to narrow definitions that only apply to severe cases of reading difficulty. However, DOD and others have adopted a definition developed by dyslexia researchers and accepted by the International Dyslexia Association, a non-profit organization dedicated to helping individuals with dyslexia. This definition describes dyslexics as typically having a deficit in the phonological component of language, the individual speech sounds that make up words, which typically causes difficulty with accurate or fluent word recognition, poor spelling ability, and problems in reading comprehension that can impede growth of vocabulary. Recent research has identified a gene that may be associated with dyslexia and has found that dyslexia often coincides with behavior disorders or speech and language disabilities and can range from mild to severe. Nevertheless, the percentage of people who have dyslexia is unknown with estimates varying from 3 to 20 percent, depending on the definition and identification method used. Research promotes early identification and instruction for dyslexics to help mitigate lifelong impacts. DOD offers professional development to all staff to help them support students who struggle to read, including those who may have dyslexia, and used designated funds to supplement existing training efforts across its schools. This professional development prepares teachers to assess student literacy skills and provides strategies to help instruct struggling readers. DOD used funds designated to support students with dyslexia for the development of two new online training courses containing modules on dyslexia, for additional seats in existing online courses, and for additional literacy assessment tools. DOD offers professional development to all staff who teach struggling readers, including students who may have dyslexia, primarily through online courses. The department offers online training courses through a professional development series known as Scholastic RED. These courses are DOD's primary professional development on literacy for general education teachers. According to DOD, the department began offering the courses during the 2003-04 school year. DOD officials told us that since that time about half of the nearly 8,700 teachers in DOD schools have taken at least one Scholastic RED online course. Of the school principals who responded to our survey, almost all indicated that some of their staff members, including administrators and general and special education teachers, had participated in Scholastic RED training. Beyond Scholastic RED courses, DOD officials we interviewed told us that general education teachers also receive literacy development through instructional training in subject areas other than reading. For example, professional development on teaching at the middle school level may include guidance on how to enhance students' reading skills through the study of a particular science. Most professional development for staff working with struggling readers focuses on the assessment of student literacy skills and presents strategies for instructing students who struggle to read, some of whom may have dyslexia. Scholastic RED online courses train teachers in five basic elements of reading instruction: phonemic awareness, comprehension, phonics, fluency, and vocabulary. Research suggests that both phonics and phonemic awareness pose significant challenges to people who have dyslexia. According to course implementation materials, the training is designed to move beyond online course content and allow participants the opportunity to apply new skills in site-based study groups as well as in the classroom. Some principals and teachers indicated their schools follow this model with groups of teachers meeting to discuss best practices for applying Scholastic RED knowledge and resources in their classrooms. DOD districts and schools sometimes offer their own literacy training through a localized effort or initiative. Professional development unique to a DOD district or school may be offered by a district's special education coordinator. For example, the special education coordinator in a domestic district told us she offers literacy training to all staff, explaining that she tries to create a broader base of professionals who can more accurately identify and instruct students who are struggling readers. Regarding overseas schools, administrators in Korea told us they offer in-service workshops to help teachers improve student literacy, reading comprehension, and writing. DOD designed and provided additional training on literacy instruction for most special education teachers and other specialists under a special education initiative. The training provided these staff members with courses on how students develop literacy skills and how to teach reading across all grade levels. According to a 2004-05 DOD survey on the initiative, over half of special educators and other specialists said they had completed this training. Since the 2003-04 school year, special education teachers and other specialists have received training on topics such as the evaluation of young children's literacy skills and adjusting instruction based on student performance. The department also provided speech and language pathologists specialized training to help them assist struggling readers, including guidance on basic elements of literacy instruction and development, such as phonological awareness and vocabulary development. DOD offers another literacy professional development program for special education teachers and other specialists known as Language Essentials for Teachers of Reading and Spelling (LETRS). According to the department, LETRS is designed to give teachers a better understanding of how students learn to read and write, showing instructors how to use such knowledge to improve targeted instruction for every type of reader. According to our survey results, about 10 percent of schools had staff who had taken this course. The LETRS course is based on the concept that once teachers understand the manner in which students approach reading and spelling tasks, they can make more informed decisions on instructional approaches for all readers. Much like the other literacy training DOD offers, LETRS modules contain reading instruction approaches on areas that may present challenges for those who have dyslexia: phonemic awareness, vocabulary, and reading comprehension. Overall, DOD staff told us the literacy training the department offered was useful for them, with some indicating they wanted additional training. In responding to our survey, more than 80 percent of the principals who said their staff used Scholastic RED courses rated them as very useful for specialized instruction. Principals we interviewed told us their teachers characterize Scholastic RED concepts as practical and easy to apply in the classroom. While teachers we interviewed told us Scholastic RED training is helpful, some special education teachers indicated the course material is basic and better-suited to meet the developmental needs of general education teachers than special education teachers. For example, one special education teacher we spoke to said Scholastic RED courses do little to enhance the professional skills of special education teachers because many of these teachers have already received advanced training on reading interventions. Special education teachers did indicate, however, that training offered through the department's special education initiative has provided them with identification strategies and intervention tools to support struggling readers. Regarding the impact of the initiative's training, a DOD survey of special education teachers and other specialists found that over half of respondents said they had seen evidence of professional development designed to maximize the quality of special education services, and most had completed some professional development. The department did report, however, that respondents working with elementary school students frequently requested more training in areas such as phonemic awareness, while respondents working with high school students requested more professional development in a specific supplemental reading program used at DOD schools: Read 180. Moreover, teachers we interviewed in both foreign and domestic locations said they would like additional training on identifying and teaching students with specific types of reading challenges, including dyslexia. For example, one special education teacher we interviewed told us this specific training could help general education teachers to better understand the types of literacy challenges struggling readers face that in turn could help teachers better understand why students experience difficulties with other aspects of coursework. DOD reported it had fully obligated the $3.2 million designated for professional development on dyslexia, with about $2.9 million for online courses and literacy assessment tools. Between fiscal years 2004 and 2006, the conference committee on defense appropriations designated a total of $3.2 million within the operation and maintenance appropriation for professional development on dyslexia. As of September 2007, DOD reported it had obligated these funds for professional development in literacy, including online training courses containing components on dyslexia. Reported obligations also included tools to help teachers identify and support students who struggle to read, some of who may have dyslexia. DOD obligated the remaining designated funds for general operations and maintenance purposes. All related obligations, as reported by the department, are outlined in table 1. The online training included two newly developed courses that may be too new to evaluate and the purchase of extra seats in existing Scholastic RED training courses. The first of the new training courses to be fully developed was Fundamentals of Reading K-2. According to DOD, this course was designed to present teachers with strategies for instructing struggling readers in the early K-2 grade levels and contains six modules on the components of reading, including a specific module on dyslexia. The K-2 course was first made available in January 2006 to teachers who participated in a pilot project. DOD then opened the course to all teachers in February 2007. According to our survey results, 29 percent of the schools serving grades K-2 had used the course by the end of the school year. Nearly half of those school principals who indicated their staff used the course, however, did not indicate the extent to which it had been helpful in supporting struggling readers. It is possible the course is still too new for DOD schools to evaluate as some principals indicated on our survey that they had not heard of the course or they were not aware it was available to their staff. The second of the new online training courses, Fundamentals of Reading Grades 3-5, is not fully developed for use at this time. According to DOD officials, the course will be available to all staff in the 2007-08 school year and will also contain six modules on the components of reading, including a module on dyslexia. Additionally, DOD reported purchasing another 1,100 seats in selected Scholastic RED online training courses. The department also added a page entitled, Help your Students with Dyslexia to its main online resource site that is available to all teachers. DOD reported also using designated funds to purchase electronic literacy assessment tools and other instruments that were widely used in DOD schools, one of which received mixed reviews on its usefulness. DOD reported obligating about one-third of the designated funds for the Dynamic Indicators of Basic Early Literacy Skills (DIBELS) assessment tool. The DIBELS assessment allows a teacher to evaluate a student's literacy skills in a one-on-one setting through a series of one-minute exercises that can be administered via pen and paper or through the use of a hand-held electronic device. By using the exercises, teachers can measure and monitor these students' skill levels in concepts such as phoneme segmentation fluency, a reading component that often gives dyslexics significant difficulty. DIBELS was used to help identify struggling readers in at least half of the schools serving grades K-2, according to our survey results, and DOD plans to begin use of the assessment in additional locations during the 2007-08 school year. However, school officials and teachers had mixed reactions regarding the ease and effectiveness of using DIBELS to help identify struggling readers. In responding to our survey, about 40 percent of principals whose schools used DIBELS to help identify struggling readers indicated it was very or extremely useful, about 30 percent indicated it was moderately useful, and about 20 percent indicated it was either slightly or not at all useful. Several principals we surveyed indicated that they liked the instant results provided by the DIBELS assessment. For example, one principal called the assessment a quick and easy way to assess reading skills, saying it provides teachers with immediate feedback to help inform decisions about instruction. Others indicated the assessment is time-consuming for teachers. One kindergarten teacher we interviewed said that it is challenging to find the time to administer the test because it must be individually administered. Another principal expressed concern about the difficulty in using the electronic hand-held devices, saying the technology poses the greatest challenge to teachers in using the DIBELS assessment. According to DOD officials, the agency is currently evaluating its use of DIBELS, searching for other assessment tools, and will use the results to determine whether to continue using DIBELS or replace it with another tool. DOD purchased four other instruments to aid teachers in the evaluation of literacy skills; however, the tools are targeted to specific reading problems. According to DOD officials, they selected these tools because they measure specific skills associated with dyslexia. Table 2 shows reported use of each literacy assessment tool across DOD schools. DOD schools identify students who have difficulty reading and provide them with supplemental reading services. DOD uses standardized tests to determine which students are struggling readers, although these tests do not screen specifically for dyslexia. DOD then provides these students with a standard supplemental reading program. For those children with disabilities who meet eligibility requirements, DOD provides a special education program in accordance with the requirements of IDEIA and department guidance. Schools primarily determine students' reading ability and identify those who struggle through the use of standardized assessments. DOD uses several standardized assessments, including the TerraNova Achievement Test, and identifies those students who score below a certain threshold as having the most difficulty with reading and in need of additional reading instruction. DOD requires that schools administer these reading assessments starting in the third grade. However, some schools administer certain assessments as early as kindergarten. For example, some schools used Dynamic Indicators of Basic Early Literacy Skills (DIBELS) to identify struggling readers in grades K-2. In an effort to systematically assess students in kindergarten through second grade, DOD plans to identify assessment tools designed for these grades during school year 2007-08 and require their use throughout the school system. In addition to assessments, schools also use parent referrals and teacher observations to identify struggling readers. Several school officials with whom we spoke said that parent feedback about their children to school personnel and observations of students by teachers are both helpful in identifying students who need additional reading support. Like many public school systems in the United States, DOD school officials do not generally use the term "dyslexia." However, DOD officials told us they provided an optional dyslexia checklist to classroom teachers to help determine whether students may need supplementary reading instruction and if they should be referred for more intensive diagnostic screening. According to our survey results, 17 percent of schools used the checklist in school year 2006-07. DOD schools provide a supplemental reading program for struggling readers, some of whom may have dyslexia, a program that has some support from researchers and has received positive reviews from school officials, teachers, and parents we interviewed. The program, called READ 180, is a multimedia program for grades 3 through 12. It is designed for 90- minute sessions during which students rotate among three activities: whole-group direct instruction, small-group reading comprehension, and individualized computer-based instruction. The program is designed to build the reading skills, such as phonemic awareness, phonics, vocabulary, fluency, and comprehension. In responding to our survey, over 80 percent of the school principals indicated it was very helpful in teaching struggling readers. Several school administrators stated that it is effective with students due to the nonthreatening environment created by its multimodal instructional approach. Several teachers said the program also helped them to monitor student performance. Several parents told us that the program increased their children's enthusiasm for reading, improved their reading skills, and boosted their confidence in reading and overall self- esteem. Some parents stated that their children's grades in general curriculum courses improved as well since the children were not having difficulty with course content but rather with reading. At the secondary level, however, school officials stated that some parents chose not to enroll their child in READ 180 because of the stigma they associate with what they view as a remedial program. According to the Florida Center for Reading Research, existing research supports the use of READ 180 as an intervention to teach 6th, 7th, and 8th grade students comprehension skills, however; the center recommends additional studies to assess the program's effectiveness. Certain districts and schools have implemented additional strategies for instructing struggling readers such as using literacy experts, offering early intervention reading programs, and prioritizing reading in annual improvement plans. In the Pacific region and the Bavaria district, literacy experts work in collaboration with classroom teachers and reading specialists to design appropriate individualized instruction for struggling readers and monitor student performance. All of the elementary schools in the Pacific region offer reading support to struggling readers. Some schools offer early reading support in grades K-2. Certain districts offer early intervention to first and second graders in small groups of five and eight students, respectively. Some schools in Europe provide intensive instruction to students in first grade through Reading Recovery, a program in which struggling readers receive 30-minute tutoring sessions by specially trained teachers for 12 to 20 weeks. According to the Department of Education's What Works Clearinghouse, Reading Recovery may have positive effects in teaching students how to read. Several superintendents and principals we interviewed said that improved reading scores was one of the school's goals in their annual school-improvement plan, which is in line with DOD's strategic plan milestone of having all students in grades three, six, and nine read at their grade level or higher by July 2011. For example, to improve reading scores, officials in the Heidelberg District developed a literacy program requiring each school to identify all third grade students who read below grade level and develop an action plan to improve their reading abilities. Those students whose performance does not improve through their enrollment in supplemental reading programs or who have profound reading difficulties may be eligible to receive special education services. DOD provides this special education program in accordance with the requirements of department guidance and the IDEIA, although DOD is not subject to the reporting and funding provisions of the act. According to our survey results, almost all schools provided special education services in the 2006-2007 school year. The level of special education services available to students with disabilities varies between districts and schools, and may affect where some service-members and families can be assigned and still receive services. DOD established the Exceptional Family Member Program to screen and identify family members who have special health or educational needs. It is designed to assist the military personnel system to assign military service members and civilian personnel to duty stations that provide the types of health and education services necessary to meet their family members' needs. In general, parents with whom we spoke said that they were pleased with the services their children received in DOD schools at the duty locations where they were assigned. DOD conducts a comprehensive multidisciplinary assessment to evaluate whether a student is eligible to receive special education services under any of DOD's disability categories, and most parents we interviewed were complimentary of the program. A student who is identified as having a disability receives specific instruction designed to meet the student's academic needs. A team comprised of school personnel and the student's parents meets annually to assess the student's progress. While the majority of parents we interviewed were complimentary of DOD's special education program, a few expressed concern that their children were not evaluated for special education eligibility early enough despite repeated requests to school personnel that their children needed to be evaluated for a suspected disability. According to DOD officials, department guidance requires school officials to look into parent requests, but officials do not have to evaluate the child unless they suspect the child has a disability. However, they must provide parents with written or oral feedback specifying why they did not pursue the matter. Students with dyslexia may qualify for special education services under the specific learning disability category, but students must meet specific criteria. To qualify as having a specific learning disability, students must have an information-processing deficit that negatively affects their educational performance on an academic achievement test resulting in a score at or near the 10th percentile or the 35th percentile for students of above average intellectual functioning. There must also be evidence through diagnostic testing to rule out the possibility that the student has an intellectual deficit. DOD schools provide children with disabilities instruction through two additional programs that have some research support. Fifteen percent of our survey respondents were principals of schools that used the Lindamood Phoneme Sequencing Program (LiPS), a program that helps students in grades prekindergarten through 12 with the oral motor characteristics of individual speech sounds. According to the What Works Clearinghouse, one research study it reviewed in 2007 suggested the LiPS program may have positive effects on reading ability. Our survey results indicated that 37 percent of schools serving grades 7 through 12 used a program called Reading Excellence: Word Attack and Rate Development Strategies that targets students who have mastered basic reading skills but who are not accurate or fluent readers of grade-level materials. According to a Florida Center for Reading Research report, there is research support for the program, but additional research is needed to assess its effectiveness. DOD assesses the academic achievement of all students using standardized tests. The department administers the TerraNova Achievement Test to students in grades 3 through 11. Test scores represent a comparison between the test taker and a norm group designed to represent a national sample of students. For example, if a student scored at the 68th percentile in reading, that student scored higher than 68 percent of the students in the norm group-the national average is the 50th percentile. DOD uses these scores to compare the academic achievement of its students to the national average. In addition, DOD schools participate in the National Assessment of Educational Progress (NAEP), known as the nation's report card, which provides a national picture of student academic achievement and a measure of student achievement among school systems. According to an agency official, DOD administers NAEP to all of its fourth and eighth grade students every other year. The NAEP measures how well DOD students perform as a whole relative to specific academic standards. Overall, DOD students perform well in reading compared to the national average and to students in state public school systems, as measured by their performance on standardized tests. The latest available test results showed that DOD students scored above average and in some cases ranked DOD in the top tier of all school systems tested. According to the 2007 TerraNova test results, DOD students scored on average between the 60th and 75th percentile at all grade levels tested. The 2007 NAEP reading test results ranked the DOD school system among the top for all school systems. Specifically, on the eighth grade test, DOD tied for first place with two states among all states and jurisdictions and on the fourth grade test, tied with one state for third place. All students, including those with disabilities, participate in DOD's systemwide assessments using either the standard DOD assessment or alternate assessments. In some cases, students who require accommodations to complete the standard assessment may need to take the test in a small group setting, get extended time for taking the test, or have directions read aloud to them. Some students with severe disabilities may take an alternate assessment if required by the student's individualized education program. An alternate assessment determines academic achievement by compiling and assessing certain documentation, such as a student's work products, interviews, photographs, and videos. According to an official from DODEA's Office of System Accountability and Research, DOD provides an alternate assessment to fewer than 200 of its roughly 90,000 students each year. For use within the department and in some districts and schools, DOD disaggregates TerraNova test scores for students with disabilities. DOD officials reported that they disaggregate scores for the entire school system, each area, and each district, in order to gauge the academic performance of students with disabilities. DOD's policy states that DOD shall internally report on the performance of children with disabilities participating in its systemwide assessments. According to DOD officials, they use the data to determine progress toward goals and to guide program and subject area planning. According to our survey results, over 90 percent of DOD schools disaggregate their test scores by gender and race and about 85 percent disaggregate for students with disabilities for internal purposes. Some school officials told us they use test data in order to track students' progress, assess the effectiveness of services they offer students, identify areas of improvement, and assess school performance. For example, one Superintendent who shared her disaggregated data with us showed how third-grade students with disabilities made up over half of those who read below grade level in her district. DOD does not generally report disaggregated test scores for students with disabilities. DOD's annual report provides data at each grade level, and test scores posted on its Web site provide data for each school. DOD also reports some results by race and ethnicity for the NAEP test. However, DOD does not disaggregate its TerraNova test data for students with disabilities or other subgroups. A primary goal of its strategic plan is for all students to meet or exceed challenging academic content standards, and DOD uses standardized test score data to determine progress towards this goal. Disaggregating these data provides a mechanism for determining whether groups of students, such as those with disabilities, are meeting academic proficiency goals. However, unlike U.S. public school systems that are subject to the No Child Left Behind Act, DOD is not required to report test scores of designated student groups. According to DOD officials, they do not report test results for groups of fewer than 20 students with disabilities because doing so may violate their privacy by making it easier to identify individual students. Where there are groups of 20 or more students with disabilities, DOD officials said they do not report it publicly because it might invite comparisons between one school and another when all of them do well compared to U.S. public schools. DOD officials did not comment on any negative implications of such comparisons. On the whole, DOD students perform well in reading compared with public school students in the United States, and in some cases DOD ranks near the top of all school systems, as measured by students' performance on standardized tests. DOD has programs and resources in place to provide supplemental instruction to students who have low scores on standardized tests or who otherwise qualify for special education services, some of whom may have dyslexia. The department generally includes these students when administering national tests. Nevertheless, by not reporting specifically on the achievement of students with disabilities, including those who may have dyslexia, DOD may be overlooking an area that might require attention and thereby reducing its accountability. Without these publicly reported data, parents, policymakers, and others are not able to determine whether students with disabilities as a whole are meeting academic proficiency goals in the same way as all other students in the school system. For example, high performance on the part of most DOD students could mask low performance for students with disabilities. To improve DOD's accountability for the academic achievement of its students with disabilities, including certain students who may have dyslexia, we recommend that the Secretary of Defense instruct the Director of the Department of Defense Education Activity to publish separate data on the academic achievement of students with disabilities at the systemwide, area, district, and school levels when there are sufficient numbers of students with disabilities to avoid violating students' privacy. We provided a draft of this report to DOD for review and comment. DOD concurred with our recommendation. DOD's formal comments are reproduced in appendix II. DOD also provided technical comments on the draft report, which we have incorporated when appropriate. We will send copies of this report to the Secretary of Defense, the Director of the Department of Defense Education Activity, 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 GAO's Web site at http://www.gao.gov. Please contact me at (202) 512-7215 if you or your staff have any questions about this report. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributions to this report are listed in appendix III. Our objectives were to determine: 1) what professional development DOD provides its staff to support students with dyslexia and how the fiscal year 2004-to-2006 funds designated for this purpose were used, (2) what identification and instructional services DOD provides to students who may have dyslexia, and (3) how DOD assesses the academic achievement of students with disabilities, including dyslexia. To meet these objectives, we interviewed and obtained documentation from DOD and others, conducted a Web-based survey of all 208 DOD school principals, and visited or interviewed by phone officials and parents in six school districts. We conducted our work between January 2007 and October 2007 in accordance with generally accepted government auditing standards. To obtain information on how schools support students with dyslexia we interviewed officials from the Department of Defense Education Activity (DODEA) and the Department of Education, as well as representatives from the International Dyslexia Association and the National Association of State Directors of Special Education. We obtained several DODEA reports including: a 2007 report to Congress on DODEA's efforts to assist students with dyslexia, a 2006 evaluation of DODEA's English and language arts instruction, and a 2005 survey of DODEA special education personnel. We reviewed relevant federal laws, regulations, and DOD guidance, and also obtained information on DOD's obligation and disbursement of funds designated for professional development on dyslexia. We also reviewed the DODEA web site for schools' student performance data to determine how DOD assesses the academic achievement of students with disabilities. We also obtained summary reports on the scientific evidence regarding the effectiveness of DODEA's supplemental reading programs from the Department of Education's What Works Clearinghouse and the Florida Center for Reading Research, two organizations that compile and evaluate research on reading. To gather information concerning dyslexic students in DoDEA schools, including how DoDEA schools identify dyslexic students and the instructional services provided to such students, we designed a Web-based survey. We administered the survey to all 208 DODEA school principals between May 10, 2007 and July 6, 2007, and received completed surveys from 175 school principals--an 84 percent response rate. In order to obtain data for a high percentage of DOD schools, we followed up with principals through e-mail and telephone to remind them about the survey. We also examined selected characteristics to ensure that the schools responding to our survey broadly represent DODEA's school levels, geographic areas, and special education population. Based on our findings, we believe the survey data are sufficient for providing useful information concerning students with dyslexia. Nonresponse (or, in the case of our work, those DOD school principals that did not complete the survey) is one type of nonsampling error that could affect data quality. Other types of nonsampling error include variations in how respondents interpret questions, respondents' willingness to offer accurate responses, and data collection and processing errors. We included steps in developing the survey, and collecting, editing, and analyzing survey data to minimize such nonsampling error. In developing the web survey, we pretested draft versions of the instrument with principals at various American and European elementary, middle, and high schools to check the clarity of the questions and the flow and layout of the survey. On the basis of the pretests, we made slight to moderate revisions of the survey. Using a web- based survey also helped remove error in our data collection effort. By allowing school principals to enter their responses directly into an electronic instrument, this method automatically created a record for each principal in a data file and eliminated the need for and the errors (and costs) associated with a manual data entry process. In addition, the program used to analyze the survey data was independently verified to ensure the accuracy of this work. We visited school officials and parents of struggling readers in two of the three areas (the Americas and Europe) overseen by DODEA and contacted schools in the third area (the Pacific) by phone. For each location we interviewed the district Superintendent or Assistant Superintendent, school principals, teachers, and special education teachers. At each location we also interviewed parents of struggling readers. Each group had between two and seven parents, and in some cases we interviewed a parent individually. To see how DOD schools instruct struggling readers we observed several reading programs during classroom instruction including Read 180, Reading Recovery, and Reading Improvement, as well as the use of literacy tools such as the Dynamic Indicator of Basic Literacy Skills. We selected 6 of DOD's 12 school districts, 2 from each area, using the following criteria: (1) geographic dispersion, (2) representation of all military service branches, (3) variety of primary and secondary schools, and (4) range in the proportion of students receiving special education services. Harriet Ganson, Assistant Director, and Paul Schearf, Analyst-In-Charge, managed this assignment. Farah Angersola and Amanda Seese made significant contributions throughout the assignment, and Rebecca Wilson assisted in data collection and analysis. Kevin Jackson provided methodological assistance. Susan Bernstein and Rachael Valliere helped develop the report's message. Sheila McCoy provided legal support.

Many of our nation's military and civilian personnel depend on Department of Defense (DOD) schools to meet their children's educational needs. These schools provide a range of educational services including programs for students with disabilities and those who struggle to read, some of whom may have a condition referred to as dyslexia. To determine how DOD supports students with dyslexia and how it used $3.2 million in funds designated to support them, GAO was asked to examine: (1) what professional development DOD provides its staff to support students with dyslexia and how the fiscal year 2004-to-2006 funds designated for this purpose were used, (2) what identification and instructional services DOD provides to students who may have dyslexia, and (3) how DOD assesses the academic achievement of students with disabilities, including dyslexia. To address these objectives, GAO conducted a survey of all school principals and interviewed agency officials, school personnel, and parents in six school districts. DOD provides a mix of online and classroom training to teachers who work with students who struggle to read, and DOD used 2004-to-2006 funds designated for professional development on dyslexia, in particular, to supplement these efforts. Most of the online and classroom professional development prepares teachers and specialists to assess student literacy and provides them with strategies to teach students who have particular difficulties. For the 2004-to-2006 funding for professional development on dyslexia, DOD supplemented its existing training with online courses that include specific modules on dyslexia and tools to assess students' literacy skills. DOD identifies students who struggle to read--some of who may have dyslexia--through standardized tests and provides them with supplemental reading instruction. DOD uses standardized tests to screen its students and identify those who need additional reading instruction, but these schools do not generally label them as dyslexic. To teach students they identify as struggling readers, DOD schools primarily employ an intensive multimedia reading program that is highly regarded by the principals, teachers, and parents GAO interviewed. Those students whose performance does not improve through their enrollment in supplemental reading programs or who have profound reading difficulties may be eligible to receive special education services. DOD is subject to many of the requirements of the Individuals with Disabilities Education Improvement Act of 2004 on the education of students with disabilities. Students with dyslexia may qualify for these services, but they must meet program eligibility requirements. DOD uses the same standardized tests it uses for all students to assess the academic achievement of students with disabilities, including those who may have dyslexia, but does not report specifically on the outcomes for students with disabilities. A primary goal of DOD's strategic plan is for all students to meet or exceed challenging academic standards. To measure progress towards this goal, DOD assesses all students' academic achievement and school performance by comparing test scores to a national norm or to a national proficiency level. Overall, students perform well in reading compared to U.S. public school students. DOD disaggregates test scores for students with disabilities but does not report such information publicly. In contrast, U.S. public school systems under the No Child Left Behind Act of 2001 must report such data. Without this information, it is difficult for parents, policy makers, and others to measure the academic achievement of students with disabilities relative to all other students in the DOD school system.

The statutes that create federal programs may contain requirements that recipients must comply with in order to receive federal assistance. In addition, when Congress enacts a law establishing a program, it may authorize or direct a federal agency to develop and issue regulations to implement it. Congress may impose specific requirements in the statute; alternatively it may set general parameters and the implementing agency may then issue regulations further clarifying the requirements. Most federal agencies use the informal rulemaking procedures described in the Administrative Procedure Act. Those procedures, also known as "notice- and-comment" rulemaking, generally include publishing proposed regulations for public comment before issuing final rules. Comments from the public, particularly parties that will be affected by the proposed regulations, can provide agencies with valuable information on the regulation's potential effects. In addition to regulations, agencies also use guidance and other documents to provide advice and information to entities affected by government programs. When agencies issue guidance documents, the Administrative Procedure Act generally allows them to forgo notice-and-comment procedures. In addition, agencies must comply with other rulemaking requirements, some of which direct agencies to estimate the burden of proposed regulations or assess their potential costs and benefits (see table 1). OMB performs many functions related to federal agency rulemaking. For example, under Executive Order 12866, OMB reviews agency rulemaking to ensure that regulations are consistent with applicable law, the President's priorities, and the principles in executive orders. OMB also ensures that decisions made by one agency do not conflict with the policies or actions taken or planned by another agency and provides guidance to agencies. In 2003, for example, OMB revised guidelines for agencies to use when they assess the regulatory impact of economically significant regulations and provided guidance for how agencies can improve how they evaluate the benefits and costs of regulations. Title I of ESEA, as amended, provides funding to states and school districts to expand and improve educational programs in schools with high concentrations of students from low-income families. Title I funds may be used for instruction and other supportive services for disadvantaged students to increase their achievement and help them meet challenging state academic standards. To receive Title I funds, states must comply with certain requirements. For example, states must develop (1) academic assessments, to provide information on student achievement, and (2) an accountability system, to ensure that schools are making adequate yearly progress (AYP). Education developed 20 indicators to implement these monitoring requirements. Examples of indicators include the percent of youths with IEPs who graduate with a regular diploma and the percent which drop out of high school. For more information on the priority areas and indicators, see Education's web site on the IDEA Part B State Performance Plan and Annual Performance Report: http://www2.ed.gov/policy/speced/guid/idea/bapr/index.html, accessed June 19, 2012. receive federal funds from discriminating against students based on their race, color or national origin, sex, disability, or other characteristics. Other federal agencies also administer grant programs and issue associated regulations with which states and school districts must comply. For example, USDA has issued regulations and guidance to states and school districts to implement the national school meals programs, which provide federal assistance to help provide nutritionally balanced reduced-price or free meals (breakfast, lunch, and snacks) to low-income students. These programs, in part, aim to address the adverse effects that inadequate nutrition can have on children's learning capacity and school performance. In fiscal year 2010, almost 32 million students participated in the largest school meal program, the National School Lunch Program. The Healthy, Hunger-Free Kids Act of 2010revised some requirements for school meal programs, most notably by requiring USDA to update nutrition standards for meals served through the National School Lunch and School Breakfast programs. Key education stakeholders we interviewed said many federal requirements related to ESEA Title I, IDEA Part B, or national school meals programs were burdensome to states and school districts. For example, representatives from the National Governors Association identified multiple federal requirements as burdensome, such as the requirement for school districts to spend 20 percent of their Title I allocation on specified school improvement activities, including Supplemental Educational Services (SES), and the requirement to provide Title I services on an equitable basis to eligible children attending private school. (See appendix I for a description, including the sources, of these requirements as well as all other requirements cited throughout our report.) Also, representatives from the Council of Chief State School Officers told us of a study they conducted in which they found that states must comply with numerous duplicative reporting requirements.Specifically, their study found that states are required to report over 200 data elements multiple times to Education through collections such as the ESEA Consolidated State Performance Report (CSPR), the IDEA Part B Annual Performance Report, and the CRDC. Representatives from other organizations we interviewed--such as the American Association of School Administrators, the Council of the Great City Schools, and the National Rural Education Association--identified other federal requirements as burdensome for states and school districts. These requirements include data collection and reporting requirements for IDEA Part B and monitoring of SES providers under ESEA. Officials we interviewed in 3 states and 12 school districts reported 17 federal requirements as most burdensome, and many of these were the same requirements identified by key stakeholders. The 17 requirements included in this report met the following criteria: (1) they were identified as burdensome by more than one state or school district; (2) they could potentially impact all schools, districts, or states; and (3) they are mandatory requirements established by Congress or a federal agency. Of these 17 requirements, 7 relate to ESEA Title I, 3 to IDEA Part B, and 4 to the national school meals programs. For example, multiple state and district officials identified certain data collection and reporting requirements for IDEA Part B, referred to as the IDEA Indicators, as burdensome. Education uses these indicators to monitor states on key priority areas that are identified in the IDEA, such as ensuring that students with disabilities receive a free appropriate public education. The remaining 3 requirements relate to more than one federal grant program. For example, as required by the Federal Funding Accountability and Transparency Act of 2006 and OMB guidance, recipients of federal funds totaling $25,000 or more must report basic information on awards, such as the name and location of the entity receiving the award, and the award amount. As shown in figure 1, state and district officials we interviewed described many ways in which the identified requirements were burdensome to them: complicated, time-intensive, paperwork-intensive, resource- intensive, duplicative, and vague. Officials characterized 16 of the 17 requirements as being burdensome in multiple ways. For example, officials told us that collecting data for the IDEA Indicators requires a significant amount of time and resources because of the volume of data reported. In addition, these officials said that Education routinely changes what data is collected, which one official noted resulted in costly modifications to state and local data systems. All of the requirements identified by state and school district officials as most burdensome were characterized as being complicated, time- intensive, or both. Officials described 15 of the 17 burdensome requirements as complicated, but also identified some benefits, as illustrated by the following requirements: SES provider approval and monitoring. Under ESEA Title I, for schools that do not make AYP for 3 years, school districts must offer SES, such as tutoring and other academic enrichment activities, from state-approved providers selected by the parents of eligible students. State educational agencies must approve SES service providers and develop, implement, and publicly report on standards and techniques for monitoring the quality and effectiveness of their services. To approve providers, states told us they process applications, develop lists of approved providers, and address complaints from applicants who were not approved. A state official said that monitoring providers can also be challenging. For example, the official said it is difficult to know which providers are effective and that it is unclear whether SES has resulted in improvements in student achievement. School district officials told us they also struggle with their responsibilities under these requirements. School districts must notify parents about the availability of services annually and enter into a service agreement with any approved provider selected by parents of an eligible student. Districts must work with providers selected by parents, which, according to one district official, is burdensome because the districts have no control over the services provided. The official said her district employs teachers to monitor the SES providers and that in some cases the district has had problems with providers. Another district official said some of the challenges his district faced include providers not responding to the district in a timely manner, not submitting timely invoices, and submitting poorly crafted student learning plans. In contrast, according to a 2008 report, most parents of children receiving SES are satisfied with those services, which may In addition, be because parents are able to select service providers.one official we interviewed said that a benefit of SES is that students receive extended learning time. However, officials indicated they would like certain improvements. For example, one district official indicated she would like more input into which providers to use and how to monitor the services provided. IEP processing. Under IDEA Part B, for each eligible student with a disability, an IEP must be in place at the beginning of each school year. The IEP must be developed, reviewed, and revised in accordance with a number of requirements. For example, the IEP must include information about the child's educational performance and goals, and the special education and related services that will be provided. The IEP team (consisting of, at a minimum, the parents, a regular education teacher, a special education teacher, a representative of the school district, and the child, when appropriate) must consider specific criteria when developing, reviewing, or revising each child's IEP. Officials described this multistep process as complicated, in part because of unclear terms in the IEP paperwork. For example, an official told us that special education service providers on the IEP team often misinterpret questions on the IEP regarding the student's performance and progress. Another form official said the paperwork required for an IEP meeting takes 2 to 3 hours to complete and the meeting itself takes another 2 to 3 hours. Although meetings can be consolidated or held via conference call, this official said that each of these time commitments takes away from classroom instruction time and provision of support services. Despite these challenges, IEPs provide benefits for students with disabilities. For example, one advocacy group noted that the IEP contains goals and includes progress reporting for parents so that the IEP team will know whether or not the child is actually benefiting from his or her educational program. Also, one district official we interviewed said that having IEPs online has allowed special education administrators to give immediate feedback to teachers and other special education service providers on changes to students' educational needs. Other officials acknowledged that these requirements are designed to ensure that parental and student rights are protected, but believe those rights can be protected in a less-complicated way. Officials described 13 of the 17 requirements as time-intensive. For example, officials said disseminating state and district report cards is time-intensive, and according to one official this is due to the large amount of time devoted to developing data for the reports and printing and mailing them. States and districts that receive ESEA Title I funds are required to disseminate annual report cards that include, among other information, student achievement data at each proficiency level on the state academic assessments, both in the aggregate for all students and disaggregated by specified subgroups. They also include information on the performance of school districts in making AYP and schools identified for school improvement, as well as the professional qualifications of teachers in the state.report cards can also include state-required information. To comply with these and other ESEA requirements, states maintain a large amount of student demographic and assessment data, which they use to provide information about the academic progress of students in the schools and districts. An official also noted that processes for collecting, verifying, and reporting these data take large amounts of state and local officials' time and resources. In addition, these report cards can be quite long; one state official said report cards for districts in his state can be 20 to 30 pages in length. A district official we interviewed recognized that the information on state and district report cards is important to help inform parents about the academic performance of their children's school. However, officials suggested ways to streamline the report cards, including that states and districts be allowed to distribute one page of data highlights along with a reference to where the full report is available publicly, such as online or in the school library. In its guidance on state and district report cards, Education stated that because not all parents and members of the public According to Education officials, state and district have access to the Internet, posting the report cards on the Internet alone is not sufficient to meet the dissemination requirement. Several of the most burdensome requirements identified are reporting requirements, which state and district officials told us contained duplicative data elements. Specifically, officials said some data collections may require the same or similar data elements to be reported multiple times. For example, through the CSPR used for ESEA reporting as well as the Annual Performance Report used for IDEA reporting, states are required to report graduation and dropout rates for students with disabilities. Additionally, officials from eight school districts told us that the CRDC required them to provide data directly to Education that had previously been submitted to the state. Examples of data elements reported as duplicative by district officials include student enrollment; testing; and discipline, which includes suspensions and expulsions. State and school district officials characterized other burdensome federal requirements as paperwork-intensive (7 of 17), resource-intensive (6 of 17), and vague (4 of 17). For example, officials said time distribution requirements, established by OMB,to these requirements, in order for state and local grant recipients to use federal funds to pay the salaries of their employees who perform activities under multiple grants, they must maintain documentation of the employee's activities. One district said that IDEA funding is used to pay for teachers working directly with students with disabilities, but because these students are included in general education classrooms it is difficult to document exactly how much time is spent working with these students. Two officials we interviewed said that complying with time distribution requirements provided no benefit to them. Officials described requirements to administer academic assessments as resource-intensive due to the costs needed to establish and maintain appropriate data systems. However, one state official noted that, as a result of the requirements, assessment data on student performance can be provided immediately to teachers and administrators. Also, some officials said they are paperwork-intensive. According were uncertain about requirements to implement the Healthy, Hunger- Free Kids Act of 2010, because, at the time of our interviews, some of the requirements had not gone into effect. According to key stakeholders and state and school district officials we interviewed, states and districts do not generally collect information about the cost to comply with federal requirements. Stakeholders we interviewed said there were many reasons that states and school districts generally do not collect data on compliance costs. For example, some stakeholders told us most states and districts do not have the capacity to track spending on compliance activities. In addition, three stakeholders told us that school districts often have difficulty determining whether requirements are federal requirements or state requirements, and may not be able to separately track costs associated with federal requirements. Information provided by the states and school districts we interviewed was generally consistent with views from these key stakeholders. Specifically, state and school district officials we interviewed said they do not collect information about the costs their agencies incur to comply with federal requirements, for a variety of reasons, including: (1) capacity limitations, such as limited staff and heavy workloads; (2) states and the federal government do not require them to report it; (3) it is too burdensome to collect the information; and (4) the information is not useful for improving student achievement or program administration and evaluation (see figure 2). When we asked state and district officials whether they could provide cost estimates on one requirement, most of them said they were unable to do so, and the estimates that were provided did not meet our criteria to include in the report. Education and USDA developed plans, known as retrospective analysis plans, to identify and address burdensome regulations, as required by Executive Order 13563. The order required agencies to develop plans to periodically review their existing significant regulations and determine whether these regulations should be modified, streamlined, expanded or repealed to make the agencies' regulatory programs more effective or less burdensome. Consistent with the order's emphasis on public participation in the rulemaking process, OMB encouraged agencies to obtain public input on their plans and make their final plans available to the public. Education's final plan, issued in August 2011 discussed its efforts to reduce the burden on states and school districts and identified a preliminary list of regulatory provisions for future review, including IDEA reporting requirements, which were mentioned as burdensome by several stakeholders and state and school district officials we interviewed. Based on their review, Education officials told us they planned to consolidate several separate IDEA Part B data collections and include them in EDFacts beginning in October 2012. Education also said it would survey departmental program offices to ask program personnel to identify requirements they consider to be burdensome. However, department officials told us this survey has been delayed due to other priorities within the department, and they now expect to administer it in the fall of 2012. 20 U.S.C. SS 7861. ESEA authorizes the Secretary of Education to waive, with certain exceptions, any statutory or regulatory requirement of ESEA for states or school districts that receive ESEA funds and submit a waiver request that meets statutory requirements. Under the ESEA, waivers can be effective for up to 4 years, although they may be extended. Education currently offers waivers from 10 ESEA provisions, including the timeline for 100 percent proficiency on state assessments and implementation of school improvement requirements. States that choose to apply must request waivers from 10 provisions and may choose to request waivers from an additional 3 provisions. For more information on the waivers, see http://www.ed.gov/esea/flexibility accessed June 19, 2012. distinguishes high-performing districts and schools from those that are lower-performing; and 3. commit to create and implement teacher and principal evaluation and support systems that will be used to continually improve instruction and assess performance using at least three performance levels. After receiving and reviewing waiver requests, Education approved waivers for 19 states, and, as of May 2012, was reviewing the requests of 17 other states and the District of Columbia. The waivers are generally for a 2-year period, beginning in the 2012-2013 school year. The waivers may be extended, but Education has not specified the length of time an extension would be in effect. Of the three states included in our review, Education has approved requests from Massachusetts and Ohio and, as of May 2012, is considering one from Kansas. ESEA waivers may address some requirements officials and stakeholders identified as burdensome. For example, as a result of obtaining a waiver, Massachusetts will no longer require that school districts implement SES requirements. These exemptions are beneficial only to states which receive a waiver; states not approved for waivers must still comply with ESEA requirements. According to Education officials, the waivers may provide relief to many school districts by reducing certain reporting requirements and requirements to provide SES, among other provisions. However, we believe it is too soon to know whether states and school districts will encounter difficulties in implementing these waivers or what the ultimate benefits may be in terms of reducing regulatory burden. In prior work we reported that states faced challenges implementing multiple reforms and, as a result, some reform efforts have been delayed.Similar to these other efforts, states with ESEA waivers may face challenges taking the steps needed to implement the required principles. As stated in its retrospective analysis plan, USDA implemented the direct certification process, which streamlined the approval process for free school meals. Direct certification is a means to determine a child's eligibility for free school meals based on whether the child receives benefits through the Supplemental Nutrition Assistance Program, among other criteria. For example, students from families who receive nutrition assistance through this program are eligible for free school meals without completing the school meals application. In addition, in January 2012, USDA issued a final rule implementing revisions to nutrition standards required by the Healthy, Hunger-Free Kids Act of 2010 that contained changes from the proposed rule. Among the provisions that may assist school districts in implementing the new requirements, the final rule gives school districts more time to make changes to school breakfast menus. In addition, in accordance with legislation passed in 2012, USDA removed a proposed limit on the amount of starchy vegetables that could be served. As a result of these and other changes and lower estimates for the cost of food, USDA estimates the cost of complying with the new rule will be about $3.2 billion over the next 5 years, instead of the $6.8 billion cited in the proposed rule. 77 Fed. Reg. 11,778 (Feb. 28, 2012). Education, to reduce the burden of time distribution reports that school personnel must complete. According to Education, states, districts, and other stakeholders have repeatedly identified time distribution reports, required by OMB, as a source of administrative burden. Education officials told us they solicited feedback from stakeholders as they were designing this initiative. While the OMB notice did not include a timeline for this pilot, Education officials told us they expect to issue a notice to invite states and school districts to participate in the pilot later in 2012. Education has taken some action to address duplicative reporting requirements. For example, department officials removed items from the 2009-2010 CRDC that were already collected by the department under IDEA. According to Education officials, data on how students complete high school is no longer required in the CRDC, because Education already collects that information through its EDFacts data collection. Education officials also told us of an effort to consolidate district-level ESEA and IDEA reports and implement single file reporting in the 2011- 2012 school year. In an effort to reduce duplicative reporting by school districts, Education officials said they proposed that states report data required by the CRDC on behalf of their districts. However, according to department officials, only Florida has done so. Despite these efforts, department officials generally disagree with stakeholders and state and districts officials about the extent to which duplicative reporting requirements exist and the burden they impose. In its July 2011 letter to Education regarding the department's preliminary retrospective analysis plan, the Council of Chief State School Officers wrote of its on-going concerns about such requirements in the CSPR, CRDC, and other data collections. The National Title I Association and the National Association of State Directors of Special Education expressed similar concerns to the department. When we discussed the issues raised in these letters with Education officials, they told us there are few duplicative reporting requirements and that the burden they impose is minimal. For example, states are to report the graduation rate for students with disabilities in the ESEA CSPR and the IDEA Annual Performance Report and possibly other reports. However, Education officials said states' reporting these data twice, in their view, is not burdensome, because both reports use the same data. They also said that similar reporting requirements may be viewed as duplicative by state and district officials. For example, states are required to report not only a graduation rate for students with disabilities, but also a program completion rate, which includes students with disabilities who finish high school but do not graduate.completion data through another departmental data collection, the Common Core of Data. However, Education officials said these data are not duplicative, because they measure different ways students finish high school. We asked Education officials why, in response to comments they received on their draft retrospective analysis plan, they did not include a broader effort to identify duplicative reporting requirements in their final plan. In response, they said Executive Order 13563 (which required the department to develop the plan) focused on regulations and, as such, any reporting requirements based in statute would have been outside the scope of the order. Education may be unable to address certain burdensome requirements in the absence of legislative changes. These include, for example, certain requirements related to IDEA Indicators and transitioning preschool children with disabilities into IDEA Part B programs as well as requirements not addressed through ESEA waivers. IDEA indicators. IDEA requires Education to monitor states and states to monitor school districts using indicators in each of three specified priority areas. In accordance with this requirement, Education has established 20 indicators under IDEA Part B. In October 2011, Education published a Federal Register notice seeking public comments on proposed changes to the IDEA Part B data collection. Education said it planned to eliminate two Part B indicators, since states report data on those indicators in other data collections. In response to the notice, several commenters recommended that the department eliminate many other indicators, but the department did not do so; among other reasons, the department said many of the indicators are required by the IDEA. In addition, Education withdrew other modifications it had proposed to the data collection in response to input that those changes would actually increase the burden on states and districts. Education may continue to make modifications to the IDEA data collection in future years. However, Education lacks authority to eliminate certain indicators on priority areas that are required by statute. Transition of preschool students with disabilities from the IDEA Part C program to the IDEA Part B program. Every state that receives IDEA funds must have in effect policies and procedures to ensure that an IEP (or an individualized family service plan, if applicable) has been developed and is implemented by the third birthday for children participating in the IDEA Part C program who will transition into the IDEA Part B program. Two district officials told us that the transition requirements impose a burden on them, since there is no flexibility, even in the case of emergencies or other extenuating circumstances. Officials in one district told us that failure to comply with the requirement to have the IEP done by the child's third birthday, by even one day, renders the school district out of compliance with this requirement. To comply with this requirement, officials in this district said that they begin the transition process with an assessment about 6 months in advance even though it would be better to assess the child as close to their third birthday as possible. (They explained that a child assessed when he or she is two and a half years old may need special education services, but, since children change more rapidly when they are young, it is possible they may not need services by the time they are three years old.) However, because the third birthday deadline is established by statute, Education lacks authority to provide exceptions to states and school districts. Requirements not addressed through ESEA waivers. Several of the ESEA Title I requirements identified as burdensome by states and school districts are also required by statute. For example, the statute specifies certain information that must be included in state and district report cards and requires that school districts must spend 20 percent of their Title I allocation on SES and school choice-related transportation, unless a lesser amount is needed. Although Education does not have the authority to modify these statutory requirements, it has used its waiver authority to issue waivers exempting states and their districts from the SES and school choice requirements and from some of the state and district report card requirements. Other than offering these waivers, however, Education does not have the authority to change the underlying statute, so states and districts must still comply with the statutory requirements to the extent they are not covered by a waiver. Recent government-wide initiatives have highlighted the need to reduce the burden faced by states and school districts in complying with federal grant requirements. While stakeholders and state and district officials generally agree that requirements are necessary to ensure program integrity, transparency, and fair and equal educational opportunities for all students, there is also acknowledgement that states and districts spend considerable time and resources complying with requirements. Education has taken some steps to alleviate burden on states and districts while, at the same time, ensuring these entities achieve program goals. Despite these efforts, additional in-depth analysis and greater collaboration among Education and key stakeholders is needed so that states and districts do not waste resources implementing overly complex processes or reporting data multiple times. Education can work with interested parties to identify requirements that can be modified or eliminated without affecting program integrity. Education cannot, however, change some requirements that states and districts find burdensome, because they are specified by statute. In these cases, statutory changes would be needed. Finding the appropriate balance between program goals and compliance can be difficult but maintaining requirements that are unnecessary and burdensome can hinder education reform efforts. We recommend that the Secretary of Education take additional steps to address duplicative reporting and data collection efforts across major programs such as ESEA Title I and IDEA Part B as well as other efforts, such as the Civil Rights Data Collection. For example, Education could work with stakeholders to better understand and address their concerns and review reporting requirements to identify specific data elements that are duplicative. In addition, we recommend that the Secretary build on these efforts by identifying unnecessarily burdensome statutory requirements and developing legislative proposals to help reduce or eliminate the burden these requirements impose on states and districts. We provided a draft copy of this report to Education, USDA, and OMB for review and comment. Education's comments are reproduced in appendix II. Education generally agreed with our recommendations. In particular, Education agreed that it should take additional steps to address duplicative reporting and data collection efforts that are not statutorily required and said it believes additional efficiencies can be achieved in its data collections. Education noted that some data elements are required under various program statutes and said it will work with Congress on reauthorization of key laws, such as the ESEA and IDEA, to address duplication or the appearance of duplication resulting from those requirements. Education also acknowledged the importance of collaborating with stakeholders whenever the department develops regulations, such as data reporting requirements. Education and USDA provided technical comments on our report which we incorporated as appropriate. OMB did not have any comments on our report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Education and Agriculture, the Director of OMB, and other interested parties. In addition, this report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Table 2 lists the 17 federal requirements identified as most burdensome by the officials we interviewed in 3 state educational agencies and 12 school districts. Requirements are grouped by program: Elementary and Secondary Education Act (ESEA) Title I, Part A; Individuals with Disabilities Education Act (IDEA) Part B; national school meals programs, including the National School Lunch Program and the School Breakfast Program; and other requirements related to the receipt of federal funds. The summaries and cited provisions for each requirement represent the burdens described in our interviews; therefore they are not intended to be complete descriptions of each requirement. Additional provisions related to these requirements may apply. In some cases a requirement may have multiple sources, such as where statutory requirements are further interpreted in a regulation or guidance document. In addition to the contact named above, the following staff members made important contributions to this report: Elizabeth Morrison, Assistant Director; Jason Palmer, Analyst-in-Charge; Sandra Baxter; Jamila Kennedy; and Amy Spiehler. In addition, Sarah Cornetto and Sheila McCoy provided extensive legal assistance. Jean McSween, Timothy Bober, Phyllis Anderson, and Kathleen Van Gelder provided guidance on the study.

States and school districts receive funding through ESEA, IDEA, and national school meals programs. Some requirements for these programs are intended to help ensure program integrity and transparency, among other purposes, but questions have been raised about whether some federal requirements place an undue burden on states and school districts. GAO was asked to (1) describe federal requirements identified as the most burdensome by selected states and school districts and other stakeholders, (2) describe information states and school districts collect on the cost of complying with those requirements, and (3) assess federal efforts to reduce or eliminate burdensome requirements. We defined burdensome requirements as those that are viewed as complicated or duplicative, among other things. We interviewed officials in 3 states and 12 districts and obtained information on the costs to comply with selected requirements. While the results from these interviews are not generalizable, they provide insights into complying with federal requirements. We interviewed external education stakeholders and officials in the Departments of Education and Agriculture and the Office of Management and Budget. Generally consistent with the views of key stakeholders we interviewed, state and school district officials cited 17 federal requirements as most burdensome for them. These requirements were related to the Elementary and Secondary Education Act (ESEA) Title I, Part A; the Individuals with Disabilities Education Act (IDEA) Part B; national school meals programs; or other requirements related to the receipt of federal funds. Officials described the burdens associated with these requirements as complicated, time-intensive, and duplicative, among other things, and characterized most of the requirements as being burdensome in multiple ways. For example, several officials told us that collecting data for IDEA reporting requirements--such as the number of data elements collected--takes a significant amount of time and resources. State and district officials also noted benefits of some requirements, for example, that the process to create individualized education programs can help protect the rights of students with disabilities. For a variety of reasons, states and school districts generally do not collect information about the costs to comply with federal requirements, according to officials we interviewed. For example, states and district officials told us they are not required to report compliance cost data, the data are not useful to them, and collecting the data would be too burdensome, in their view. Federal agencies have developed plans and are taking other steps to reduce burden, but stakeholders and state and district officials told us about several burdensome requirements that have not been addressed. The Department of Education's (Education) plan identified regulatory provisions for review including ones that were mentioned as burdensome in interviews we conducted. In addition, Education granted waivers to some states from certain ESEA requirements, such as offering supplemental educational services to eligible students in certain schools identified for improvement. To receive waivers, states had to describe how they will implement key efforts, such as college and career-ready standards. Despite these efforts, stakeholders and state and district officials said there are potentially duplicative reporting requirements that still need to be addressed. Department officials told us that there are relatively few duplicative reporting requirements and the few that exist present only a small burden on states and districts. In addition, Education's ability to address the burden associated with some requirements, such as some IDEA provisions, may be limited without statutory changes. GAO recommends that the Secretary of Education take additional steps to address potentially duplicative reporting requirements, such as working with stakeholders to address their concerns, and develop legislative proposals to reduce unnecessarily burdensome statutory requirements. Education generally agreed with our recommendations.

Minority Serving Institutions vary in size and scope but generally serve a high percentage of minority students, many of whom are financially disadvantaged. In the 2000-01 school year, 465 schools, or about 7 percent of postsecondary institutions in the United States, served about 35 percent of all Black, American Indian, and Hispanic students. Table 1 briefly compares the three main types of Minority Serving Institutions in terms of their number, type, and size. The Higher Education Act of 1965, as amended, provides specific federal support for Minority Serving Institutions through Titles III and V. These provisions authorize grants for augmenting the limited resources that many Minority Serving Institutions have for funding their academic programs. In 2002, grants funded under these two titles provided over $300 million for Historically Black Colleges and Universities, Hispanic Serving Institutions, and Tribal Colleges to improve their academic quality, institutional management, and fiscal stability. Technology is one of the many purposes to which these grants can be applied, both inside the classroom and, in the form of distance education, outside the classroom. Technology is changing how institutions educate their students, and Minority Serving Institutions, like other schools, are grappling with how best to adapt. Through such methods as E-mail, chat rooms, and direct instructional delivery via the Internet, technology can enhance students' ability to learn any time, any place, rather than be bound by time or place in the classroom or in the library. For Minority Serving Institutions, the importance of technology takes on an additional dimension in that available research indicates their students may arrive with less prior access to technology, such as computers and the Internet, than their counterparts in other schools. These students may need considerable exposure to technology to be fully equipped with job-related skills. The growth of distance education has added a new dimension to evaluating the quality of postsecondary education programs. Federal statutes recognize accrediting agencies as the gatekeepers of postsecondary education quality. To be eligible for the federal student aid program, a school must be periodically reviewed and accredited by such an agency. Education, in turn, is responsible for recognizing an accrediting agency as a reliable authority on quality. While the accreditation process applies to both distance education and campus-based instruction, many accreditation practices focus on the traditional means of providing campus-based education, such as the adequacy of classroom facilities or recruiting and admission practices. These measures can be more difficult to apply to distance education when students are not on campus or may not interact with faculty in person. In this new environment, postsecondary education officials are increasingly recommending that outcomes--such as course completion rates or success in written communication--be incorporated as appropriate into assessments of distance education. The emphasis on student outcomes has occurred against a backdrop of the federal government, state governments, and the business community asking for additional information on what students are learning for the tens of billions of taxpayer dollars that support postsecondary institutions each year. While there is general recognition that the United States has one of the best postsecondary systems in the world, this call for greater accountability has occurred because of low completion rates among low- income students (only 6 percent earn a bachelors degree or higher), perceptions that the overall 6-year institutional graduation rate (about 52 percent) at 4-year schools and the completion rate at 2-year schools (about 33 percent) are low, and a skills gap in problem solving, communications, and analytical thinking between what students are taught and what employers need in the 21st Century workplace. For the most part, students taking distance education courses can qualify for financial aid in the same way as students taking traditional courses. As the largest provider of student financial aid to postsecondary students, the federal government has a substantial interest in distance education. Under Title IV of the Higher Education Act of 1965, as amended, the federal government provides grants, loans, and work-study wages for millions of students each year. There are limits, however, on the use of federal student aid at schools with large distance education offerings. Concerns about the quality of some correspondence courses more than a decade ago led the Congress, as a way of controlling fraud and abuse in federal student aid programs, to impose restrictions on the extent to which schools could offer distance education and still qualify to participate in federal student aid programs. The rapid growth of distance education and emerging delivery modes, such as Internet-based classes, have led to questions about whether these restrictions are still needed and how the restrictions might affect students' access to federal aid programs. Distance education's effect on helping students complete their courses of study is still largely unknown. Although there is some anecdotal evidence that distance education can help students complete their programs or graduate from college, school officials that we spoke to did not identify any studies that evaluated the extent to which distance education has improved completion or graduation rates. There are some variations in the use of distance education at Minority Serving Institutions and other schools. While it is difficult to generalize across the Minority Serving Institutions, the available data indicate that Minority Serving Institutions tend to offer at least one distance education course at the same rate as other schools, but they differ in how many courses are offered and which students take the courses. Overall, the percentage of schools offering at least one distance education course in the 2002-03 school year was 56 percent for Historically Black Colleges and Universities, 63 percent for Hispanic Serving Institutions, and 63 percent for Tribal Colleges, based on data from our surveys of Minority Serving Institutions. Similarly, 56 percent of 2- and 4-year schools across the country offered at least one distance education course in the 2000-01 school year, according to a separate survey conducted by Education.Minority Serving Institutions also tended to mirror other schools in that larger schools were more likely to offer distance education than smaller schools, and public schools were more likely to offer distance education than private schools. Tribal Colleges were an exception; all of them were small, but the percentage of schools offering distance education courses was relatively high compared to other smaller schools. The greater use of distance education among Tribal Colleges may reflect their need to serve students who often live in remote areas. In two respects, however, the use of distance education at Minority Serving Institutions differed from other schools. First, of those institutions offering at least one distance education course, Historically Black Colleges and Universities and Tribal Colleges generally offered fewer distance education courses--a characteristic that may reflect the smaller size of these two types of institutions compared to other schools. Second, to the extent that data are available, minority students at Historically Black Colleges and Universities and Hispanic Serving Institutions participate in distance education to a somewhat lower degree than other students. For example, in the 1999-2000 school year, fewer undergraduates at Historically Black Colleges and Universities took distance education courses than students at non-Minority Serving Institutions--6 percent v. 8.4 percent of undergraduates--a condition that may reflect the fact that these schools offer fewer distance education courses. Also, at Hispanic Serving Institutions, Hispanic students had lower rates of participation in distance education than non-Hispanic students attending these schools. These differences were statistically significant. We found that Minority Serving Institutions offered distance education courses for two main reasons: (1) they improve access to courses for some students who live away from campus and (2) they provide convenience to older, working, or married students. The following examples illustrate these conditions. Northwest Indian College, a Tribal College in Bellingham, Washington, has over 10 percent of its 600 students involved in distance education. It offers distance education by videoconference equipment or correspondence. The College offers over 20 distance education courses, such as mathematics and English to students at seven remote locations in Washington and Idaho. According to College officials, distance education technology is essential because it provides access to educational opportunities for students who live away from campus. For example, some students taking distance education courses live hundreds of miles from the College in locations such as the Nez Perce Reservation in Idaho and the Makah Reservation in Neah Bay, Washington. According to school officials, students involved in distance education tend to be older with dependents, and therefore, find it difficult to take courses outside of their community. Also, one official noted that staying within the tribal community is valued and distance education allows members of tribes to stay close to their community and still obtain skills or a degree. The University of the Incarnate Word is a private nonprofit Hispanic Serving Institution with an enrollment of about 6,900 students. The school, located in San Antonio, Texas, offers on-line degree and certificate programs, including degrees in business, nursing, and information technology. About 2,400 students are enrolled in the school's distance education program. The school's on-line programs are directed at nontraditional students (students who are 24 years old or older), many of whom are Hispanic. In general, the ideal candidates for the on-line program are older students, working adults, or adult learners who have been out of high school for 5 or more years, according to the Provost and the Director of Instructional Technology. Not all schools wanted to offer distance education, however, and we found that almost half of Historically Black Colleges and Universities and Hispanic Serving Institutions did not offer any distance education because they preferred to teach their students in the classroom rather than through distance education. Here are examples from 2 schools that prefer teaching their students in the classroom rather than by the use of distance education. Howard University, an Historically Black University in Washington, D.C., with about 10,000 students, has substantial information technology; however, it prefers to use the technology in teaching undergraduates on campus rather than through developing and offering distance education. The University has state-of-the-art hardware and software, such as wireless access to the school's network; a digital auditorium; and a 24- hour-a-day Technology Center, which support and enhance the academic achievement for its students. Despite its technological capabilities, the University does not offer distance education courses to undergraduates and has no plans to do so. According to the Dean of Scholarships and Financial Aid, the University prefers teaching undergraduates in the classroom because more self-discipline is needed when taking distance education courses. Also, many undergraduates benefit from the support provided by students and faculty in a classroom setting. Robert Morris College is a private nonprofit Hispanic Serving Institution located in Chicago, Illinois, that offers bachelor degrees in business, computer technology, and health sciences. About 25 percent of its 6,200 undergraduates are Hispanic. Although the College has one computer for every 4 students, it does not offer distance education courses and has no plans to do so. School officials believe that classroom education best meets the needs of its students because of the personal interaction that occurs in a classroom setting. Among Minority Serving Institutions that do not offer distance education, over 50 percent would like to offer distance education in the future, but indicated that they have limited resources with which to do so. About half of Historically Black Colleges and Universities and Hispanic Serving Institutions that do not offer distance education indicated that they do not have the necessary technology--including students with access to computers at their residences--for distance education. A higher percentage of Tribal Colleges (67 percent) cited limitations in technology as a reason why they do not offer distance education. Technological limitations are twofold for Tribal Colleges. The first, and more obvious limitation is a lack of resources to purchase and develop needed technologies. The second is that due to the remote location of some campuses, needed technological infrastructure is not there--that is, schools may be limited to the technology of the surrounding communities. All 10 Tribal Colleges that did not offer distance education indicated that improvements in technology, such as videoconference equipment and network infrastructure with greater speed, would be helpful. Minority Serving Institutions, like other schools, face stiff challenges in keeping pace with the rapid changes and opportunities presented by information technology and Education could improve how technological progress is monitored. Minority Serving Institutions view the use of technology as a critical tool in educating their students. With respect to their overall technology goals, Minority Serving Institutions viewed using technology in the classroom as a higher priority than offering distance education. (See fig. 1.) Other priorities included improving network infrastructure and providing more training for faculty in the use of information technology as a teaching method. Minority Serving Institutions indicated that they expect to have difficulties in meeting their goals related to technology. Eighty-seven percent of Tribal Colleges, 83 percent of Historically Black Colleges and Universities, and 82 percent of Hispanic Serving Institutions cited limitations in funding as a primary reason for why they may not achieve their technology-related goals. For example, the Southwest Indian Polytechnic Institute in Albuquerque, New Mexico, serves about 670 students and it uses distance education to provide courses for an associates degree in early childhood development to about 100 students. The school uses two-way satellite communication and transmits the courses to 11 remote locations. According to a technology specialist at the school, this form of distance education is expensive compared to other methods. As an alternative, the Institute would like to establish two-way teleconferencing capability and Internet access at the off-site locations as a means of expanding educational opportunities. However, officials told us that they have no means to fund this alternative. About half of the schools also noted that they might experience difficulty in meeting their goals because they did not have enough staff to operate and maintain information technology and to help faculty apply technology. For example, officials at Dine College, a Tribal College on the Navajo Reservation, told us they have not been able to fill a systems analyst position for the last 3 years. School officials cited their remote location and the fact that they are offering relatively low pay as problems in attracting employees that have skills in operating and maintaining technology equipment. Having a systematic approach to expanding technology on campuses is an important step toward improving technology at postsecondary schools. About 75 percent of Historically Black Colleges and Universities, 70 percent of Hispanic Serving Institutions, and 48 percent of Tribal Colleges had completed a strategic plan for expanding their technology infrastructure. Fewer schools had completed a financial plan for funding technology improvements. About half of Historically Black Colleges and Universities and Hispanic Serving Institutions, and 19 percent of Tribal Colleges have a financial plan for expanding their information technology. Studies by other organizations describe challenges faced by Minority Serving Institutions in expanding their technology infrastructure. For example, an October 2000 study by Booz, Allen, and Hamilton determined that historically or predominantly Black colleges identified challenges in funding, strategic planning, and keeping equipment up to date. An October 2000 report by the Department of Commerce found that most Historically Black Colleges and Universities have access to computing resources, such as high-speed Internet capabilities, but individual student access to campus networks is seriously deficient due to, among other things, lack of student ownership of computers or lack of access from campus dormitories. An April 2003 Senate Report noted that only one Tribal College has funding for high-speed Internet. Education has made progress in monitoring the technological progress of Minority Serving Institutions; however, its efforts could be improved in two ways. First, more complete data on how Historically Black Colleges and Universities and Tribal Colleges use Title III funds for improving technology on campus, and thus, the education of students, would help inform program managers and policymakers about progress that has been made and opportunities for improvement. Education's tracking system appears to include sufficient information on technology at Hispanic Serving Institutions. Second, although Education has set a goal of improving technology capacity at Minority Serving Institutions, it has not yet developed a baseline against which progress can be measured. If Education is to be successful in measuring progress in this area, it may need to take a more proactive role in modifying existing research efforts to include information on the extent to which technology is available at schools. Committee hearings such as this, reinforce the importance of effective monitoring and good data collection efforts. As the Congress considers the status of programs that aid Minority Serving Institutions, or examines creating new programs for improving technology capacity at these institutions, it will be important that agencies adequately track how students benefit from expenditures of substantial federal funds. Without improved data collection efforts, programs are at risk of granting funds that may not benefit students. Accrediting agencies have made progress in ensuring the quality of distance education programs. For example, they have developed supplemental guidelines for evaluating distance education programs and they have placed additional emphasis on evaluating student outcomes. Additionally, the Council on Higher Education Accreditation--an organization that represents accrediting agencies--has issued guidance and several issue papers on evaluating the quality of distance education programs. Furthermore, some accrediting agencies have called attention to the need for greater consistency in their procedures because distance education allows students to enroll in programs from anywhere in the country. While progress has been made, our preliminary work has identified two areas that may potentially merit attention. While accrediting agencies have made progress in reviewing the quality of distance education programs, there is no agreed upon set of standards for holding schools accountable for student outcomes. In terms of progress made, for example, the Council on Higher Education Accreditation has issued guidance on reviewing distance education programs. In addition, some agencies have endorsed supplemental guidelines for distance education and four of the seven agencies have revised their standards to place greater emphasis on student learning outcomes. Not withstanding the progress that has been made, we found that agencies have no agreed upon set of standards for holding institutions accountable for student outcomes. Our preliminary work shows that one strategy for ensuring accountability is to make information on student achievement and attainment available to the public, according to Education. The Council on Higher Education Accreditation and some accrediting agencies are considering ways to do this, such as making program and institutional data available to the public; however, few if any of the agencies we reviewed currently have standards that require institutions to disclose such information to the public. The second issue involves variations in agency procedures for reviewing the quality of distance education. For example, agency procedures for reviewing distance education differ from one another in the degree to which agencies require institutions to have measures that allow them to compare their distance learning courses with their campus-based courses. Five agencies require institutions to demonstrate comparability between distance education programs and campus-based programs. For example, one agency requires that "the institution evaluate the educational effectiveness of its distance education programs (including assessments of student learning outcomes, student retention, and student satisfaction) to ensure comparability to campus-based programs." The two other agencies do not explicitly require such comparisons. Finally, we found that if some statutory requirements--requirements that were designed to prevent fraud and abuse in distance education--remain as they are, increasing numbers of students will lose eligibility for the federal student aid programs. Our preliminary work shows that 9 schools that are participating in Education's Distance Education Demonstration Program collectively represent about 200,000 students whose eligibility for financial aid could be adversely affected without changes to the 50 percent rule--a statutory requirement that limits aid to students who attend institutions that have 50 percent or more of their students or courses involved in distance education. As part of the demonstration program, 7 of the 9 schools received waivers from Education to the 50 percent rule so that their students can continue to receive federal financial aid. We identified 5 additional schools representing another 8,500 students that are subject to, or may be subject to, the rule in the near future if their distance education programs continue to expand. These 5 schools have not received waivers from Education. While the number of schools currently affected is small in comparison to the over 6,000 postsecondary schools in the country, this is an important issue for more than 200,000 students who attend these schools. In deciding whether to eliminate or modify these rules, the Congress and the Administration will need to ensure that changes to federal student aid statutes and regulations do not increase the chances of fraud, waste, and abuse to federal student financial aid programs. Mr. Chairman, this concludes my testimony. I will be happy to respond to any questions you or other members of the Subcommittee might have. For further information, please contact Cornelia M. Ashby at (202) 512- 8403. Individuals making key contributions to this testimony include Jerry Aiken, Neil Asaba, Kelsey Bright, Jill Peterson, and Susan Zimmerman. 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 Higher Education Act of 1965 gives special recognition to some postsecondary schools--called Minority Serving Institutions--that serve a high percentage of minority students. These and other schools face stiff challenges in keeping pace with technology. One rapidly growing area, distance education, has commanded particular attention and an estimated 1.5 million students have enrolled in at least one distance education course. In light of this, GAO was asked to provide information on: (1) the use of distance education by Minority Serving Institutions; (2) the challenges Minority Serving Institutions face in obtaining and using technology; (3) GAO's preliminary finding on the role that accrediting agencies play in ensuring the quality of distance education; and (4) GAO's preliminary findings on whether statutory requirements limit federal aid to students involved in distance education. GAO is currently finalizing the results of its work on (1) the role of accrediting agencies in reviewing distance education programs and (2) federal student financial aid issues related to distance education. There are some variations in the use of distance education at Minority Serving Institutions when compared to other schools. While it is difficult to generalize, Minority Serving Institutions offered at least one distance education course at the same rate as other schools. When Minority Serving Institutions offered distance education, they did so to improve access for students who live away from campus and provide convenience to older, working, or married students. Some Minority Serving Institutions do not offer distance education because classroom education best meets the needs of their students. Additionally, schools view the overall use of technology as a critical tool in educating their students and they generally indicated that offering more distance education was a lower priority than using technology to educate their classroom students. The two primary challenges in meeting technology goals cited by these institutions were limitations in funding and inadequate staffing to maintain and operate information technology. Accrediting agencies have taken steps to ensure the quality of distance education programs, such as developing supplemental guidelines for reviewing these programs. However, GAO found (1) no agreed upon set of standards for holding institutions accountable for student outcomes and (2) differences in how agencies review distance education programs. Finally, several statutory rules limit the amount of federal aid for distance education students. GAO estimates that at least 14 schools are not eligible or could lose their eligibility for federal student financial aid if their distance education programs continue to expand. While the number of schools potentially affected is relatively small in comparison to the more than 6,000 postsecondary institutions in the country, this is an important issue for the nearly 210,000 students who attend these schools. Several factors must be considered before deciding whether to eliminate or modify these rules. They include the cost of implementation, the extent to which the changes improve access, and the impact that changes would have on Education's ability to prevent schools from fraudulent or abusive practices.

The FAIR Act requires executive agencies to submit each year to the Office of Management and Budget (OMB) inventories of activities that, in the judgment of the head of the agency, are not inherently governmental functions. The first FAIR Act inventories were due to OMB by June 30, 1999. According to an OMB official, most agencies met this requirement. these inventories to include information about (1) the fiscal year the activity first appeared on the FAIR Act list, (2) the number of full-time- equivalent (FTE) staff years necessary to perform the activity by a federal government source; and (3) the name of a federal government employee responsible for the activity from whom additional information about the activity may be obtained. It is important to note that the FAIR Act does not require an agency to list activities that the agency determines are inherently governmental and therefore not commercial. OMB published draft guidance in March 1999 and issued final guidance on the implementation of the FAIR Act on June 24--about a week before the first inventories were due. OMB implemented the FAIR Act by revising its Circular A-76, "Performance of Commercial Activities," and the A-76 Supplemental Handbook. Under Circular A-76, executive agencies are to conduct cost comparison studies of commercial activities performed by government personnel to determine whether it would be more cost efficient to maintain them in-house or contract with the private sector for their performance. Under OMB's revised guidance, agencies were expected to list the activities the agency determined are not inherently governmental using specific codes established for A-76. These include both "reason" and "function" codes. The "reason codes" are used to show whether the agency believes that an activity determined to be commercial should be subject to an A-76 cost comparison or not, including identifying those commercial activities that cannot be competed because of a legislative or other exemption. The function codes are to characterize the types of activities that the agency performs. The function codes range from fairly broad categories, such as "family services," to much more specific (and defense-related) activities, such as "Intermediate, Direct, or General Repair and Maintenance of Equipment--Missiles." would group a set of inventories for release together, rather than releasing them on a rolling, agency-by-agency schedule. In a September 30, 1999, Federal Register announcement, OMB listed the first group of FAIR Act inventories--from 52 agencies--that were made available to the public. Of these 52 inventories, 10 were from CFO Act agencies. Five of these were from cabinet agencies (Agriculture, Commerce, Education, Health and Human Services, and Housing and Urban Development) and the other five were from EPA, GSA, the National Aeronautics and Space Administration, the Social Security Administration, and the Agency for International Development. The remaining 42 inventories released in September 1999 were from smaller executive agencies such as the Marine Mammal Commission and the Office of National Drug Control Policy. The next step in implementing the FAIR Act includes potential challenges to the lists. According to the FAIR Act, within 30 days after publication of the notice of the public availability of the list, an interested party may challenge the omission of a particular activity from, or an inclusion of a particular activity on, the FAIR Act inventory. Within 28 days after an executive agency receives a challenge, it must decide the challenge and provide written notification, including a discussion of the rationale for the decision, to the challenger. This decision can be appealed to the head of the agency within 10 days after the challenger receives written notification of the decision. Clearly, executive agencies and OMB still have plenty of work ahead to implement even the first step of the FAIR Act--the public release of inventories. Nevertheless, our initial review of selected inventories that have been released raise a number of important questions about the efforts thus far. On behalf of the Subcommittee, we will be seeking answers to these and related questions over the coming months in order to assess agencies' efforts and to develop a body of best practices, as efforts under the FAIR Act move forward. A major area of interest during the initial implementation of the FAIR Act concerns the decisions agencies made about whether or not activities were eligible for competition and the reasons for those decisions. The FAIR Act provides that when an agency considers contracting with a private sector source for a commercial activity on its list, the agency shall use a competitive process to select the source unless it is exempted from doing so. A commercial activity in an agency can be exempted from competition for a variety of reasons. These reasons include legislative restrictions, other actions by Congress, Executive Orders, OMB decisions, or separate decisions by the relevant agency. Our initial review of the selected inventories suggests that questions can be raised about how agencies decided whether or not a commercial activity could be subject to competition, particularly when an agency reports that relatively few of its commercial activities could be considered for competition. Out of a total of 829 FTEs performing commercial activities listed in EPA's FAIR Act inventory, about 30 FTEs (about 3.6 percent) were listed in commercial activities that could be considered for competition. These activities were listed under six function codes, including (1) nonmanufacturing operations (such as mapping and charting or printing and reproduction activities); (2) maintenance, repair, alteration, and minor construction of real property; (3) regulatory management and support services; (4) installation services; (5) administrative support for environmental activities; and (6) other selected functions. EPA listed about 24 FTEs, or about 3 percent of the total of the commercial activities listed, as performing activities that are exempt from competition because of actions by Congress, Executive Order, or OMB. Most of these FTEs provide support for two function codes--research, development, testing, and evaluation; or administrative support for environmental activities. house expertise to effectively apply and enforce the nation's environmental laws in fulfilling its mission and meeting emergency requirements. For example, EPA's Deputy CFO told us that the agency exempted selected positions requiring scientific expertise in its research and development office in order to oversee the work produced by laboratories run by contractors. Out of a total of 7,249 FTEs GSA determined were providing commercial activities, it listed 4,556 FTEs (63 percent) who perform commercial activities that could be subject to competition. Almost half of these FTEs were involved in the maintenance, repair, or minor construction of real property. GSA also listed 874 FTEs (12 percent of the total commercial activities identified) as exempt from competition--more than half of these FTEs also perform activities involved with the maintenance, repair, or minor construction of real property. According to GSA's FAIR Act inventory, 1,819 FTEs (25 percent of its FTEs performing commercial activities) should be retained in-house because the activities are being "reinvented." GSA plans to reassess the activities for possible recategorization once reinvention efforts are completed. The FTEs are devoted to various activities, including financial and payment services, information and telecommunication program management, and security and protection. Agencies used a variety of approaches to develop their FAIR Act inventories. For example, a number of agencies used their "Raines inventories" as a basis for their FAIR Act inventories. The Raines inventories were developed as part of a 1998 effort led by OMB under which agencies were to identify commercial and other activities and provide that information to OMB. Specifically, agencies were asked to list agency functions and positions supporting activities that were inherently governmental; commercial, but specifically exempt from the cost comparison requirements of OMB Circular A-76; commercial and should be competed; and commercial, but must be retained in-house (including the reason why). Officials from the Department of Commerce said that Commerce based its FAIR Act inventory almost entirely on the information from its Raines inventory. The Department asked its component organizations to update the information that previously had been prepared for OMB as part of its Raines inventory. According to Commerce officials, these organizations made only minor changes for the FAIR Act inventory. GSA described its approach as starting from the top and working down, with agency management forming a team to develop its FAIR Act inventory. GSA's team was composed of one or two staff members from each of GSA's service divisions and regional offices. GSA officials said that this team held lengthy discussions about GSA's core mission and about which of its functions should be considered inherently governmental. In addition, a contractor was hired to train staff and to facilitate discussions on the topic of inherently governmental activities. GSA officials said that making the training as inclusive as possible was important to address the staff's apprehensions about privatization. EPA delegated the responsibility for developing its inventory to its 10 regional offices because it decided that the regional officials closest to the work should make determinations about specific activities. EPA headquarters reviewed and compared the submissions from its regions and offices and worked to resolve any discrepancies. EPA's Deputy CFO said that he does not expect the percentage of activities EPA identifies as commercial to remain static. He predicted that it would increase in the future, although he also emphasized that EPA is already very reliant on contractor support to fulfill its mission. The inventories now being released represent the first time that agencies have produced inventories under the FAIR Act. Thus, it is not surprising that a variety of different reporting formats are being used. It will likely take several reporting cycles before a documented set of best practices emerges that meets the needs of Congress and other interested parties. Also, it is not surprising that these inventories will become more useful as they become clearer and more complete. competition. However, Commerce also assigned these same entries a "reason code" indicating that these activities are "prohibited from conversion to contract because of legislation." Thus, the information reported does not appear to be consistent. In addition, Commerce did not assign any "reason codes" for a substantial number of FTEs listed throughout its FAIR Act inventory, so it is not clear how Commerce is characterizing these commercial activities. Officials in agencies we spoke to generally found that the A-76 codes needed additional refinement. Officials from the Department of Commerce noted that the function codes were oriented toward military activities and needed to be augmented to more fully capture the range of activities undertaken by civilian agencies. In response to concerns such as Commerce's, OMB allows agencies to develop new function codes to better meet their needs. Commerce, EPA, and GSA are among the agencies that are using additional function codes. While such flexibility is important to accurately reflect the diversity of the types of specific activities that individual agencies perform, it also needs to be balanced against the need for comparisons of the types of activities that are common across agencies. Beyond the requirements of the FAIR Act, some agencies are including information with their inventories that can provide additional perspective on the contracting and management issues confronting agencies. In the inventories that we have examined, we found that, in some cases, the agencies included supplemental information that was helpful, such as listing inherently governmental activities, describing the scope of activities currently under contract, and discussing how listed activities contribute to agencies' strategic and annual performance. Including information about an agency's inherently governmental activities (such as was provided to OMB as part of the Raines inventories) helps provide a fuller perspective about all of an agency's activities, not just those the agency considers commercial. For example, although not required to do so, GSA's FAIR Act inventory included inherently governmental activities. Such information can help provide Congress and other interested parties with a more complete picture of GSA's activities and allows for more informed judgments about whether an activity currently characterized as inherently governmental should be considered commercial. Similarly, describing the scope of activities that an agency has already outsourced can provide an important perspective on and context for the agency's operations. In their letters or other documents submitting their FAIR Act inventories to OMB, for example, GSA, EPA, and Commerce all describe their current levels of contracting. Commerce's letter said that its service contracting outlays increased by 36 percent from 1996 through 1998. GSA stated that nearly 94 percent of its budget is spent for contractors. EPA's letter estimates the amount of resources currently contracted outside of EPA translates into 11,000 to15, 000 FTE had it retained the work inside of the agency. Finally, it is important to recognize how an agency's strategies, including any plans to contract for services, contributes to the achievement of the agency's mission and its programmatic goals. In its introduction to its FAIR Act inventory, GSA states that its strategic plan provides the road map for achieving its mission and the context within which it developed this inventory, citing four goals, such as one to "create loyal customers by providing excellence in customer service." EPA's FAIR Act inventory links each commercial activity with 1 or more of EPA's 10 strategic goals--such as linking the administrative support activities in the Office of Water with EPA's strategic goal of ensuring clean and safe water. The FAIR Act inventories, then, can provide valuable information about the role of contracting in an agency's efforts to provide cost-effective products and services. OMB has encouraged agencies to understand and use a variety of tools and strategies to make sound business decisions and enhance federal performance through competition and choice. Efforts under the FAIR Act can best be understood within the context of other initiatives, such as the Government Performance and Results Act, performance-based organizations, and franchise funds, as part of a package of ways agencies can improve services and reduce costs. FAIR Act inventories that provide information and perspective on how various initiatives are being used together can be helpful to congressional and other decisionmakers in assessing the economy, efficiency, and effectiveness of an agency. questions about the efforts thus far which we will be reviewing for the Subcommittee. These questions include the following: What decisions did agencies make about whether or not activities were eligible for competition and what were the reasons for those decisions? What processes did agencies use to develop their FAIR Act inventories? How useful are the FAIR Act inventories? What supplemental information can be included to increase the usefulness of inventories? By enacting the FAIR Act, Congress has increased the visibility of agencies' commercial activities. Continuing congressional interest in the FAIR Act process is needed in order to maintain serious agency attention to developing and using the FAIR Act inventories. Oversight hearings, such as today's hearing, send clear messages to agencies that Congress is serious about improving the efficiency and effectiveness of government operations and the effective implementation of the FAIR Act. We look forward to continuing to work with you and other Members of Congress as your oversight efforts continue. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further contacts regarding this testimony, please contact J. Christopher Mihm at (202) 512-8676. Individuals making key contributions to this testimony included Steven G. Lozano, Thomas M. Beall, Susan Michal-Smith, Susan Ragland, and Jerome T. Sandau. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO discussed its observations on the initial implementation of the Federal Activities Inventory Reform (FAIR) Act of 1998, focusing on: (1) the progress to date in developing and releasing agencies' FAIR Act inventories; (2) the status of the initial steps taken to implement the FAIR Act; and (3) issues related to the Department of Commerce, the Environmental Protection Agency, and the General Services Administration FAIR Act inventories. GAO noted that: (1) most agencies' FAIR Act inventories have been submitted to the Office of Management and Budget (OMB) for review and consultation, and the first group of inventories is now publicly available; (2) clearly, executive agencies and OMB still have plenty of work ahead to implement the FAIR Act, including the public release of more inventories and the resolution of any challenges; (3) nevertheless, GAO's initial review of selected inventories raise some questions about the efforts thus far which GAO will be reviewing for the House Subcommittee on Government Management, Information and Technology; (4) these questions concern: (a) the decisions agencies make about whether or not activities were eligible for competition and what the reasons for those decisions were; (b) the processes agencies use to develop their FAIR Act inventories; (c) how useful the FAIR Act inventories are; and (d) what supplemental information can be included to increase the usefulness of inventories; (5) by enacting the FAIR Act, Congress has increased the visibility of agencies' commercial activities; (6) continuing congressional interest in the FAIR Act process is needed in order to maintain serious agency attention to developing and using the FAIR Act inventories; and (7) oversight hearings send clear messages to agencies that Congress is serious about improving the efficiency and effectiveness of government operations and the effective implementation of the FAIR Act.

To a large degree, spectrum management policies flow from the technical characteristics of radio spectrum. Although the radio spectrum spans nearly 300 billion frequencies, 90 percent of its use is concentrated in the 1 percent of frequencies that are below 3.1 gigahertz. The crowding in this region has occurred because these frequencies have properties that are well suited for many important wireless technologies, such as mobile phones, radio and television broadcasting, and numerous satellite communication systems. The process known as spectrum allocation has been adopted, both domestically and internationally, as a means of apportioning frequencies among the various types of uses and users of wireless services and preventing radio congestion, which can lead to interference. Interference occurs when radio signals of two or more users interact in a manner that disrupts the transmission and reception of messages. Spectrum allocation involves segmenting the radio spectrum into bands of frequencies that are designated for use by particular types of radio services or classes of users, such as broadcast television and satellites. Over the years, the United States has designated hundreds of frequency bands for numerous types of wireless services. Within these bands, government, commercial, scientific, and amateur users receive specific frequency assignments or licenses for their wireless operations. The equipment they use is designed to operate on these frequencies. During the last 50 years, developments in wireless technology have opened up additional usable frequencies, reduced the potential for interference, and improved the efficiency of transmission through various techniques, such as reducing the amount of spectrum needed to send information. While this has helped limit congestion within the radio spectrum, competition for additional spectrum remains high. Wireless services have become critically important to federal, state, and local governments for national security, public safety, and other functions. At the same time, the consumer market for wireless services has seen extraordinary growth. For example, mobile phone service in the United States greatly exceeded the industry's original growth predications, as it jumped from 16 million subscribers in 1994 to an estimated 110 million in 2001. The legal framework for allocating radio spectrum among federal and non- federal users emerged from a compromise over two fundamental policy questions: (1) whether spectrum decisions should be made by a single government official, or a body of decision-makers; and (2) whether all non- federal users should be able to operate radio services without qualification, or if a standard should be used to license these operators. The resulting regulatory framework--dividing spectrum management between the President and an independent regulatory body--is rooted both in the President's responsibility for national defense and in the fulfillment of federal agencies' missions, and the encouragement and recognition by the federal government of the investment made by private enterprise in radio and other communications services. The first federal statute to establish a structure for spectrum management--the Radio Act of 1912--consolidated licensing authority with the Secretary of Commerce. However, the act proved to be deficient in addressing the burgeoning growth of radio communications and ensuing interference that occurred in the late 1910s and 1920s. Specifically, the Secretary of Commerce lacked the authority to use licensing as a means of controlling radio station operations, or to take actions to control interference, such as designating frequencies for uses or issuing licenses of limited duration. In recognition of such limitations, deliberations began in the 1920s to devise a new framework for radio spectrum management. Although there was general agreement that licensing should entail more than a registration process, there was debate about designation of the licensing authority and the standard that should govern the issuance of licenses. The Radio Act of 1927, reflecting a compromise on a new spectrum management framework, reserved the authority to assign frequencies for all federal government radio operators to the President and created the Federal Radio Commission (FRC) to license non-federal government operators. Composed of five members from five different regions of the country, FRC could assign frequencies, establish coverage areas, and establish the power and location of transmitters under its licensing authority. Further, the act delineated that a radio operation proposed by a non-federal license applicant must meet a standard of "the public interest, convenience and necessity," and that a license conveyed no ownership in radio channels nor created any right beyond the terms of the license.FRC's authorities were subsequently transferred to the Federal Communications Commission (FCC), and the FRC was abolished upon enactment of the Communications Act of 1934, which brought together the regulation of telephone, telegraph, and radio services under one independent regulatory agency. The 1934 act also retained the authority of the President to assign spectrum to and manage federal government radio operations. The need for cooperative action in solving problems arising from the federal government's interest in radio use was recognized in 1922 with the formation of the Interdepartment Radio Advisory Committee (IRAC), comprised of representatives from the federal agencies that use the most spectrum. IRAC, whose existence and actions were affirmed by the President in 1927, has continued to advise whoever has been responsible for exercising the authority of the President to assign frequencies to the federal government. In 1978, the President's authority for spectrum management of federal government users was delegated to NTIA, an agency of the Department of Commerce. IRAC assists NTIA in assigning frequencies to federal agencies and developing policies, programs, procedures, and technical criteria for the allocation, management, and use of the spectrum. Over the past 75 years, since the 1927 act formed our divided structure of spectrum management, there is historical evidence of cooperation and coordination in managing federal and non-federal users to ensure the effective use of spectrum. For example, FCC and IRAC agreed in 1940 to give each other notice of proposed actions that might cause interference or other problems for their respective constituencies. Further, FCC has always participated in IRAC meetings and NTIA frequently provides comments in FCC proceedings that impact federal radio operations. And, as I will discuss later, FCC and NTIA also work together with the Department of State to formulate a unified U.S. position on issues at international meetings that coordinate spectrum use regionally and globally. However, as demand for this limited resource increases, particularly with the continuing emergence of new commercial wireless technologies, NTIA and FCC face serious challenges in trying to meet the growth in the needs of their respective incumbent users, while accommodating the needs of new users. The current shared U.S. spectrum management structure has methods for allocating spectrum for new uses and users of wireless services, but these methods have occasionally resulted in lengthy negotiations between FCC and NTIA over how to resolve some allocation issues. Since nearly all of the usable radio spectrum has been allocated already, accommodating more services and users often involves redefining spectrum allocations. One method, spectrum "sharing," enables more than one user to transmit radio signals on the same frequency band. In a shared allocation, a distinction is made as to which user has "primary" or priority use of a frequency and which user has "secondary" status, meaning it must defer to the primary user. Users may also be designated as "co-primary" in which the first operator to obtain authority to use the spectrum has priority to use the frequency over another primary operator. In instances where spectrum is shared between federal and non-federal users--currently constituting 56 percent of the spectrum in the 0-3.1 GHz range--FCC and NTIA must ensure that the status assigned to users (primary/secondary or co-primary) meet users' radio needs, and that users abide by rules applicable to their designated status. Another method to accommodate new users and technologies is "band- clearing," or re-classifying a band of spectrum from one set of radio services and users to another, which requires moving previously authorized users to a different band. Band-clearing decisions affecting either only non-federal or only federal users are managed within FCC or NTIA respectively, albeit sometimes with difficulty. However, band- clearing decisions that involve radio services of both types of users pose a greater challenge. Specifically, they require coordination between FCC and NTIA to ensure that moving existing users to a new frequency band is feasible and not otherwise disruptive to their radio operation needs.While many such band-clearing decisions have been made throughout radio history, these negotiations can become protracted. For example, a hotly debated issue is how to accommodate third-generation wireless services. FCC also told us that the relationship between FCC and NTIA on spectrum management became more structured following the enactment of legislative provisions mandating the reallocation of spectrum from federal to non-federal government use. To address the protracted nature of some spectrum band-clearing efforts, some officials we interviewed have suggested establishing a third party-- such as an outside panel or commission, an office within the Executive branch, or an inter-agency group--to arbitrate or resolve differences between FCC and NTIA. In some other countries, decisions are made within one agency or within interagency mechanisms that exist for resolving contentious band-clearing issues. For example, the United Kingdom differs from the U.S. spectrum management structure in that a formal standing committee, co-chaired by officials from the Radiocommunications Agency and the Ministry of Defense, has the authority to resolve contentious spectrum issues. Another proposed mechanism is the preparation of a national spectrum plan to better manage the allocation process. The Omnibus Budget Reconciliation Act of 1993 required NTIA and FCC to conduct joint spectrum planning sessions. The National Defense Authorization Act of 2000 included a requirement for FCC and NTIA to review and assess the progress toward implementing a national spectrum plan. Top officials from FCC and NTIA said that neither requirement has been fully implemented. However, they indicated their intention to implement these directives. A central challenge for the United States in preparing for WRCs, at which international spectrum allocation decisions are made, is completing the preparatory actions to ensure that the U.S. is able to effectively negotiate for international allocations that best serve the interests of domestic federal and non-federal spectrum users. The management of our domestic spectrum is closely tied to international agreements on spectrum use at regional and global levels. Domestic spectrum allocations are generally consistent with international allocations negotiated and agreed to by members of the International Telecommunication Union (ITU). The spectrum allocation decisions reached at these international conferences can affect the direction and growth of various wireless communications services and have far-reaching implications for the multi-billion dollar wireless communications industry in this country and abroad. While the first international radio conferences were aimed at interference avoidance for early radio uses, such as maritime safety, meeting this same objective has become increasingly challenging throughout the last century with the proliferation of services and the number of nations adopting communications that utilize the radio frequency spectrum. For example, the emergence of new radio applications with international ramifications, such as broadcasting, radio navigation, and satellite-based services, has increased the need to reach agreements to prevent cross border signal interference and maximize the benefits of spectrum in meeting global needs, such as air traffic control. At the same time, the number of participating nations in these negotiations has risen dramatically--from 9 nations in the first conference held in 1903, to 65 nations in 1932, to 148 at the conference held in 2000--along with the frequency of conferences (now held every 2 to 3 years), and the number of agenda items negotiated at a conference (e.g., 11 in 1979; 34 in 2000). There has also been a movement toward regional cooperation at WRCs. Because decisions on WRC agenda items are made by vote of the participating countries--with one vote per country--uniform or block voting of nations in regional alignment has emerged to more effectively advance regional positions. The State Department coordinates and mediates the U.S. position for the WRC and leads the U.S. delegation to the conference through an ambassador appointed by the President. We found strong agreement among those we interviewed that it is important for the United States to develop its position in advance of the conference in order to have time to meet with other nations to gain international support for our positions. However, we heard differences of opinion about the United States' preparatory process for the conferences. U.S. positions on WRC agenda items are developed largely through separate processes by FCC and NTIA with the involvement of their respective constituencies. To obtain input from non-federal users, FCC convenes a federal advisory committee comprised of representatives of various radio interests (e.g., commercial, broadcast, private, and public safety users), and solicits comment through a public notice in the Federal Register. NTIA and federal government users can and do participate in the FCC process. To obtain the views of federal spectrum users, IRAC meets to provide NTIA with input on WRC agenda items. Although IRAC's WRC preparatory meetings are closed to the private sector due to national security concerns, non-federal government users may make presentations to IRAC to convey their views on WRC agenda items. Any differences of opinion between FCC and NTIA on the U.S. position must ultimately be reconciled into a unified U.S. position on each WRC agenda item. In cases where differences persist, the ambassador acts as a mediator to achieve consensus to form a position. State Department and FCC officials told us that the work of FCC and NTIA with their respective constituencies and with each other in preparation for a conference leads to U.S. positions on WRC agenda items that are thoroughly scrutinized, well reasoned, and generally supported among federal and non-federal parties. In contrast, some non-federal officials told us that the NTIA process does not allow the private sector adequate involvement in the development of U.S. positions for the WRC. Also, some federal and non-federal officials said that since each agency develops its positions through separate processes, it takes too long to meld the two toward the end of the preparatory period. For example, to speed up our preparatory process, the former U.S. Ambassador to the 2000 WRC recommended merging the separate FCC and NTIA preparatory groups to get an earlier start at working with industry and government users to reach a consensus on U.S. positions regarding WRC agenda items. Differing views also have been expressed on how we appoint an individual to head the U.S. delegation. Since the early 1980s, the President has appointed an ambassador to head the U.S. delegation to WRCs for a time period not exceeding six months. The former U.S. Ambassador to the 2000 WRC said that ambassador status is generally believed to confer a high level of support from the administration, and it is viewed as helping to achieve consensus in finalizing U.S. positions and enhancing our negotiating posture. However, the former ambassador also said that the brief tenure of the appointment leaves little time for the ambassador to get up to speed on the issues, solidify U.S. positions, form a delegation, and undertake pre-conference meetings with heads of other delegations to promote U.S. positions. In addition, the ambassador said there is concern about the lack of continuity in leadership from one conference to the next, in contrast to other nations that are led by high-level government officials who serve longer terms and may represent their nations through multiple conferences. Leaders of national delegations with longer terms are perceived as being more able to develop relationships with their counterparts from other nations, helping them to negotiate and build regional and international support for their positions. On the other hand, NTIA officials expressed the view that the ambassador's negotiating skill was of equal importance to the duration of the appointment. NTIA has several activities to encourage efficient spectrum use by the federal government, but does not have assurance that these activities are effective. NTIA is required to promote the efficient and cost-effective use of the federal spectrum that it manages--over 270,000 federal frequency assignments at the end of 2000--"to the maximum extent feasible." NTIA has directed agencies to use only as much spectrum as they need. NTIA's process for assigning and reviewing spectrum places primary responsibility for promoting efficiency in the hands of the individual agencies because the determination of agencies' spectrum needs depends on an understanding of their varied missions. Moreover, the large number of frequency assignments that require attention (NTIA processes between 7,000 and 10,000 assignment action requests--applications, modifications, or deletions--from agencies every month on average) makes it necessary to depend heavily on the agencies to justify and review their assignment needs. NTIA authorizes federal agency use of the spectrum through its frequency assignment process. As part of this process, NTIA requires an agency to justify on its application that it will use the frequency assignment to fulfill an established mission and that other means of communication, such as commercial services, are not appropriate or available. In turn, agencies generally rely on mission staff to identify and justify the need for a frequency assignment and complete the engineering and technical specifications for the application. NTIA and IRAC review the application to ensure, among other things, that the assignment will not interfere with other users. Once NTIA has authorized spectrum use by agencies, it requires that the agencies review their frequency assignments every 5 years to determine that the assignments are still needed and meet technical specifications. NTIA said that it may delete assignments that have not been reviewed for more than 10 years. Officials from the seven federal agencies in our review told us that they attempt to use spectrum as efficiently as possible, but five of them are not completing the required five-year reviews in a timely or meaningful way. According to agency officials, this is due to shortages of staff available to complete the review or because completing the reviews are a low agency priority. For example, a spectrum manager for a major agency division has over 1,000 frequency assignments that have not been reviewed in 10 years or more. A spectrum manager in another agency said that the agency has eliminated all field staff responsible for assisting with the five-year reviews, which has impaired the timeliness and quality of the reviews. The spectrum manager for a third federal agency said that he was sure that the agency was not using all of its frequency assignments, but he added that conducting a comprehensive review would be cost prohibitive and generate limited benefits to the agency. However, we note that although the agencies may not reap benefits from conducting these reviews, if these reviews result in the release of unused or underutilized spectrum, other federal and non-federal users could benefit. Although NTIA's rules and procedures also include NTIA monitoring programs designed to verify how spectrum is used by federal agencies, NTIA no longer conducts these programs as described. For example, at one time, the Spectrum Management Survey Program included NTIA site visits to verify if agency transmitters were being used as authorized. NTIA said that although this program helped correct frequency assignment information and educate field staff on NTIA requirements, it is not currently active due to NTIA staff shortages. In addition, the Spectrum Measurement Program made use of van-mounted monitoring equipment to verify that federal agencies were utilizing assigned frequencies in accordance with the assignment's requirements. NTIA said that although this program provided useful information, the van-mounted verification has been discontinued due to lack of resources. As a result of the limited nature of the assignment and review programs and decreased monitoring, NTIA lacks assurance that agencies are only using as much spectrum as they need. NTIA also seeks to promote efficiency by advocating spectrum conservation through research and technical initiatives, but some of these activities face implementation problems. Two examples illustrate the potential and the limitations of these types of efforts. First, NTIA, with the approval of IRAC, has required all federal agencies to upgrade land-based mobile radios by setting deadlines for halving the spectrum bandwidth used per channel (in essence, freeing up half of each band currently in use) for radios in certain highly congested bands--a process called narrowbanding. This requirement has the potential to greatly expand the spectrum available for land mobile telecommunications, but some agencies said that they are struggling to meet the deadline due to a lack of sufficient staff and funding. Several agencies in our review said they will not complete the upgrades before the deadline. For example, the Chief Information Officer for one agency that is a member of IRAC compared the requirement to an unfunded mandate, and indicated that his office did not have the financial resources needed to upgrade the tens of thousands of radios that fall under the requirement. A second example of a technological initiative is a NTIA-sponsored pilot program for federal agencies in six cities in the early 1990s to establish a spectrum sharing method for voice radio communications, called trunking, which conserves spectrum by putting more users on each radio channel. According to NTIA, some agencies resisted the program because it was more costly for agencies to participate in trunking than it was for them to use their own channels. In addition, some agencies said the trunking systems did not meet their mission needs. NTIA added that the program was only completely successful in Washington, DC, where agency demand for frequency assignments, and therefore spectrum congestion, is extremely high. We found efforts to encourage this technology in other countries as well. In the United Kingdom, providers of emergency services are being encouraged to join a trunking system. Once the new system has proved to be capable of meeting their needs, certain public safety users will incur financial penalties if they do not use this system. Additionally, in one province in Canada, a variety of public safety users have voluntarily begun developing a trunking system in order to use their assigned spectrum more efficiently in light of the fees they must pay for this resource. NTIA also told us that the congressionally-mandated spectrum management fees agencies must pay also help to promote the efficient use of spectrum. These fees are designed to recover part of the costs of NTIA's spectrum management function. The fees began in 1996 and amounted to about $50 per frequency assignment in 2001. NTIA decided to base the fee on the number of assignments authorized per agency instead of the amount of spectrum used per agency because the number of assignments better reflects the amount of work NTIA must do for each agency. Moreover, NTIA stated that this fee structure provides a wider distribution of cost to the agencies. Although NTIA officials said that spectrum fees provide an incentive for agencies to relinquish assignments, it is not clear that this promotes efficient use of spectrum, in part because agencies may be able to reduce assignments without returning spectrum. For example, a spectrum manager for a federal agency said that the spectrum fee has caused the agency to reduce redundant assignments, but that it has not impacted the efficiency of the agency's spectrum use because the agency did not return any spectrum to NTIA as a result of reducing its assignments. We have learned that other countries are moving toward using payment mechanisms for government spectrum users that are specifically designed to encourage government users to conserve their use of spectrum, rather than to recover the cost of managing the spectrum. Both Canada and the United Kingdom are reviewing their administrative fee structures at this time with the intent of encouraging spectrum efficiency. We are conducting additional work on the management of the radio spectrum to determine how the current rules and regulations governing spectrum holders affect the rollout of new technologies and services and the level of competition in markets that utilize spectrum. To address these and other related issues, we are building on the information presented here today concerning U.S. rules and regulations governing spectrum management. We are interviewing an array of providers of mobile telephone, satellite, paging services, broadcasters, NTIA, other federal agencies, and public safety representatives. Tomorrow we are hosting a panel with experts from several of these sources to elicit additional input on these and other issues.

As new technologies that depend on the radio spectrum continue to be developed and used more widely, managing the spectrum can grow increasingly challenging. The current legal framework for domestic spectrum management evolved as a compromise over the questions of who should determine the distribution of the spectrum among competing users and what standard should be applied in making this determination. Although initially, all responsibility for spectrum management was placed in the executive branch, this responsibility has been divided between the executive branch for managing federal use and an independent commission for managing non-federal use since 1927 . The current shared U.S. spectrum management system has processes for allocating spectrum, but these processes have occasionally resulted in lengthy negotiations between the Federal Communications Commission and the National Telecommunications and Information Administration (NTIA) over allocation issues. The United States also faces challenges in effectively preparing for World Radiocommunication Conferences. NTIA has several activities to encourage efficient spectrum use by federal agencies, but it lacks the assurance that these activities are effective. NTIA is required to promote efficiency in the federal spectrum it manages, which included more than 270,000 federal frequency assignments at the end of 2000. To do this, NTIA directs federal agencies to use only as much of the spectrum as they need.

Private sector data have become increasingly available to researchers, and several studies have established that significant geographic variation in spending exists in the private sector. For example, in a recent comprehensive assessment of geographic variation in private sector spending, the Institute of Medicine (IOM) reported on the presence of substantial spending variation, concluding that a large amount of the variation remained unexplained after adjusting for enrollee demographic and health status factors, insurance plan factors, and market-level factors, and suggesting that inefficiency is one of the causes of the current levels of variation. Using private sector claims data from two nationwide databases from 2007 through 2009, IOM found unadjusted spending for the area at the 90th percentile was 36 to 42 percent higher than the area at the 10th percentile, depending on the database used. The spending differences existed at all levels of geography IOM studied, including MSAs, and these differences persisted over time. IOM also found that price is a major determinant of geographic variation in the private sector, and estimated that, after adjusting for underlying costs, price accounted for 70 percent of the geographic variation in private sector spending. The researchers attributed the large impact of price in explaining private sector geographic spending variation to the relatively strong market power of providers in some areas. Other studies, including one by GAO, have reached similar conclusions. The Medicare Payment Advisory Commission (MedPAC) examined geographic variation in private sector spending and estimated that in 2008, hospital inpatient spending for the MSA at the 90th percentile was 90 percent higher than for the MSA at the 10th percentile. MedPAC also found that spending for physician services varied, but less so than hospital inpatient spending. Physician spending at the 90th percentile was 50 percent higher than that at the 10th percentile. Early work by GAO analyzing 2001 private sector claims in the Federal Employees Health Benefits Program also found substantial geographic variation in private sector hospital inpatient prices, physician prices, and spending. IOM also found that areas with relatively high prices tended to have relatively low utilization and vice versa. In addition, IOM found that private sector utilization varied more for some service types than others. For example, emergency department use was 50 to 100 percent higher for the area at the 90th percentile of utilization relative to the 10th percentile, and hospital outpatient visits were 30 to 46 percent higher. In addition, consistent with other research, use of discretionary services varied substantially. For example, the utilization rate for hip replacement, considered a discretionary procedure, for the area at the 90th percentile was 53 percent higher than the area at the 10th percentile, and other discretionary procedures, such as hysterectomies, lower back surgeries, and nuclear stress tests, had even larger differences. Researchers from the National Institute for Health Care Reform recently examined geographic variation in spending for hip and knee replacement episodes of care using 2011 claims data for autoworkers and their dependents in nine geographic areas in six states. They defined episodes as those beginning with a hospital admission and including all services up to 30 days postdischarge. Average spending per episode across the nine markets ranged from below $25,000 in Louisville, However, variation Kentucky, to above $30,000 in Buffalo, New York.across the 36 hospitals within these markets varied more than twofold, and all but one of the markets had a lower-spending hospital option, defined as having average episode spending below $25,000. To get a broader measure of variation in episode spending, these researchers also examined all episode types across hospitals. The spending variations observed for knee and hip replacements held true for other conditions, and hospitals with high spending for one service line (cardiology, orthopedics, etc.) were also likely to have high spending for other service lines. In addition, the price of the initial hospital stay accounted for more than 80 percent of the variation in overall spending. Variation in the prices and volume of physician and other services together accounted for less than one-tenth of the variation in episode spending. These researchers noted that reasons for higher-priced hospitals in some areas included their provision of specialized service lines that other nearby hospitals did not offer, being part of a local hospital system with greater bargaining clout, having unusually good clinical reputations, and being part of a large teaching hospital. We noted variation in episode spending across MSAs for all three procedures, even after adjusting for geographic differences in the cost of doing business and differences in demographics and health status of enrollees in each MSA. For example, average adjusted episode spending across all MSAs in our analysis for laparoscopic appendectomy was $12,506; however, MSAs in the highest-spending quintile had average adjusted episode spending of $17,047, which was almost 94 percent higher than the average adjusted episode spending of $8,802 for MSAs in the lowest-spending quintile. Average adjusted episode spending for this procedure for individual MSAs ranged from $25,924 in Salinas, California, to $6,166 in Joplin, Missouri. We found similar results for the other two procedures we studied, coronary stent placement and total hip replacement. Average adjusted episode spending for MSAs in the highest-spending quintile was about 84 percent and 74 percent higher than for MSAs in the lowest-spending quintile, respectively. (See fig. 1; also, see app. II for complete rankings of MSAs by procedure.) We found greater geographic variation in average episode spending than the research from the National Institute for Health Care Reform, likely because our study included many more geographic areas. For all three procedures, adjustments to control for geographic differences in the cost of doing business and for differences in demographics and health status of enrollees reduced the extent of variation in spending across MSAs. For example, before adjustment, average episode spending for laparoscopic appendectomy in the highest- spending MSA (Salinas, California) was 511 percent higher than the lowest-spending MSA (Joplin, Missouri); and, after adjustment, spending was 320 percent higher. MSAs with higher spending on one procedure generally had higher spending on the other two procedures. For example, Salinas, California, and Fort Wayne, Indiana, were among the highest-spending MSAs for all three procedures, while Hartford, Connecticut, and Youngstown, Ohio, were among the lowest-spending MSAs for all three procedures. We examined average adjusted episode spending in the 78 MSAs that had a sufficient number of episodes for all three procedures and found that the extent of correlation for each pair of procedures for the 78 MSAs ranged from 0.68 to 0.83, consistent with the research from the National Institute for Health Care Reform. (See fig. 2.) The price of the initial hospital inpatient admission was the largest contributor to differences in private sector episode spending across MSAs. Differences in the price of the initial admission accounted for 91 percent or more of the difference in average adjusted episode spending between the lowest- and highest-spending quintiles. For example, for total hip replacement, the difference in average adjusted episode spending in the MSAs in the lowest- and highest-spending quintiles was $14,506, and $13,198 of that difference--or 91 percent-- was attributable to differences in the price of the initial inpatient admission. Similarly, differences in initial inpatient admission prices accounted for 92 and 96 percent of the differences in episode spending between MSAs in the lowest- and highest-spending quintiles for coronary stent placement and laparoscopic appendectomy, respectively (see table 1). The role of inpatient admission price as the primary driver of geographic differences in spending in the private sector has been reported in the literature, such as by the National Institute for Health Care Reform. The price of the initial inpatient admission contributed most to geographic differences in average adjusted episode spending for two reasons. First, the price of the initial admission represented the largest percentage of adjusted episode spending. For the lowest- and highest-spending quintiles in each of the three procedures, at least two-thirds of episode spending was for the price of the hospital inpatient admission. For example, for total hip replacement, the price of the initial admission was $17,134, representing 76 percent of the $22,463 in total episode spending for MSAs in the lowest-spending quintile and $30,332, representing 82 percent of the $36,969 in total episode spending for MSAs in the highest-spending quintile. Second, the average price of the initial inpatient admission varied considerably across MSAs.difference in the price of the initial inpatient admission in MSAs in the lowest- and highest-spending quintiles ranged from 77 percent to 121 percent, depending on the procedure. For example, for laparoscopic appendectomy, the price of the initial admission was 121 percent higher for MSAs in the highest-spending quintile compared with MSAs in the lowest-spending quintile (see fig. 3). Specifically, MSAs in the highest- spending quintile had an average price of $13,177 for the initial admission--and ranged from $11,087 in Colorado Springs, Colorado, to $23,432 in Salinas, California--whereas MSAs in the lowest-spending quintile had an average price of $5,971 for the initial admission--and ranged from $4,528 in Las Vegas, Nevada, to $7,430 in San Antonio, Texas. (See app. IV for average adjusted episode spending by procedure and service category, and app. V for complete rankings of hospital inpatient spending, initial admission price, and number of days by MSA and procedure.) We provided a draft of this product to the Department of Health and Human Services, which did not comment on our findings but provided technical comments. We incorporated these technical comments 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 Secretary of Health and Human Services and the Administrator of the Centers for Medicare & Medicaid Services. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. This appendix describes the data and methods we used in our study. We created episodes of care based on inpatient admissions for three procedures--coronary stent placement, laparoscopic appendectomy, and total hip replacement--using private health insurance claims and enrollment data from the Truven Health Analytics MarketScan®️ Commercial Claims and Encounters Database for 2009 and 2010. We identified procedures based on the presence of specific procedure codes in the hospital inpatient and professional service claims. We selected these procedures because they were commonly performed in the years we analyzed and were associated with high levels of national spending in the MarketScan database. In addition, we selected procedures that were generally provided by different medical specialties, and we selected hospital-based procedures because the United States spends more nationally on hospital services than any other type of health care service. We included all services in the episode from the day of admission to 30 days after discharge, and certain services in the 3 days prior to admission. Specifically, we included any outpatient services received by an enrollee in the 3 days prior to admission at the same hospital where the inpatient admission occurred, because those services may be related to the admission. In the episode, we included any drugs provided during the hospital inpatient admission because these drugs were part of the hospital inpatient claims. However, we excluded outpatient drugs, such as prescription drugs, due to limitations of the claims in the MarketScan database. We excluded enrollees from our study who had inpatient admissions for any of the three procedures outside the 50 states and the District of Columbia, had secondary insurance, or were enrolled in a managed care or other capitated plan.conditions that could increase spending for reasons unrelated to the procedure analyzed. For example, we excluded enrollees who received the procedure more than one time during the episode, enrollees whose overall initial hospital admission was coded as being for a reason unrelated to the procedure analyzed, enrollees with diagnoses of end- stage renal disease, enrollees who were pregnant, and enrollees with a hospice stay. In addition, we excluded enrollees under the age of 18 for coronary stent placement and total hip replacement episodes, and we excluded enrollees with a diagnosis of appendix rupture for laparoscopic appendectomy episodes. We analyzed average episode spending across metropolitan statistical areas (MSA) for each procedure. We assigned episodes to MSAs based on the location of the hospital inpatient admission, and we had a sufficient number of episodes to support our analyses of coronary stent placement in 155 MSAs, laparoscopic appendectomy in 139 MSAs, and total hip replacement in 141 MSAs. For some analyses where we draw comparisons across procedures, we report data on only the 78 MSAs that had a sufficient number of episodes to support our analyses for all three procedures. For each procedure, we estimated unadjusted spending and spending adjusted for geographic differences in the cost of doing business and differences in the demographics and health status of enrollees in each MSA. To estimate unadjusted spending, we summed the insurer's allowed payment amount for all services within the episode, including the amount paid by the insurer and any cost-sharing paid by the enrollee. We adjusted for geographic differences in the cost of doing business by using Medicare's payment-adjustment methodology. For services provided by physicians and certain other health professionals, we applied the Geographic Practice Cost Index, which is Medicare's estimate of the geographic differences in the costs of operating a medical practice, to the unadjusted spending for professional services. For services provided by hospitals, such as during an inpatient admission, and by certain other facilities, we applied the Hospital Wage Index value, which is Medicare's estimate of differences in the wage-related component of the costs of doing business, to a portion of the unadjusted spending for those services. We additionally adjusted for differences in the demographics and health status of enrollees in each MSA by using a regression-based approach. In the regression, the dependent variable was total cost- adjusted episode spending, and the independent variables were enrollee- level factors (such as age, gender, number of readmissions, and certain comorbidities) and MSA-level indicator variables to identify the portion of the remaining variation in episode spending that was attributable to specific geographic areas. Using all MSAs in our analyses, we reported the distribution of average adjusted episode spending for each procedure. Using the 78 MSAs with a sufficient number of episodes for all three procedures, we reported the correlation coefficient to show the extent to which MSAs with high or low episode spending for one procedure also had high or low episode spending for another procedure. We also examined whether MSAs in the lowest- and highest-spending quintile were concentrated in particular regions of the nation. To examine how one of the components of spending--mix of service types--contributes to variation in episode spending across geographic areas, we assigned all adjusted spending within an episode to one of five service categories based on the procedure code for the service and place of service. The five service categories were (1) hospital inpatient, (2) hospital outpatient, (3) postdischarge, (4) professional, and (5) ancillary. For the 78 MSAs with a sufficient number of episodes for all three procedures, we compared the MSAs in the lowest- and highest-spending quintiles for each procedure, and we reported the extent to which those differences in spending for each service category contributed to differences in episode spending. We also reported the difference in adjusted spending by service category between the quintiles. To examine how the other components of spending contribute to variation in episode spending for private payers, we analyzed volume, intensity, and price of services for hospital inpatient and professional services. For hospital inpatient services, we measured volume as the number of days of the hospital stay, and we measured price by the amount of spending on the initial hospital inpatient admission (which excluded spending on any subsequent readmissions) because hospitals are generally paid one amount per admission regardless of the patient's length of stay or the services delivered. In addition, we calculated the extent to which the price of the initial inpatient admission contributed to differences in episode spending between MSAs in the lowest- and highest-spending quintiles. For professional services, we measured volume as the number of services, measured intensity based on the relative value unit (RVU), which is an estimate of the resources needed to provide a given service,and calculated the price per unit of intensity by dividing average spending on professional services by the total units of intensity (number of RVUs) associated with those services.we used a regression-based approach to control for differences in the demographics and health status of enrollees in each MSA. In addition, we compared differences in volume, intensity, and price per unit of intensity between MSAs in the lowest- and highest-spending quintiles. This appendix ranks metropolitan statistical areas (MSA) by average adjusted episode spending for each of the three procedures we analyzed--coronary stent placement, laparoscopic appendectomy, and total hip replacement. Number of metropolitan statistical areas (MSA) This appendix presents average adjusted episode spending for each of the three procedures we analyzed--coronary stent placement, laparoscopic appendectomy, and total hip replacement--by service category for metropolitan statistical areas (MSA) in the lowest- and highest-spending quintiles. This appendix presents hospital inpatient spending, initial admission price, and number of days, by metropolitan statistical area (MSA), for each of the three procedures we analyzed--coronary stent placement, laparoscopic appendectomy, and total hip replacement. This appendix presents professional service spending, number of services, intensity, and price, by metropolitan statistical area (MSA), for each of the three high-cost procedures we analyzed--coronary stent placement, laparoscopic appendectomy, and total hip replacement. In addition to the contact named above, Christine Brudevold, Assistant Director; Ramsey Asaly; Greg Giusto; Andy Johnson; Corissa Kiyan; Elizabeth T. Morrison; Vikki Porter; and Dan Ries made key contributions to this report.

Research shows that spending on health care varies by geographic area and that higher spending in an area is not always associated with better quality of care. While a substantial body of research exists on geographic variation in spending in Medicare, less research has been done on variation in private sector health care spending, although this spending accounts for about a third of overall health care spending. As U.S. health expenditures continue to rise, policymakers and others have expressed interest in better understanding spending variation and how health care systems can operate efficiently--that is, providing equivalent or higher quality care while maintaining or lowering current spending levels. GAO was asked to examine geographic variation in private sector health care spending. GAO examined (1) how spending per episode of care for certain high-cost procedures varies across geographic areas for private payers, and (2) how the mix of service types, and the volume, intensity, and price of services contribute to variation in episode spending across geographic areas for private payers. Using a large private sector claims database for 2009 and 2010, GAO examined spending by MSA for episodes of care for three commonly performed inpatient procedures and examined spending by hospital inpatient, hospital outpatient, postdischarge, professional, and ancillary service categories. For inpatient and professional services, GAO examined the volume, intensity, and price of services. GAO's findings may not be generalizable to all private insurers due to data limitations. Spending for an episode of care in the private sector varied across metropolitan statistical areas (MSA) for coronary stent placement, laparoscopic appendectomy, and total hip replacement, even after GAO adjusted for geographic differences in the cost of doing business and differences in enrollee demographics and health status. MSAs in the highest-spending quintile had average adjusted episode spending that was 74 to 94 percent higher than MSAs in the lowest-spending quintile, depending on the procedure. MSAs with higher spending on one procedure generally had higher spending on the other two procedures. High- or low-spending MSAs were not concentrated in particular regions of the nation. The price of the initial hospital inpatient admission accounted for 91 percent or more of the difference in episode spending between MSAs in the lowest- and highest-spending quintiles. The price of the initial admission was the largest contributor to the difference for two reasons. First, it represented the largest percentage of adjusted episode spending. For example, for total hip replacement, the average price of the initial admission was $17,134, representing 76 percent of the $22,463 in total episode spending for MSAs in the lowest-spending quintile and $30,332, representing 82 percent of the $36,969 in total episode spending for MSAs in the highest-spending quintile. Second, the price of the initial admission varied considerably across MSAs. For MSAs in the highest-spending quintile, the average price of the initial admission for total hip replacement was 77 percent higher than for MSAs in the lowest-spending quintile. Professional services--office visits and other services provided by a physician or other health professional--were the second largest contributor to geographic differences in episode spending, but accounted for 7 percent or less of the difference in episode spending between MSAs in the lowest- and highest-spending quintiles. (See table.) MSAs in the highest-spending quintile had higher average prices and intensity (a measure of the resources needed to provide a service) but fewer services (volume) than MSAs in the lowest-spending quintile for all three procedures. The Department of Health and Human Services provided technical comments on a draft of this report, which were incorporated as appropriate.

Over the past decade, the number of acres burned annually by wildland fires in the United States has substantially increased. Federal appropriations to prepare for and respond to wildland fires, including appropriations for fuel treatments, have almost tripled. Increases in the size and severity of wildland fires, and in the cost of preparing for and responding to them, have led federal agencies to fundamentally reexamine their approach to wildland fire management. For decades, federal agencies aggressively suppressed wildland fires and were generally successful in decreasing the number of acres burned. In some parts of the country, however, rather than eliminating severe wildland fires, decades of suppression contributed to the disruption of ecological cycles and began to change the structure and composition of forests and rangelands, thereby making lands more susceptible to fire. Increasingly, the agencies have recognized the role that fire plays in many ecosystems and the role that it could play in the agencies' management of forests and watersheds. The agencies worked together to develop a federal wildland fire management policy in 1995, which for the first time formally recognized the essential role of fire in sustaining natural systems; this policy was subsequently reaffirmed and updated in 2001. The agencies, in conjunction with Congress, also began developing the National Fire Plan in 2000. To align their policies and to ensure a consistent and coordinated effort to implement the federal wildland fire policy and National Fire Plan, Agriculture and Interior established the Wildland Fire Leadership Council in 2002. In addition to noting the negative effects of past successes in suppressing wildland fires, the policy and plan also recognized that continued development in the wildland-urban interface has placed more structures at risk from wildland fire at the same time that it has increased the complexity and cost of wildland fire suppression. Forest Service and university researchers estimated in 2005 that about 44 million homes in the lower 48 states are located in the wildland-urban interface. To help address these trends, current federal policy directs agencies to consider land management objectives--identified in land and fire management plans developed by each local unit, such as a national forest or a Bureau of Land Management district--and the structures and resources at risk when determining whether or how to suppress a wildland fire. When a fire starts, the land manager at the affected local unit is responsible for determining the strategy that will be used to respond to the fire. A wide spectrum of strategies is available to choose from, some of which can be significantly more costly than others. For example, the agencies may fight fires ignited close to communities or other high-value areas more aggressively than fires on remote lands or at sites where fire may provide ecological or fuel-reduction benefits. In some cases, the agencies may simply monitor a fire, or take only limited suppression actions, to ensure that the fire continues to pose little threat to important resources, a practice known as "wildland fire use." The Forest Service and Interior agencies have initiated a number of steps to address issues that we and others have identified as needing improvement to help federal agencies contain wildland fire costs, but the effects of these steps on containing costs are unknown, in part because many of the steps are not yet complete. Dozens of studies by federal agencies and other organizations examining federal agencies' management of wildland fire have repeatedly identified a number of similar issues needing improvement to help contain wildland fire costs. These issues generally fall into one of three operational areas--reducing accumulated fuels, acquiring and using firefighting assets, and selecting firefighting strategies. Recent studies have also raised concerns about the framework used to share the cost of fighting fires between federal and nonfederal entities. First, federal firefighting agencies have made progress in developing a system to help them better identify and set priorities for lands needing treatment to reduce accumulated fuels. Many past studies have identified fuel reduction as important for containing wildland fire costs because accumulated fuels can contribute to more-severe and more costly fires. The agencies are developing a geospatial data and modeling system, called LANDFIRE, intended to produce consistent and comprehensive maps and data describing vegetation, wildland fuels, and fire regimes across the United States. The agencies will be able to use this information to help identify fuel accumulations and fire hazards across the nation, help set nationwide priorities for fuel-reduction projects, and assist in determining an appropriate response when wildland fires do occur. According to Forest Service and Interior officials, the agencies completed mapping the western United States in April 2007; mapping of the eastern states is scheduled to be completed by 2008 and of Alaska and Hawaii by 2009. The agencies, however, have not yet finalized their plan for ensuring that collected data are routinely updated to reflect changes to fuels, including those from landscape-altering events, such as hurricanes, disease, or wildland fires themselves. Forest Service and Interior officials told us that they recognize the importance of ensuring that data are periodically updated and are developing a plan to operate and maintain the system, including determining how often data will be updated. The agencies expect to submit this plan to the Wildland Fire Leadership Council for approval in June 2007. Second, the agencies have also taken some steps to improve how they acquire and use firefighting personnel, aviation resources, and equipment--assets that constitute a major cost of responding to wildland fires--but much remains to be done. The agencies have improved their systems for dispatching and monitoring firefighting assets and for gathering and analyzing cost data. However, they have yet to complete the more fundamental step of determining the appropriate type and quantity of firefighting assets needed for the fire season. Over the past several years, the agencies have been developing a Fire Program Analysis (FPA) system, which was proposed and funded to help the agencies determine national budget needs by analyzing budget alternatives at the local level--using a common, interagency process for fire management planning and budgeting--and aggregating the results; determine the relative costs and benefits for the full scope of fire management activities, including potential trade-offs among investments in fuel reduction, fire preparedness, and fire suppression activities; and identify, for a given budget level, the most cost-effective mix of personnel and equipment to carry out these activities. We have said for several years--and the agencies have concurred--that FPA is critical to helping the agencies contain wildland fire costs and plan and budget effectively. Recent design modifications to the system, however, raise questions about the agencies' ability to fully achieve these key goals. A midcourse review of the developing system resulted in the Wildland Fire Leadership Council's approving in December 2006 modifications to the system's design. FPA and senior Forest Service and Interior officials told us in April 2007 they believed the modifications will allow the agencies to meet the key goals. The officials said they expected to have a prototype developed for the council's review in June 2007 and to substantially complete the system by June 2008. We have yet to systematically review the modifications, but after reviewing agency reports on the modifications and interviewing knowledgeable officials, we have concerns that the modifications may not allow the agencies to meet FPA's key goals. For example, under the redesigned system, local land managers will use a different method to analyze and select various budget alternatives, and it is unclear whether this method will identify the most cost-effective allocation of resources. In addition, it is unclear how the budget alternatives for local units will be meaningfully aggregated on a nationwide basis, a key FPA goal. Third, the agencies have clarified certain policies and are improving analytical tools to assist agency officials in identifying and implementing an appropriate response to a given fire. Officials have a wide spectrum of strategies available to them when responding to wildland fires, some of which can be significantly more costly than others. For individual fires, past studies have found that officials may not always consider the full range of available strategies and may not select the most appropriate one, which would consider the cost of suppression; value of structures and other resources threatened by the fire; and, where appropriate, any benefits the fire may provide to natural resources. The agencies call a strategy that considers these factors the "appropriate management response." The agencies updated their policies in 2004 to require officials to consider the full spectrum of available strategies when selecting one to use. Nevertheless, other policies limit the agencies' use of less aggressive strategies, which typically cost less. The Forest Service and Interior agencies are working together to revise these policies--revisions that could, for example, allow different areas of the same fire to be managed for suppression and wildland fire use concurrently or allow a fire that was previously being suppressed to be managed instead for wildland fire use. The agencies are also continuing to refine existing tools, and to develop new ones, for analyzing both fuel and predicted weather conditions to model expected fire behavior, information that officials can use to identify appropriate suppression strategies; these tools are still being designed and tested. It is still too early to tell, however, to what extent the policy changes being considered or the new tools being developed will help to contain costs. Finally, we and others have also reported that the existing framework for sharing firefighting costs between federal and nonfederal entities insulates state and local governments from the cost of protecting homes and communities in or near wildlands, which may reduce those governments' incentive to adopt building codes and land use requirements that could help reduce the cost of suppressing wildland fires. Federal agencies, working with nonfederal entities, have recently taken steps to clarify guidance and better ensure that firefighting costs are shared consistently for fires that threaten both federal and nonfederal lands and resources. In early 2007, the Forest Service and Interior agencies approved an updated template that land managers can use when developing master agreements--which establish the framework for sharing costs between federal and nonfederal entities--as well as agreements on how to share costs for a specific fire. Because master agreements are normally updated every 5 years, however, it may take several years to fully incorporate this new guidance. Although the new guidance states that managers must document their rationale for selecting a particular cost-sharing method, officials told us that the agencies have no clear plan for how they will provide oversight to ensure that appropriate cost-sharing methods are used. Despite steps taken to strengthen their management of cost-containment efforts, the agencies have neither clearly defined their cost-containment goals and objectives nor developed a strategy for achieving them--steps that are fundamental to sound program management. To manage their cost-containment efforts effectively, the Forest Service and Interior agencies should, at a minimum, have (1) clearly defined goals and measurable objectives, (2) a strategy to achieve the goals and objectives, (3) performance measures to track their progress, and (4) a framework for holding appropriate agency officials accountable for achieving the goals. First, although the agencies have established a broad goal of suppressing wildland fires at minimum cost considering firefighter and public safety and the resources and structures to be protected, they have established neither clear criteria by which to weigh the relative importance of these often-competing priorities nor measurable objectives by which to determine if they are meeting their goal. Without such criteria and objectives, according to agency officials we interviewed and reports we reviewed, officials in the field lack a clear understanding of the relative importance that the agencies' leadership places on containing costs and, therefore, are likely to select firefighting strategies without due consideration of costs. Second, the agencies have yet to establish an overall cost-containment strategy. Without a strategy designed to achieve clear cost-containment goals, the agencies (1) have no assurance that the variety of steps they are taking to help contain wildland fire costs are prioritized so that the most important steps are undertaken first and (2) are unable to determine to what extent these steps will help contain costs and if a different approach may therefore be needed. Third, the agencies recently adopted a new performance measure--known as the stratified cost index--that may improve the agencies' ability to evaluate their progress in containing costs, but the measure may take a number of years to fully refine. Also, although the agencies have in recent years improved their data on suppression costs and fire characteristics, additional improvement is needed. In particular, cost data for "fire complexes"--that is, two or more fires burning in proximity that are managed as a single incident--are particularly difficult to identify. Thus, the costs of many of the largest fires are not included in the index, limiting its effectiveness. Further, to date, the index is based solely on fires managed by the Forest Service. Forest Service researchers are currently developing, at Interior's request, a similar index for fires managed by the Interior agencies, but it will be several years, at the earliest, before enough data have been collected for the index to be useful. In addition, because the stratified cost index is based on costs from previous fires--and because the agencies have only recently begun to emphasize the importance of using less aggressive suppression strategies--we are concerned that the index does not include data from many fires where less costly firefighting strategies were used. As a result, the index may not accurately identify fires where more, or more-expensive, resources were used than needed. According to Forest Service officials, data from recent fires will be added annually; over time, the index should therefore include more fires where less aggressive firefighting strategies were used. Finally, the agencies have also taken, or are beginning to take, steps to improve their oversight and accountability framework, although the extent to which these steps will assist the agencies in containing costs is unknown. For example, the agencies have issued guidance clarifying that land managers, not fire managers, have primary responsibility for containing wildland fire costs, but they have not yet determined how the land managers are to be held accountable for doing so. Rather, the agencies have taken several incremental steps intended to assist land managers in carrying out this responsibility--such as assigning "incident business advisors" to observe firefighting operations and work with fire managers to identify ways those operations could be more cost-effective, and requiring land managers to evaluate fire managers for how well they achieve cost-containment goals. The utility of these steps, however, may be limited because the agencies have yet to establish a clear measure to evaluate the benefits and costs of alternative firefighting strategies. Some past studies have concluded that the absence of such a measure fundamentally weakens the agencies' ability to provide effective oversight. Continuing concerns about the cost of preparing for and responding to wildland fires have spurred numerous studies and actions by federal wildland fire agencies, but little in the way of a coordinated and focused effort to rein in these costs. Although the agencies have taken--and continue to take--steps intended to contain wildland fire costs, the effect of these steps on containing costs is unknown, in part because the agencies lack a clear vision for what they want to achieve. Without clearly defined cost-containment goals and objectives, federal land and fire managers in the field are more likely to select strategies and tactics that favor suppressing fires quickly over those that seek to balance the benefits of protecting the resources at risk and the costs of protecting them. Further, without clear goals, the agencies will be unable to develop consistent standards by which to measure their performance. Perhaps most important, without a clear vision of what they are trying to achieve and a systematic approach for achieving it, the agencies--and Congress and the American people--have little assurance that cost-containment efforts will lead to substantial improvement. Thus, to help the agencies manage their ongoing efforts to contain wildland fire costs effectively and efficiently, and to assist Congress in its oversight role, we recommended in our report that the Secretaries of Agriculture and the Interior work together to direct their respective agencies to (1) establish clearly defined goals and measurable objectives for containing wildland fire costs, (2) develop a strategy to achieve these goals and objectives, (3) establish performance measures that are aligned with these goals and objectives, and (4) establish a framework to ensure that officials are held accountable for achieving the goals and objectives. Because of the importance of these actions and continuing concerns about the agencies' response to the increasing cost of wildland fires--and so that the agencies can use the results of these actions to prepare for the 2008 fire season--the agencies should provide Congress with this information no later than November 2007. In commenting on a draft of our report, the Forest Service and Interior generally disagreed with the characterization of many of our findings; they neither agreed nor disagreed with our recommendations. In particular, the Forest Service and Interior stated that they did not believe we had accurately portrayed some of the significant actions they had taken to contain wildland fire costs, and they identified several agency documents that they believe provide clearly defined goals and objectives that make up their strategy to contain costs. Although documents cited by the agencies provide overarching goals and objectives, we believe that they lack the clarity and specificity needed by their land management and firefighting officials in the field to help manage and contain wildland fire costs. Therefore, we believe that our recommendations, if effectively implemented, would help the agencies better manage their cost- containment efforts and improve their ability to contain wildland fire costs. Mr. Chairman, this concludes my prepared statement. I would be please to answer any questions that you or other Members of the Committee may have at this time. For further information about this testimony, please contact 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. David P. Bixler, Assistant Director; Ellen W. Chu; Jonathan Dent; Janet Frisch; Chester Joy; and Richard Johnson made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Annual appropriations to prepare for and respond to wildland fires have increased substantially over the past decade, in recent years totaling about $3 billion. The Forest Service within the Department of Agriculture and four agencies within the Department of the Interior (Interior) are responsible for responding to wildland fires on federal lands. GAO determined what steps federal agencies have taken to (1) address key operational areas that could help contain the costs of preparing for and responding to wildland fires and (2) improve their management of their cost-containment efforts. This testimony is based on GAO's June 2007 report, Wildland Fire Management: Lack of Clear Goals or a Strategy Hinders Federal Agencies' Efforts to Contain the Costs of Fighting Fires (GAO-07-655). The Forest Service and Interior agencies have initiated a number of steps to address key operational areas previously identified as needing improvement to help federal agencies contain wildland fire costs, but the effects on containing costs are unknown, in part because many of these steps are not yet complete. First, federal firefighting agencies are developing a system to help them better identify and set priorities for lands needing treatment to reduce fuels, but they have yet to decide how they will keep data in the system current. Second, federal agencies have taken some steps to improve how they acquire and use personnel, equipment, and other firefighting assets--such as implementing a computerized system to more efficiently dispatch and track available firefighting assets--but have not yet completed the more fundamental step of determining the appropriate type and quantity of firefighting assets needed for the fire season. Third, the agencies have clarified certain policies and are improving analytical tools that assist officials in identifying and implementing an appropriate response to a given fire, but several other policies limit the agencies' use of less aggressive firefighting strategies, which typically cost less. Fourth, federal agencies, working with nonfederal entities, have recently taken steps to clarify guidance to better ensure that firefighting costs are shared consistently for fires that threaten both federal and nonfederal lands and resources, but it is unclear how the agencies will ensure that this guidance is followed. The agencies have also taken steps to address previously identified weaknesses in their management of cost-containment efforts, but they have neither clearly defined their cost-containment goals and objectives nor developed a strategy for achieving them--steps that are fundamental to sound program management. Although the agencies have established a broad goal of suppressing wildland fires at minimum cost--considering firefighter and public safety and resources and structures to be protected--they have no defined criteria by which to weigh the relative importance of these often-competing priorities. As a result, according to agency officials and reports, officials in the field lack a clear understanding of the relative importance the agencies' leadership places on containing costs and, therefore, are likely to select firefighting strategies without due consideration of the costs of suppression. The agencies have also yet to develop a vision of how the various cost-containment steps they are taking relate to one another or to determine the extent to which these steps will be effective. The agencies are working to develop a better cost-containment performance measure, but the measure may take a number of years to fully refine. Finally, the agencies have taken, or are beginning to take, steps to improve their oversight and increase accountability--such as requiring agency officials to evaluate firefighting teams according to how well they contained costs--although the extent to which these steps will assist the agencies in containing costs is unknown.

Historically, the mining of hardrock minerals, such as gold, lead, copper, silver, and uranium, was an economic incentive for exploring and settling the American West. However, when the ore was depleted, miners often left behind a legacy of abandoned mines, structures, safety hazards, and contaminated land and water. Even in more recent times, after cleanup became mandatory, many parties responsible for hardrock mining sites have been liquidated through bankruptcy or otherwise dissolved. Under these circumstances, some hardrock mining companies have left it to the taxpayer to pay for cleanup of the mining sites. Four federal agencies--the Department of Agriculture's Forest Service, the Environmental Protection Agency (EPA), and the Department of the Interior's BLM and Office of Surface Mining Reclamation and Enforcement (OSM)--fund the cleanup and reclamation of some of these abandoned hardrock mine sites. BLM's and the Forest Service's Abandoned Mine Lands programs focus on the safety of their land by addressing physical and environmental hazards. EPA's funding, under its Superfund Program, among other things, focuses on the cleanup and long-term health effects of air, ground, or water pollution caused by abandoned hardrock mine sites, and is generally for mines on nonfederal land. OSM, under amendments to the Surface Mining Control and Reclamation Act of 1977, can provide grants to fund the cleanup and reclamation of certain hardrock mining sites. BLM and the Forest Service are responsible for managing more than 450 million acres of public land in their care, including land disturbed and abandoned by past hardrock mining activities. BLM manages about 258 million acres in 12 western states, and Alaska. The Forest Service manages about 193 million acres across the nation. In 1997, BLM and the Forest Service each launched a national Abandoned Mine Lands Program to remedy the physical and environmental hazards at thousands of abandoned hardrock mines on the federal land they manage. According to a September 2007 report by these two agencies, they had inventoried thousands of abandoned sites and, at many of them, had taken actions to cleanup hazardous substances and mitigate safety hazards. BLM and the Forest Service are also responsible for managing and overseeing current hardrock operations on their land, including the mining operators' reclamation of the land disturbed by hardrock mining. Reclamation can vary by location, but it generally involves such activities as regrading and reshaping the disturbed land to conform with adjacent land forms and to minimize erosion, removing or stabilizing buildings and other structures to reduce safety risks, removing mining roads to prevent damage from future traffic, and establishing self-sustaining vegetation. One of the agencies' key responsibilities is to ensure that adequate financial assurances, based on sound reclamation plans and cost estimates, are in place to guarantee reclamation costs. If a mining operator fails to complete required reclamation, BLM or the Forest Service can take steps to obtain funds from the financial assurance provider to complete the reclamation. BLM requires financial assurances for both notice-level hardrock mining operations--those disturbing 5 acres of land or less--and plan-level hardrock mining operations--those disturbing over 5 acres of land and those in certain designated areas, such as the national wild and scenic rivers system. For hardrock operations on Forest Service land, agency regulations require reclamation of sites after operations cease. According to a Forest Service official, if the proposed hardrock operation is likely to cause a significant disturbance, the Forest Service requires financial assurances. Both agencies allow several types of financial assurances to guarantee estimated reclamation costs for hardrock operations on their land. According to regulations and agency officials, BLM and the Forest Service allow cash, letters of credit, certificates of deposit or savings accounts, and negotiable U.S. securities and bonds in a trust account. BLM also allows surety bonds, state bond pools, trust funds, and property. EPA administers the Superfund Program, which was established under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to address the threats that contaminated waste sites, including those on nonfederal land, pose to human health and the environment. The act also requires that the parties statutorily responsible for pollution bear the cost of cleaning up contaminated sites, including abandoned hardrock mining operations. Some contaminated hardrock mine sites have been listed on Superfund's National Priorities List-- EPA's list of seriously contaminated sites. Typically, these sites are expensive to cleanup and the cleanup can take many years. For example, in 2004, EPA's Office of Inspector General determined there were 63 hardrock mining sites on the National Priorities List that would cost up to $7.8 billion to cleanup, $2.4 billion of which was expected to be borne by taxpayers rather than the parties responsible for the contamination. Regarding financial assurances, EPA has statutory authority under the Superfund program to require businesses handling hazardous substances on nonfederal land to provide financial assurances and is taking steps to do so. In 2006, we testified that without the mandated financial assurances, significant gaps in EPA's environmental financial assurance coverage exist, thereby increasing the risk that taxpayers will eventually have to assume financial responsibility for cleanup costs. OSM's Abandoned Mine Land Program primarily focuses on cleaning up abandoned coal mine sites. However, OSM, under amendments to the Surface Mining Control and Reclamation Act of 1977, can provide grants to fund the cleanup and reclamation of certain hardrock mining sites either (1) after a state certifies that it has cleaned up its abandoned coal mine sites and the Secretary of the Interior approves the certification or (2) at the request of a state or Indian tribe to address problems that could endanger life and property, constitute a hazard to the public and safety, or degrade the environment, and the Secretary of the Interior grants the request. In 2008, we reported that OSM had provided more than $3 billion to cleanup dangerous abandoned mine sites. Its Abandoned Mine Land Program had eliminated safety and environmental hazards on 314,108 acres since 1977, including all high-priority coal problems and noncoal problems in 27 states and on the land of three Indian tribes. In 2008 and 2009, we reported that BLM and the Forest Service have had difficulty determining the number of abandoned hardrock mines on their land and have no definitive estimates on the number of such sites. Moreover, we reported that other estimates that had been developed about the number of abandoned hardrock mine sites on federal, state, and private land in the 12 western states and Alaska (where most of the mining takes place) varied widely and did not provide an accurate assessment of the number of abandoned mines in these states. For example, federal agency estimates included abandoned nonhardrock mines such as coal mines, and included a large number of sites on land with "undetermined" ownership, which may not all be on federal land. Similarly, we reviewed six studies conducted between 1998 and 2008 that estimated the number of abandoned hardrock mine sites in the 12 western states and Alaska, regardless of the type of land they were located on. However, we found that the estimates in these studies varied widely in part because there was no generally accepted definition for what constitutes an abandoned hardrock mine site and because different states define these sites differently. In 2008, we developed a standard definition of an abandoned hardrock mining site and used this definition to determine how many such sites potentially existed on federal, state and private land in the12 western states and Alaska. Based on our survey of these states, we determined that there were at least 161,000 abandoned hardrock mine sites in these states, and at least 33,000 of these sites had degraded the environment, by, for example, contaminating surface water and groundwater or leaving arsenic-contaminated tailings piles. We also determined that these 161,000 sites had at least 332,000 features that may pose physical safety hazards, such as open shafts or unstable or decayed mine structures. In 2008, we reported that BLM, the Forest Service, and the U.S. Geological Survey (USGS) either do not routinely collect or do not consistently maintain data on the amount of hardrock minerals being produced on federal land, the amount of hardrock minerals remaining, and the total acreage of federal land withdrawn from hardrock mining operations. According to officials with BLM and the Forest Service, they do not have the authority to collect information from mine operators on the amount of hardrock minerals produced on federal land, or the amount remaining. In April 2011, we reported on this issue again and found that this information is not being collected. In contrast, USGS collects extensive data on hardrock mineral production through its mineral industry surveys and reports these data in monthly, quarterly, and annual reports, but mine operators' participation in these surveys is voluntary, and USGS does not collect land ownership data that would allow it to determine the amount of hardrock mineral production on federal land. As a result, we found that it is not possible to determine hardrock mineral production on federal land from the USGS data. In addition, although USGS does publish the total amount of hardrock mineral production by mineral type, it is prohibited by law from reporting individual mine production and other company proprietary data unless the mine operator authorizes release of that information. In some cases, mine operators that respond to these surveys report consolidated data that covers production from several mines. Therefore, information on hardrock mineral production for every mine is not available to the public. Some hardrock mineral production data are available from state sources and through financial reports filed with the Securities and Exchange Commission. However, these data may not always provide the level of detail necessary to determine the amount of mineral production on federal land. BLM also does not centrally maintain data on the amount of federal land withdrawn from hardrock mining operations. BLM documents land withdrawn from hardrock mining operations on its master title plats-- detailed paper maps maintained at BLM's state offices. These maps contain land survey information on federal land, including ownership information, land use descriptions, and land status descriptions. BLM's annual publication, Public Land Statistics, does report the total number of acres withdrawn each year, but these data do not account for instances in which multiple withdrawals may have overlapping boundaries, which can result in double-counting the number of acres withdrawn. Furthermore, the reason for withdrawing the land is not always indicated, making it difficult to determine whether it was withdrawn from mining or from other purposes. In March 2008, we reported that over a 10 year period, four federal agencies--BLM, the Forest Service, EPA, and OSM-- had spent at least a total of $2.6 billion to reclaim abandoned hardrock mines on federal, state, private, and Indian land. Of this amount, EPA had spent the most-- $2.2 billion. The amount each agency spent annually varied considerably, and the median amount spent for abandoned hardrock mines on public land by BLM and the Forest Service was about $5 million and about $21 million, respectively. EPA spent substantially more--a median of about $221 million annually--to cleanup abandoned mines that were generally on nonfederal land. Further, OSM provided grants with an annual median value of about $18 million to states and Indian tribes through its program for hardrock mine cleanups. As we have reported, contributing to the costs incurred by the federal government to reclaim land disturbed by mining operations are inadequate financial assurances required by BLM for current hardrock mining operations. Since 2005, we have reported several times that operators of hardrock mines on BLM land have provided inadequate financial assurances to cover estimated reclamation costs in the event that they fail to perform the required reclamation. Specifically, in June 2005 we reported that some current hardrock operations on BLM land did not have financial assurances, and some had no or outdated reclamation plans and/or cost estimates on which the financial assurances were based. At that time we concluded that BLM did not have an effective process and critical management information needed for ensuring that adequate financial assurances are actually in place, as required by federal regulations and BLM guidance. We made recommendations to strengthen BLM's management of financial assurances for hardrock operations on its land, which the agency generally implemented. However, when we again looked at this issue in 2008, we found that although BLM had taken actions to strengthen its processes, the financial assurances that it had in place as of November 2007 were still inadequate to cover estimated reclamation costs. Specifically, as of November 2007, hardrock mining operators had provided financial assurances valued at approximately $982 million to guarantee the reclamation costs for 1,463 hardrock mining operations on BLM land in 11 western states, according to BLM's Bond Review Report. BLM's report indicated that 52 of the 1,463 hardrock mining operations had inadequate financial assurances--about $28 million less than needed to fully cover estimated reclamation costs. However, our review of BLM's assessment process found that BLM had inaccurately estimated the shortfall, and that in fact the financial assurances for these 52 operations should be more accurately reported as about $61 million less than needed to fully cover estimated reclamation costs. In addition, we found that BLM's approach for determining the adequacy of financial assurances is not useful because it does not clearly lay out the extent to which financial assurances are inadequate. For example, in California, BLM reported that, statewide, the financial assurances in place were $1.5 million greater than required, suggesting reclamation costs are being more than fully covered. However, according to our analysis of only those California operations with inadequate financial assurances, the financial assurances in place were nearly $440,000 less than needed to fully cover reclamations costs for those operations. Having adequate financial assurances to pay reclamation costs for BLM land disturbed by hardrock operations is critical to ensuring that the land is reclaimed if operators fail to complete reclamation as required. When operators with inadequate financial assurances fail to reclaim BLM land disturbed by their hardrock operations, BLM is left with public land that requires tens of millions of dollars to reclaim and poses risks to the environment and public health and safety. In conclusion, Mr. Chairman, while it is critical to develop innovative approaches to cleanup abandoned mines, our work also demonstrates the importance of federal agency's having accurate information on the number of abandoned hardrock mines to know the extent of the problem and adequate financial assurances to prevent future abandoned hardrock mines requiring taxpayer money to cleanup. Chairman Lamborn, Ranking Member Holt, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you might have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Anu K. Mittal, Director, Natural Resources and Environment team, (202) 512-3841 or [email protected]. Key contributors to this testimony were Andrea Wamstad Brown and Casey L. Brown. 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 General Mining Act of 1872 helped foster the development of the West by giving individuals exclusive rights to mine gold, silver, copper, and other hardrock minerals on federal land. However, miners often abandoned mines, leaving behind structures, safety hazards, and contaminated land and water. Four federal agencies--the Department of the Interior's Bureau of Land Management (BLM) and Office of Surface Mining Reclamation and Enforcement (OSM), the Department of Agriculture's Forest Service, and the Environmental Protection Agency (EPA)--fund the cleanup of some of these hardrock mine sites. From 2005 through 2009, GAO issued a number of reports and testimonies on various issues related to abandoned and current hardrock mining operations. This testimony summarizes some of the key findings of these reports and testimonies focusing on the (1) number of abandoned hardrock mines, (2) availability of information collected by federal agencies on general mining activities, (3) amount of funding spent by federal agencies on cleanup of abandoned mines, and (4) value of financial assurances for mining operations on federal land managed by BLM. In 2005, GAO recommended that BLM strengthen the management of its financial assurances, which BLM generally implemented. BLM also agreed to take steps to address additional concerns raised by GAO in 2008. GAO's past work has shown that there are no definitive estimates of the number of abandoned hardrock mines on federal and other lands. For example, in 2008 and 2009, GAO reported that BLM and the Forest Service had difficulty determining the number of abandoned hardrock mines on their lands and had no definitive estimates. Similarly, estimates of the number of abandoned hardrock mine sites in the 12 western states and Alaska (where most of the mining takes place) varied widely because there was no generally accepted definition of what constitutes an abandoned hardrock mine site. In 2008, GAO developed a standard definition for abandoned hardrock mining sites and used this definition to determine that there were at least 161,000 abandoned hardrock mine sites in the 12 western states and Alaska, and at least 33,000 of these sites had degraded the environment, by contaminating surface water and groundwater or leaving arsenic-contaminated tailings piles. In 2008, GAO reported that BLM, the Forest Service, and the U.S. Geological Survey (USGS) either do not routinely collect or do not consistently maintain data on the amount of hardrock minerals being produced on federal land, the amount of hardrock minerals remaining, and the total acreage of federal land withdrawn from hardrock mining operations. According to BLM and Forest Service officials, they do not have the authority to collect information from mine operators on the amount of hardrock minerals produced on federal land or the amount remaining. In contrast, USGS collects extensive data on hardrock mineral production through its mineral industry surveys and reports these data in monthly, quarterly, and annual reports, but the agency does not collect land ownership data that would allow it to determine the amount of hardrock mineral production on federal land. As a result, comprehensive information on hardrock mineral production is generally not available to the public. From 1997 to 2008, four federal agencies--BLM, the Forest Service, EPA, and OSM--had spent at least a total of $2.6 billion to reclaim abandoned hardrock mines on federal, state, private, and Indian lands. Of this amount, EPA had spent the most--$2.2 billion. The amount each agency spent annually varied considerably, and the median amount spent for abandoned hardrock mines on public lands by BLM and the Forest Service was about $5 million and about $21 million, respectively. EPA spent substantially more--a median of about $221 million annually--to clean up abandoned mines that were generally on nonfederal land. OSM provided grants with an annual median value of about $18 million to states and Indian tribes through its program for hardrock mine cleanups. One factor that contributes to costs for reclamation of federal lands disturbed by mining operations is inadequate financial assurances required by BLM. Since 2005, GAO has reported several times that operators of hardrock mines on BLM lands have not provided financial assurances sufficient to cover estimated reclamation costs in the event that operators fail to perform the required reclamation. Most recently, in 2008, GAO reported that the financial assurances that were provided for 52 operations were about $61 million less than needed to fully cover estimated reclamation costs, which could leave the taxpayer with the bill for reclamation, if the operator fails to do so.

The Assistant Secretary of Defense for Health Affairs leads the MHS and is ultimately responsible for the Defense COEs. In 2011, DOD leadership delegated responsibility for designating and overseeing Defense COEs to the Oversight Board. The Oversight Board includes members appointed by the Surgeons General of the Army, the Navy, and the Air Force; VA; and other components within DOD, as shown in table 1. The Oversight Board's charter, which was signed by the Assistant Secretary of Defense for Health Affairs, delegates oversight of Defense COEs to the Oversight Board. The charter lists the Oversight Board's responsibilities and activities, and the quarterly meeting minutes provide documentation of the Oversight Board's activities, procedures, and decisions. For example, the Oversight Board's charter requires the Board to conduct periodic reviews of Defense COEs' performance and to review and recommend applicants for Defense COE designation. The charter was originally signed in September 2011 by the Assistant Secretary of Defense for Health Affairs, and updated and signed again in May 2015. The updated charter clarified responsibilities for the Oversight Board related to overseeing COEs, such as validating that a Defense COE is meeting objectives for which it was established and that the return from its work merits continued investment. For VA, VHA's Under Secretary for Health is ultimately responsible for VHA COEs. Three program offices within VHA--the Office of Patient Care Services, the Office of Research and Development, and the Office of Academic Affiliations--have COEs. These three program offices delegate responsibility for their COEs to service offices within their organizational structures. The Office of Patient Care Services has three service offices with COEs--Mental Health Services, Specialty Care Services, and Geriatric and Extended Care Services. The Office of Research and Development has one service office with COEs-- Rehabilitation Research and Development Service--and the Office of Academic Affiliations has two service offices with COEs, referred to as coordinating centers--Primary Care Education and Patient-Centered Specialty Care Education. (See fig. 1). DOD officials established criteria that COEs must meet to be designated a Defense COE and a uniform process for applicants. VHA's service offices use a peer review process to designate COEs. However, unlike DOD, VHA has not established criteria for an entity to be designated as a COE. Criteria for designating entities as COEs. In 2011, following our study of one of DOD's statutorily mandated COEs, DOD leadership determined that it needed to conduct a review of all existing COEs and develop a definition that would be used as criteria for designating entities as Defense COEs. MHS leadership developed a definition for Defense COEs, and the COE Oversight Board members refined and approved the criteria contained in this definition. Only entities that meet the criteria in the Oversight Board-approved definition can be given the designation of a Defense COE. The definition approved by the Oversight Board states that Defense COEs will focus on an associated group of clinical conditions and achieve improvement in outcomes through clinical, educational, and research activities. The criteria require Defense COEs to provide the entire clinical spectrum of care for a patient--from the prevention of diseases and treatment of clinical conditions through rehabilitation and transition to civilian life; for example, by developing clinical practice guidelines and educational materials and identifying research priorities and strategies for improving access to care. In addition, the Oversight Board developed other criteria that entities applying for Defense COE designation have to meet, such as clearly defining their mission, developing metrics to quantitatively assess their progress in meeting their mission, and determining whether the research they plan to conduct is needed because of existing research gaps. The Oversight Board acting chairman said the board developed criteria for a Defense COE because it is important for the board, as well as MHS leadership, to apply consistent criteria when designating entities as Defense COEs. The acting chairman said not having clear and consistent criteria could make it easier for entities to self-identify as a Defense COE without meeting rigorous requirements. In addition, the criteria may facilitate coordination among COEs to meet the agency's intended objectives for them--which is to improve the health of servicemembers, veterans, their families, and ultimately the military readiness of servicemembers. Approval process for Defense COEs. The Oversight Board established a uniform process that requires applicants to present consistent information when applying for Defense COE designation. Applicants are required to describe why the designation as a Defense COE is important to them and how they meet the criteria of a Defense COE. The Oversight Board, after considering the applications from potential COEs, subsequently determines whether a Defense COE applicant passes the preliminary review. Applicants that do not pass the preliminary review are instructed to provide additional information or clarify the information presented for reconsideration. There is no limit on the number of times they can resubmit their application. Those that pass this preliminary review are instructed to develop a concept of operations (CONOPS) and a briefing for the Oversight Board. A CONOPS is a document that is designed to give an overall picture of the operation of the proposed Defense COE, explaining what the applicant intends to accomplish and how it will be done using available resources. The CONOPS includes a description of the value that the applicant brings to the MHS and a brief description of MHS needs and gaps that the applicant will address. The Oversight Board developed a CONOPS template to ensure that during required briefings information is consistently presented to the Board by applicants seeking Defense COE status. The applicant's briefing to the Oversight Board is intended to provide an overview of the mission and goals of the applicant COE, including how the applicant meets the Defense COE criteria, as established by the Oversight Board. After reviewing documentation from applicants, Oversight Board members make recommendations about Defense COE designation to the Assistant Secretary of Defense for Health Affairs, who makes the final decision. According to DOD officials, in 2012, after the Oversight Board reviewed the briefings and CONOPS for the four statutorily mandated COEs and made its recommendations, the Assistant Secretary of Defense for Health Affairs designated these applicants as Defense COEs. Subsequently, the Oversight Board reviewed and approved three other applicants as Defense COEs, according to these officials. The seven Defense COEs are listed in table 2 along with the origin of the Defense COE--that is, whether the Defense COE was statutorily mandated or departmentally designated. No criteria for designating entities as COEs. VHA has not developed consistent criteria for designating an entity as a COE. VHA officials told us they believe the term COE is "a term of art" and does not lend itself to standard and consistent criteria. Furthermore, officials said they never considered a need for these criteria. Standards for Internal Control in the Federal Government provide that management should have a control environment that provides management's framework for planning, directing, and controlling operations to achieve agency objectives, such as VHA's objectives for how COEs are to operate and what COEs are supposed to achieve. A good internal control environment requires that the agency's organizational structure clearly define key areas of authority and responsibility for operating activities. The organizational structure encompasses the operational processes needed to achieve management's objectives. Without VHA developing criteria to establish, execute, control, and assess COEs, VHA management risks not meeting its objectives for COEs. The lack of standard and consistent criteria for designating COEs hinders VHA's ability to carry out the following functions. VHA cannot provide both a basis for determining whether COEs are meeting the agency's intended objectives for COEs and a coordinated direction for its COEs. These objectives include meeting the needs of veterans and their families, conducting pertinent research, and promoting innovative approaches to care delivery by VHA clinicians, according to VHA officials. VHA officials might not be able to determine the precise number of COEs within the agency as a basis for planning, directing, and controlling operations to achieve agency objectives. VHA officials reported to us that the agency has 70 COEs, with the largest number located within VHA's Office of Patient Care Services. The Office of Patient Care Services reported that it has 49 COEs--39 statutorily mandated and 10 VHA designated. The Rehabilitation Research and Development Service, under VHA's Office of Research and Development, reported it has 13 VHA-designated COEs, and VHA's Office of Academic Affiliations reported 8 VHA-designated COEs. However, VHA's Office of Patient Care Services Chief of Financial Operations could not confirm this number, telling us he could not provide us with a definite number of COEs because there were no criteria for him to use to identify entities designated as COEs. Other VHA officials have also had difficulty identifying the universe of VHA's COEs. For example, VHA officials initially omitted listing the 20 Geriatric Research Education Clinical Centers (GRECC) as VHA COEs until we told these officials that GRECC officials told us they were designated as VHA COEs. In addition, confusion exists within VHA about statutorily mandated COEs because of the lack of criteria. For the COEs that VHA officials said were statutorily mandated, the statutory language often uses the term "center." VHA decided to designate some of these centers as COEs, even though the statutory language was the same or similar for many centers that VHA did not designate as COEs. For example, the National Center for Preventive Health has statutory language similar to the language establishing the National Center for Post-Traumatic Stress Disorder (PTSD); however, the National Center for PTSD is considered a VHA COE while the National Center for Preventive Health is not. Officials from VHA and VA's Office of General Counsel were unable to explain why some centers listed in statutory language are designated as COEs, while other centers with similar language are not designated as COEs. In addition, these officials could not provide the criteria that were used to designate these centers as COEs. Process for designating entities as VHA COEs. VHA service offices use a peer review process to designate entities as VHA COEs. In general, a peer review process is often used by government agencies to determine the merit of proposals submitted by researchers applying for grants or some type of funding. VHA service offices typically solicit applications or proposals from entities interested in being designated a COE, and interested entities complete an application or submit a proposal. Each application or proposal for COE designation may differ depending on the condition, disease, or specific health-related area being studied. For example, applications or proposals for a mental health COE designation may require applicants to address how their research will focus on bipolar disorder, borderline personality disorder, or schizophrenia, while applications or proposals for an educational COE may require applicants to address how they will develop and test innovative approaches for curricula related to patient-centered care or study new approaches and models of collaboration among health care professionals. Within each of the six service offices, applications or proposals are reviewed by a panel of subject matter experts who prioritize the applications based on the strengths and weaknesses of the proposals or on the proposals with the highest merit rating. The service office peer review panel may be made up of experts from VHA entities or from entities external to VHA, according to VHA officials. Generally, the experts review information such as the focus of the planned research and available staffing and funding. Once the experts identify the best applicants, they forward this information to the appropriate service office officials. If the service office staff agrees with the list of best applicants, some service offices forward this list to the Under Secretary for Health, who ultimately makes the final decision with respect to designating an entity as a VHA COE, while other service offices forward the list to their program director, who makes the final decision. While all six service offices use a peer review process to review, approve, and designate entities as COEs, the processes may differ in several respects. First, the content of submitted applications or proposals may differ among service offices. This is due, in part, to the lack of consistent and standard criteria within VHA that applicants must meet to be designated a VHA COE, such as how the applicant will meet the needs of veterans and their families and ensure that pertinent research is conducted to meet these needs--VHA's intended objectives for its COEs, according to VHA officials. Second, the types and levels of review within service offices vary. For example, to help prioritize the best applicants, two VHA service offices developed a numerical scoring system to rate each application based on scientific and technical merit, typically based on the requirements contained in the solicitation for applications or proposals. For instance, if the solicitation for applications or proposals requires an evaluation plan that contains specific evaluation criteria, such as proposed outcome measurements, reporting methodology, expected findings, and potential implications for VHA and the community, applicants can be awarded up to 10 points for including these items. Other service offices do not include a scoring system as part of their approval process. Third, four of VHA's six service offices conduct a site visit to the highest rated applicants' facilities as part of their approval process; the other two do not, according to VHA officials. An official from one service office told us the staff members that conduct the visits have seen many potential COEs, and such on-site inspections can help to determine the applicant's potential viability as a COE. Our review of the Oversight Board's charter found that it does not contain procedures for how oversight of Defense COEs will be documented. Specifically, the Oversight Board charter does not explain (1) how the Oversight Board will provide and document its feedback to Defense COEs; (2) how the COEs will respond, if needed, to this feedback; and (3) how the Oversight Board will determine and document that the COEs' actions resolved any identified problems. The acting chairman of the Oversight Board told us the board's charter gives the board its authority to conduct oversight of Defense COEs, and if these types of procedures are needed, the Oversight Board's charter and meeting minutes will serve this purpose. The Oversight Board's acting chairman said the board's minutes document its activities and decisions, including the procedures followed when conducting COE oversight reviews and any problems identified. However, our review of the Oversight Board's minutes, from its inception in 2011 to April 2015, shows that the minutes did not indicate the procedures followed when conducting COE reviews and did not explain how the Oversight Board documented and resolved identified problems. The Standards for Internal Control in the Federal Government state that transactions and events should be promptly documented to maintain their relevance and value to management in controlling their operations and helping make decisions. Further, the standards state that significant events, such as in this instance the identification of problems during oversight and the actions taken to correct these problems, need to be clearly documented, and the documentation should be readily available for examination. Federal internal control standards also state that significant events should appear in management directives, policies, or operating manuals to help ensure management's directives are carried out as intended. Once established, federal internal control standards state that management should monitor and assess over time the quality of performance, including monitoring the policies and procedures to ensure that the findings of reviews are promptly resolved. Oversight Board officials told us that feedback to Defense COEs from oversight reviews conducted by the board is typically provided verbally and has not been documented. Therefore, documentation of feedback, both positive and negative, is not always available. Officials said that negative feedback may be documented in the Oversight Board's minutes; however, if the Oversight Board identifies problems with the Defense COEs, the board's charter and meeting minutes do not require that the Defense COEs provide written corrective action plans. As a result, there will not be a record of the corrective action taken by a Defense COE and whether the action resolved the problem identified by the Oversight Board. Absent specific procedures for how oversight should be conducted and how findings and corrective actions should be documented, DOD leadership lacks assurance that the Oversight Board has identified all problems and has taken appropriate action to determine that the problems have been resolved. Only one of six VHA service offices has written procedures for documenting the oversight of its COEs, including providing written critiques of findings from service office reviews to its COEs and requiring corrective actions from COEs when needed. The other five service offices do not have written procedures for documenting oversight activities. While most service offices do not have written procedures that require them to document their COE oversight, several currently provide written feedback to their COEs on the results of the service offices' reviews. Specifically, three of the five service office directors provide written feedback to their COEs on the findings from the service office reviews. However, only one of these three service office directors requests that his COEs provide written corrective action plans. Officials from three service offices told us they believe the process they currently have works fine because they provide written feedback to the COEs on the results of their reviews. However, if these directors leave the service offices, another director might not request written documentation of the oversight that is conducted because the documentation procedures are not written. The Standards for Internal Control in the Federal Government state that transactions and events should be promptly documented to maintain their relevance and value to management in controlling their operations and helping make decisions. Further, the standards state that significant events, such as in this instance the identification of problems during oversight and the actions taken to correct these problems, need to be clearly documented, and the documentation should be readily available for examination. Federal internal control standards also state that significant events should appear in management directives, policies, or operating manuals to help ensure management's directives are carried out as intended. Once established, federal internal control standards state that management should monitor and assess over time the quality of performance, including monitoring the policies and procedures to ensure that the findings of reviews are promptly resolved. Without written procedures for documenting oversight activities, VHA leadership lacks assurance that its service offices are identifying and correcting all problems. Leadership also does not have evidence that the service offices conducted a review and do not have documentation of past and present problems to identify potential patterns and take action quickly to minimize the effects of these problems. Unlike DOD, VHA has not developed standard criteria that entities must meet in order to be designated a VHA COE. Without defined criteria, VHA lacks reasonable assurance that its COEs are meeting the agency's intended objectives for COEs, such as meeting the needs of veterans and their families throughout VA's health care system and operating with coordinated direction. By not having written procedures that outline how the agencies will document the activities through which they monitor and oversee the performance of COEs, both DOD and VHA lack assurance that oversight activities are performed consistently over time as intended. Written procedures would better ensure a common understanding of oversight activities among staff and enhance clear communication, especially as normal turnover occurs among the staff responsible for monitoring and providing feedback to COEs. Having systematic procedures for documenting oversight activities is necessary to better ensure that the agencies' COEs are accountable for accomplishing the agencies' objectives for them, such as meeting the health care needs of servicemembers and veterans. To help ensure that COEs are meeting VHA's intended objectives for them, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to establish clear, consistent standard criteria that entities must meet to receive COE designation, and require all existing VHA COEs, as well as new applicants for COE status, to meet these criteria. To improve documentation of the activities DOD undertakes to oversee the Defense COEs, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs to require the MHS Defense COE Oversight Board to develop written procedures on how to document oversight activities of Defense COEs, including requirements for documenting feedback, both positive and negative, and documenting the resolution of identified problems. To help improve VHA's oversight of its COEs, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to require VHA service offices to develop written procedures on how to document their oversight activities of COEs, including requirements for documenting feedback, both positive and negative, and documenting the resolution of identified problems. VA provided written comments on a draft of this report, as well as an action plan for implementing our recommendations. We have reprinted VA's comments and action plan in appendix III. In its comments, VA generally agreed with our conclusions and concurred with our recommendations. VA stated that a team of VHA subject matter experts will develop standards to be used in designating COEs and overseeing their performance. DOD also provided written comments on a draft of this report, which we have reprinted in appendix IV. In its comments, DOD concurred with our findings and recommendation and explained how it intends to implement the recommendation. DOD also provided technical comments, which we have incorporated in the report as appropriate. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Secretary of Veterans Affairs; and other interested parties. We will also make copies available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. The Veterans Health Administration (VHA) within the Department of Veterans Affairs has three program offices--the Office of Patient Care Services, the Office of Research and Development, and the Office of Academic Affiliations--that have centers of excellence (COE). These three program offices delegate responsibility for their COEs to six service offices within their organizational structure. The Office of Patient Care Services has three service offices with responsibility for VHA COEs-- Mental Health Services, Specialty Care Services, and Geriatric and Extended Care Services. The Office of Research and Development has one service office with COEs--Rehabilitation Research and Development Service--and the Office of Academic Affiliations has two service offices with COEs, referred to as coordinating centers--Primary Care Education and Patient-Centered Specialty Care Education. VHA's Office of Patient Care Services has all 39 of the COEs that were statutorily mandated, as well as 10 COEs that were departmentally designated. This office has three service offices that are responsible for these COEs: Mental Health Services, Specialty Care Services, and Geriatrics and Extended Care Services. Table 3 lists each COE in the Office of Patient Care Services and groups the COEs by their specific service office, as well as indicating their location. The table also indicates the origin of the COE--whether the COE was statutorily mandated or departmentally designated--and provides a brief description of the COE's research, clinical, and/or educational focus, as provided by VHA. VHA's Office of Research and Development has 13 COEs that were departmentally designated, according to VHA officials. This office has one service office--Rehabilitation Research and Development--that is responsible for these COEs. Table 4 lists each COE in this service office and provides the location of the COE, as well as a brief description of the COE's research, clinical, and/or educational focus, as provided by VHA. VHA's Office of Academic Affiliations has eight COEs that were departmentally designated, according to VHA officials. This office has two service offices, referred to as coordinating centers--Primary Care Education and Patient-Centered Specialty Care Education--that are responsible for COEs. Primary Care Education has five COEs and Patient-Centered Specialty Care Education has three COEs. Table 5 lists each COE by service office and gives the location of the COE and a brief description of the research, clinical, and/or educational focus of the respective COEs. To describe the collaboration efforts of the Defense Centers of Excellence (COE) in the Department of Defense (DOD) and the Veterans Health Administration (VHA) COEs in the Department of Veterans Affairs (VA), we sent a Web-based, structured questionnaire to COE directors, identified by DOD and VHA officials, to obtain information about how their COEs collaborate. We sent the questionnaire to the COE directors between December 2014 and January 2015. The questionnaire asked COE directors to describe the extent to which Defense and VHA COE staff collaborate internally--with other staff from within their agencies, and externally--with staff from other federal agencies and academic organizations. The questionnaire also asked the COE directors if they use certain tools, such as written agreements, staff participation in committees, working groups, councils, or task forces; or other tools or mechanisms to coordinate or collaborate. All 7 Defense COE directors responded to the questionnaire, and 60 of VHA's 70 COE directors, or 86 percent, responded to the collaboration section of the questionnaire. Tables 6 through 11 provide information about Defense and VHA COE collaboration efforts. Defense COEs report using written agreements or other tools to collaborate. Table 6 shows the Defense COEs and their reported collaboration activities. VHA's Office of Patient Care Services has three service offices that have established 49 COEs, with 39 of them statutorily mandated and 10 departmentally designated, according to VHA officials. The service offices are the Mental Health Services, the Specialty Care Services, and the Geriatric and Extended Care Services. The COEs that responded to the collaboration section of the questionnaire report using written agreements or other tools to collaborate. Tables 7, 8 and 9 provide information on the collaboration activities of the three service offices within the Office of Patient Care Services that have COEs. VHA's Office of Research and Development has one service office that has COEs--the Office of Rehabilitation Research and Development Service. This service office reports they have 13 COEs, all departmentally designated, that focus on a selected area of research relevant to veterans with disabilities. The COEs report using written agreements or other tools to collaborate. Table 10 indicates the collaboration activities of the COEs. VHA's Office of Academic Affiliations reports that it has eight COEs and all were departmentally designated. This office has two service offices, referred to as coordinating centers: Primary Care Education and Patient- Centered Specialty Care Education. Primary Care Education has five COEs and Patient-Centered Specialty Care Education has three. The Primary Care Education and Patient-Centered Specialty Care Education COEs that responded to the collaboration section of our questionnaire indicated that they use written agreements or other tools to collaborate. Table 11 shows the collaboration activities of the COEs that responded to our questionnaire. In addition to the contact named above, Marcia A. Mann, Assistant Director; Mary Ann Curran Dozier; Martha Fisher; Carolyn Fitzgerald; Carolina Morgan; and Jacquelyn Hamilton made key contributions to this report.

Both DOD and VA's VHA have COEs that are expected to improve certain services throughout both agencies' health care systems. To date, DOD and VHA have designated 7 and 70 COEs, respectively. Congressional hearings have raised questions about DOD's and VHA's oversight of the COEs, including the criteria used to designate them, and whether they are meeting their intended missions. GAO was asked to review DOD and VHA COEs. GAO (1) examined the criteria and processes DOD and VHA use to designate entities as COEs and (2) assessed how DOD and VHA document the oversight activities related to their agencies' COEs. GAO compared agency criteria against federal internal control standards, and analyzed relevant laws, committee reports, and available agency documents. GAO also analyzed documents from the 7 Defense COEs and from the 6 VHA service offices responsible for the 70 VHA COEs to understand the criteria and processes used to designate them and how oversight activities are documented. GAO interviewed officials from both agencies to obtain additional information about their COEs. The Department of Defense (DOD) has developed criteria to designate an entity as a Defense Center of Excellence (COE), but the Department of Veterans Affairs' (VA) Veterans Health Administration (VHA) has not. Health-focused COEs are intended to bring together treatment, research, and education to support health provider competencies; identify gaps in medical research and coordinate research efforts; and integrate new knowledge into patient care delivery. GAO found that DOD leadership and its Defense COE Oversight Board established and refined the definition and criteria for designating entities as Defense COEs. DOD's criteria require its Defense COEs, for example, to achieve improvements in clinical care outcomes and produce optimal value for servicemembers. The Oversight Board developed these criteria in order to have a consistent basis for designating entities as Defense COEs and to limit entities from self-identifying as Defense COEs without meeting the criteria. DOD also developed a uniform process for designating COEs. VHA service offices use a peer review process to designate their COEs. However, unlike DOD, VHA has not developed criteria for designating its COEs. Federal internal control standards provide that management should have a control environment that provides management's framework for planning, directing, and controlling operations to achieve agency objectives, such as VHA's objectives for how COEs are to operate and what COEs are supposed to achieve. Without defined criteria, VHA lacks reasonable assurance that its COEs are meeting the agency's intended objectives for COEs. The Defense COE Oversight Board and most service offices responsible for overseeing VHA COEs lack written procedures for documenting oversight activities related to their COEs, including requirements for documenting identified problems and their resolution. GAO found that the Oversight Board's charter does not explain how (1) the board will provide and document its feedback, (2) the Defense COEs will respond to this feedback, and (3) the board will document resolution of identified issues. The Oversight Board's acting chairman told GAO the charter gives the board its authority to conduct oversight of Defense COEs and if these types of procedures are needed, the Oversight Board's charter and meeting minutes will serve this purpose. However, GAO's review of the charter and minutes found that they do not contain these types of procedures. Likewise, GAO found that five of six VHA service offices have no written procedures for documenting their findings and the corrective actions taken by COEs. VHA officials told GAO that they do not see a need to develop specific written procedures for documenting oversight of their COEs. Federal internal control standards state that transactions and events should be promptly documented to maintain their relevance and value to management in controlling their operations. Further, significant events, such as the identification of problems and the actions taken to correct them, need to be clearly documented, and these events should appear in management directives, policies or operating manuals to help ensure management's directives are carried out as intended. Absent written oversight procedures, both DOD and VHA lack reasonable assurance that oversight procedures are consistently and routinely performed over time, and that issues raised during oversight are resolved. GAO recommends that VHA establish criteria for designating entities as COEs. GAO also recommends that DOD and VHA develop written procedures for documenting oversight of their COEs. VA and DOD concurred with GAO's recommendations and provided an action plan for implementing them.

Cable television service emerged in the late 1940s to fill a need for television service in areas with poor over-the-air reception, such as mountainous or remote areas. At that time, cable operators simply retransmitted the signals of local broadcast stations. By the late 1970s, cable operators began to provide new cable networks, such as HBO, Showtime, and ESPN, and the number of cable subscribers increased rapidly. Two significant changes occurred in the 1990s and early 2000s. First, the Congress passed the Cable Television Consumer Protection and Competition Act of 1992 that, among other things, prohibited local franchising authorities from awarding exclusive (or monopoly) franchises to cable operators, thereby opening the door to wire-based competition. Second, cable operators began offering new services, such as digital cable, cable modem Internet access, and telephone, in addition to their basic video service. Today, many cable operators offer these advanced services in bundles with their basic video service. Since its introduction in 1994, direct broadcast satellite (DBS) service has grown dramatically and is now the primary competitor to cable operators. Subscribers to DBS service use a small reception dish to receive signals beamed down from satellites. Because DBS satellites orbit above the equator, a reception dish must point toward the southern sky, and households located in the northern part of the United States need to angle the dish more toward the horizon than households in the southern part of the United States. Unlike cable, which upgraded to digital service in recent years, DBS service has been a digital-based service since its inception. DBS providers generally offer most of the same cable networks as cable operators. However, for many years DBS providers did not offer local broadcast stations to their subscribers in most instances because of copyright obstacles, obstacles that cable operators did not face. After the Congress passed the Satellite Home Viewer Improvement Act of 1999, which altered the copyright rules that applied to DBS providers, cable and DBS companies were placed on a more equal competitive footing. From 2001 to 2004, the aggregate number of U.S. households that subscribe to DBS television service grew rapidly. Figure 1 illustrates the growth in total DBS subscription and penetration rates for 2001 through 2004. In July 2001, about 15.5 million households were served by DBS. By January 2004, about 21.3 million households were served by DBS--an increase of 37.8 percent in 2-1/2 years. Similarly, over the same period of time, the overall penetration rate of DBS rose from 13 percent in 2001 to 17.4 percent in 2004--a 33.5 percent increase. DBS penetration rates have been higher in rural areas than in suburban and urban areas throughout the last several years, as shown in figure 2. From July 2001 to January 2004, DBS penetration has grown steadily in all three types of geographic areas. In 2001, penetration rates were highest in rural areas at 25.6 percent, followed by 13.9 percent in suburban areas and 8.6 percent in urban areas. As of January 2004, DBS penetration remained the highest in rural areas, growing to about 29 percent, while it grew to 18 percent of suburban households and 13 percent of urban households. Although the DBS penetration rate in rural areas has been and remains higher than it is in other geographic areas, subscribership has grown more rapidly in suburban and urban areas than in rural areas from 2001 to 2004. In fact, urban areas have experienced the highest growth in overall DBS subscribership. Figure 3 displays the percentage growth in total DBS subscribers and the percentage growth in DBS penetration rates in urban, suburban, and rural areas. From 2001 to 2004, DBS subscribership grew 55 percent in urban areas, 37 percent in suburban areas, and 17 percent in rural areas. In the same time period, the growth in penetration rates was also highest in urban areas, at 50.4 percent, followed by suburban penetration growth at 32 percent, and rural penetration growth of 15 percent. Less than 9 percent of American households do not have the opportunity to purchase cable television service because it is not available where they live. However, in these areas, the DBS penetration rate is about 53 percentage points greater than in areas where cable television service is available. Where cable television service is available, cable operators are increasingly providing advanced services, such as digital cable, cable modem, and telephone service. In 2004, the DBS penetration rate was over 20 percentage points greater in areas where cable operators did not provide advanced services, compared with areas where these services were available. Finally, in some limited areas, cable companies compete with other wire-based competitors, and where there is more than one wire- based cable competitor, the DBS penetration rate was 8 percentage points lower than in areas without such an additional competitor. Most households in the United States have access to cable television service. Using Knowledge Network's 2004 survey, we found that less than 9 percent of responding households reported that cable television service was not available. According to FCC, households without access to cable television service generally reside in smaller and rural markets. Where cable television service is not available, households are far more likely to purchase DBS service. In figure 4, we illustrate the percentage of households receiving television service through four different modes (over- the-air, cable, DBS, and other) for areas where households report that cable television service is available and where it is not available. In areas where cable television service is available, 65 percent purchase cable service, 16 percent use free over-the-air television, and about 15 percent purchase DBS service. When cable television service is not available, a significant percentage of households--nearly 68 percent--purchase DBS service, while nearly all of the remainder--31 percent--rely on over-the-air television. Since 2001, the percentage of cable operators providing advanced services (digital cable, cable modem, and telephone services) has increased. In figure 5, we illustrate the percentage of cable operators providing no advanced services; one or more, but not all, advanced services; and all three advanced services based on FCC's annual survey of cable franchises. In 2001, over 18 percent of cable operators did not provide advanced services, while less than 3 percent did not provide advanced services by 2004. At the same time, the percentage of cable operators providing all three advanced services increased from 16 percent in 2001 to 26 percent in 2004. In 2004, most cable operators (about 66 percent) provided both digital cable and cable modem services, but not telephone service. In areas where cable operators do not provide advanced services, the DBS penetration rate is significantly greater than in areas where cable operators provide advanced services. In figure 6, we illustrate the DBS penetration rate for 2001, 2002, and 2004 based on the availability of advanced services from cable operators. In 2004, the DBS penetration rate was over 36 percent in areas where cable operators did not provide advanced services, compared with approximately 16 percent in areas where cable operators provided one or more, but not all, advanced services, and only 14 percent in areas where cable operators provided all three advanced services. In fact, the DBS penetration rate increased modestly since 2001 in areas where cable operators provide one or more advanced services. However, the DBS penetration rate increased 12 percentage points since 2001 in areas where cable operators do not provide advanced services. Although the Telecommunications Act of 1996 sought to increase wire- based competition, few American households have a choice among companies providing television service via wire-based facilities. In a 2005 report, FCC noted that few franchise areas--about 1 percent--have effective competition based on the presence of a wire-based competitor. These competitors include telephone companies, electric and gas utilities, and broadband service providers. In areas with more than one wire-based cable provider, the DBS penetration rate is lower compared with areas with only one wire-based provider. In figure 7, we illustrate the DBS penetration rate for 2004 in cable franchise areas with and without wire-based cable competition. The DBS penetration rate is 18 percent in areas without wire-based competition and 10 percent in areas with wire-based competition. We found that three key geographic factors and three key competitive factors influence DBS penetration rates in cable franchise areas throughout the United States. Regarding geographic factors, we found that (1) the DBS penetration rate is lower in areas with a high prevalence of multiple dwelling units, such as apartments and condominiums; (2) the DBS penetration rate is lower in areas where the angle at which the satellite dish must be installed is relatively low, such that the satellite points more toward the horizon than toward the sky; and (3) the DBS penetration rate is higher in nonmetropolitan areas. In terms of competitive factors, we found that (1) the DBS penetration rate is lower in areas where the cable operator's system has greater system capacity; (2) the DBS penetration rate is lower in areas where there is more than one wire-based cable provider; and (3) the DBS penetration rate is higher in areas where DBS providers carry local broadcast stations, such as an ABC affiliate. Using an econometric model to control for the many factors that influence the DBS penetration rate, we identified three geographic factors that influenced the DBS penetration rate in cable franchise areas in 2004; see appendix III for a full explanation of, and results from, our econometric model. The DBS penetration rate is lower in areas with a relatively large number of housing units represented by multiple dwelling units (such as apartments and condominiums). A 10 percent increase in the percentage of housing units represented by multiple dwelling units is associated with a 2.5 percent decrease in the DBS penetration rate. One possible explanation for this result is that residents of multiple dwelling units are more likely to encounter greater difficulty installing a DBS satellite dish, since the dish requires a clear line of sight to the southern sky. The DBS penetration rate is lower in areas where, to see the southern sky, the satellite dish must be pointed more toward the horizon than up at the sky. In general, the farther north one is within the United States, the more the dish must be angled toward the horizon to see the satellite over the equator. We found that a 1 percent decrease in the angle at which the DBS satellite dish must be set at is associated with a 1 percent decrease in the DBS penetration rate. A possible explanation for this result is that a satellite dish facing the horizon is less likely to have a clear line of sight to the southern sky because of interference from surrounding buildings or trees. The DBS penetration rate is generally higher in nonmetropolitan areas. The DBS penetration rate is about 41 percent greater in cable franchise areas outside metropolitan areas compared with cable franchise areas within metropolitan areas. This result is consistent with the results discussed above for 2001 to 2004 and may be attributed to the early popularity of satellite service in rural areas. Using the same econometric model, we also identified three competitive factors that influence the DBS penetration rate in cable franchise areas in 2004. The DBS penetration rate is lower in areas where the cable operator's system has greater capacity. A 10 percent increase in the cable operator's system capacity is associated with a 2.4 percent decrease in the DBS penetration rate. With greater system capacity, a cable operator can provide more channels and advanced services, such as digital cable, cable modem, and telephone services. Thus, greater system capacity allows the cable operator to provide a compelling alternative to DBS service that can contribute to lower DBS penetration rates. This result is consistent with the lower DBS penetration rate in areas where cable operators provided advanced cable services for 2001 to 2004 that we discussed above. The DBS penetration rate is lower in areas with wire-based cable competition, compared with areas without wire-based competition. In particular, we found that DBS penetration rates are about 37 percent lower in areas with wire-based cable competition compared with areas without wire-based competition. Again, this result is consistent with the results discussed above. With wire-based competition, additional companies are competing for customers. The addition of a second cable operator can attract some customers who might otherwise have purchased DBS service, thereby reducing the DBS penetration rate. The DBS penetration rate is higher in areas where DBS customers can receive local-into-local service. Local-into-local service allows DBS subscribers to receive the local broadcast stations in their area (e.g., the ABC, CBS, Fox, and NBC affiliates) from the DBS provider, just as cable subscribers receive local broadcast stations from their cable operator. Since individual programming appearing on broadcast stations generally has higher ratings than individual programming appearing on cable channels, the ability of DBS providers to offer local broadcast stations to their customers remains an important competitive factor. We found that where local-into-local service is available, the DBS penetration rate is about 12 percent higher than areas where local-into-local is not available. We provided a draft of this report to the Federal Communications Commission (FCC) for its review and comment. FCC staff provided technical comments that we incorporated, where appropriate. We provided a draft of this report to the National Cable and Telecommunications Association (NCTA) and the Satellite Broadcasting and Communications Association (SBCA) for their review and comment. NCTA provided no comments. SBCA officials noted that, in addition to the factors we discuss in the report, the inability of DBS providers to carry certain programming developed by cable operators also influences the DBS penetration rate in certain markets. In particular, SBCA noted that FCC's program access rules require that vertically integrated cable operators make satellite-delivered programming available to competing subscription video providers, such as DBS providers, but that the program access rules do not apply to terrestrially delivered programming. SBCA officials note that the ability of cable operators to deliver programming terrestrially, especially popular programming such as regional sports networks, and therefore deny DBS providers access to this programming, negatively affects the DBS penetration rate in certain markets. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will send copies to interested congressional committees; the Chairman, FCC; and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no cost 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) 512-2834 or at [email protected]. Major contributors to this report include Amy Abramowitz, Stephen Brown, Michael Clements, Simon Galed, and Bert Japikse. To respond to the first and second objectives--to provide information on how direct broadcast satellite (DBS) subscribership has changed since 2001 and how the DBS penetration rate differs across urban, suburban, and rural areas--we gathered data on DBS subscribers from the Satellite Broadcasting and Communications Association (SBCA). SBCA provided us with the number of DBS subscribers by ZIP Code™️ 1 for the two DBS providers, DIRECTV®️ and EchoStar. Using information from the Census Bureau and a private vendor, we matched the zip codes to counties and calculated the number of DBS subscribers in each county throughout the United States. We also gathered data on housing unit projections from the Census Bureau, which, when combined with the number of DBS subscribers, allowed us to calculate the DBS penetration rate by county for July 2001 to January 2004. This allowed us to examine changes in the DBS penetration rate for that period of time. Further, using data from the Office of Management and Budget, we classified counties as urban, suburban, and rural, based on the location of central cities and designations of metropolitan statistical areas (MSA). This allowed us to calculate the DBS penetration rate for each of these geographic categories. ZIP Code™️ is a registered trademark of the United States Postal Service. For simplicity, we refer these as zip codes. regarding the availability of digital cable, cable modem, and telephone service and the presence of wire-based competition. We matched individual zip codes to the cable franchise areas that formed the unit of analysis in FCC's survey. When combined with the count of DBS subscribers by zip code from SBCA, we calculated the DBS penetration rate for each cable franchise area in FCC's survey. We used these data, combined with cable operators' responses to FCC's survey regarding advanced services and wire-based competition, to calculate the DBS penetration rate under these various scenarios. To respond to the fourth objective--to provide information on the factors that appear to influence the DBS penetration rate in cable franchise areas--we used an econometric model we previously developed that examines the effect of competition on cable rates and service and the DBS penetration rate. Using data from FCC's 2004 Cable Price Survey, the model considered the effect of various factors on cable rates, the number of cable subscribers, the number of channels that cable operators provide to subscribers, and the DBS penetration rate for areas throughout the United States. See appendix III for a more detailed explanation of, and results from, our econometric model. To respond to the objectives of this report, we relied extensively on three data sets and took steps to ensure the reliability of these data. The data sets we relied on include the Federal Communications Commission's (FCC) 2002 and 2004 Cable Price surveys, direct broadcast satellite (DBS) subscriber counts by zip code from the Satellite Broadcasting and Communications Association (SBCA), and Knowledge Network's 2004 The Home Technology Monitor survey. In this appendix, we explain the steps we took to ensure that these data were sufficiently reliable for the purposes of our work. FCC annually surveys approximately 700 cable franchises to fulfill a congressional mandate to report on average cable rates for cable operators found to be subject to "effective competition"--a legally defined term-- compared with operators not subject to effective competition. In previous testimonies and a report, we have noted weaknesses with FCC's survey, including insufficient instructions and inaccuracies in the classification of the competitive status of cable operators. In response to our recommendations, FCC has taken several steps to improve the reliability of its survey, including editing the survey document and correcting inaccurate classifications of the competitive status of cable franchises. Additionally, FCC conducts follow-ups with survey respondents and edits survey data when inaccuracies are apparent. We used FCC's 2002 and 2004 Cable Price surveys to identify areas where cable operators provided advanced services and also for information on price, number of channels, and other operating data necessary for our cable-satellite econometric model. Because our use of data from FCC's surveys was important in a comparative manner, rather than an absolute sense--that is, our primary concern with cable rates was the relative level of rates between cable franchises, rather than the absolute rate in a particular cable franchise--it is not important for our use that the data be precise. We conducted logic tests to identify any observations with apparent inaccuracies in the variables of interest for our work. We determined that the data were sufficiently reliable for our analysis. SBCA possesses data on the number of DBS subscribers by zip code. To respond to the objectives of this report, we sent SBCA a letter identifying the specific data elements we required. SBCA officials prepared a set of data sets consistent with our needs. We conducted logic tests on SBCA's data and identified some inconsistencies, which we discussed with SBCA officials. SBCA officials subsequently took steps to resolve these inconsistencies. Based on the revised data we received from SBCA and our subsequent tests, we determined that the data were sufficiently reliable for our analysis. To obtain information on the availability of cable service and types of television service used by U.S. households, we purchased existing survey data from Knowledge Networks Statistical Research. This survey was completed with 2,375 of the estimated 5,075 eligible sampled individuals for a response rate of 47 percent; partial interviews were conducted with an additional 96 people, for a total of 2,471 individuals completing some of the survey questions. The survey was conducted between February 23 and April 25, 2004. Because we did not have information on those contacted who chose not to participate in the survey, we could not estimate the impact of the nonresponse. Our findings will be biased to the extent that the people at the 53 percent of the telephone numbers that did not yield an interview have experiences with television service or equipment that are different from the 47 percent of our sample who responded. However, distributions of selected household characteristics (including presence of children, race, and household income) for the sample and the U.S. Census estimate of households show a similar pattern. To assess the reliability of these survey data, we reviewed documentation of survey procedures provided by Knowledge Networks and questioned knowledgeable officials about the survey process and resulting data. We determined that the data were sufficiently reliable for the purposes of this report. This appendix describes our econometric model of cable-satellite competition. In particular, we discuss (1) the specification of the model, (2) the data sources used for the model, (3) the merger of various data sources into a single data set, (4) the descriptive statistics for variables included in the model, (5) the estimation methodology and results, and (6) alternative specifications. We developed an econometric model to examine the influence of various factors, including those describing aspects of cable competition at the local level, on local DBS penetration rates. Estimating the importance of various factors on the DBS penetration rate is complicated by the possibility that the DBS penetration rate in an area may help determine, but also be determined by, in part, the local cable price in that area. One statistical method applicable in this situation is to estimate a system of structural equations in which certain variables that may be simultaneously determined are estimated jointly. In our previous reports, we estimated a four-equation structural model in which cable prices, the number of cable subscribers, the number of cable channels, and the DBS penetration rate were jointly determined. We use this same general structure again, this time using the most recent information available from FCC's 2004 Cable Price Survey and contemporaneous satellite subscriber information provided by the Satellite Broadcasting and Communications Association. We made some minor modifications because of, for example, changes in the subscription video market. We estimated the following four-equation structural model of the subscription video market: DBS penetration rate in a local market is hypothesized to be related to (1) cable prices per channel; (2) the DBS companies' provision of local stations in the franchise area; (3) the size of the television market as measured by the number of television households; (4) the age of the cable franchise; (5) the median household income of the local area; (6) cable system capacity in terms of megahertz; (7) a dummy variable for areas outside metropolitan areas; (8) the percentage of multiple dwelling units; (9) the angle, or elevation, at which a satellite dish must be fixed to receive a satellite signal in that area; and (10) the presence of a nonsatellite competitor. The DBS penetration rate variable is defined as the number of DBS subscribers in a franchise area expressed as a proportion of the total number of housing units in the area. As hypothesized, the DBS penetration rate is expected to depend on the prices set by the cable provider as well as on the demand, cost, and regulatory conditions in the subscription video market that directly affect DBS. Cable prices are hypothesized to be related to (1) the number of channels, (2) the number of cable subscribers, (3) the DBS penetration rate, (4) the DBS companies' provision of local stations in the franchise area, (5) the size of the television market as measured by the number of television households, (6) horizontal concentration, (7) vertical relationships, (8) the presence of a nonsatellite competitor, (9) regulation, (10) average wages, and (11) population density. The cable price variable used in the model is intended to reflect the total monthly rate charged by a cable franchise to the typical subscriber. The explanatory variables in the cable price relationship are essentially cost and market structure variables. Number of cable subscribers is hypothesized to be related to (1) cable prices per channel, (2) the DBS penetration rate, (3) the number of broadcast stations, (4) urbanization, (5) the age of the cable franchise, (6) the number of homes passed by the cable system, (7) the median household income of the local area, and (8) the presence of a nonsatellite competitor. The number of cable subscribers is defined as the number of households in a franchise area that subscribe to the most commonly purchased programming tier. This represents the demand equation for cable services, which depends on rates and other demand- related factors. Number of channels is hypothesized to be related to (1) the number of cable subscribers, (2) the DBS penetration rate, (3) the size of the television market as measured by the number of television households, (4) the median household income of the local area, (5) cable system capacity in terms of megahertz, (6) the percentage of multiple dwelling units, (7) vertical relationships, and (8) the presence of a nonsatellite competitor. The number of channels is defined as the number of channels included in the most commonly purchased programming tier. The number of channels can be thought of as a measure of cable programming quality and is explained by a number of factors that influence the willingness and ability of cable operators to provide high- quality service and consumers' preference for quality. Table 1 presents the explanatory variables in the structural model on cable prices and DBS penetration rates. We required several data elements to build the data set used to estimate this model. The following is a list of our primary data sources. We obtained data on cable prices and service characteristics from the 2004 Cable Price Survey that FCC conducted as part of its mandate to report annually on cable prices. FCC's survey asked a sample of cable franchises to provide information, as of January 1, 2004, about a variety of items pertaining to cable prices, service offerings, subscribership, franchise area reach, franchise ownership, and system capacity. We used the survey to define measures of each franchise area's cable prices, number of subscribers, and number of channels as described above. In addition, we used the survey to define variables measuring (1) system megahertz (the capacity of the cable system in megahertz), (2) homes passed by the cable system serving the franchise area and perhaps other franchises in the same area, (3) regulation--a dummy variable equal to 1 if the franchise is subject to rate regulation of its Basic Service Tier, (4) horizontal concentration--a dummy variable equal to 1 if the franchise area is affiliated with one of the largest MSOs with at least 1 million subscribers nationally, and (5) the status of nonsatellite competition--a dummy variable equal to 1 if the franchise faced competition from a second wireline company that provides cable service. From the Satellite Broadcasting and Communications Association, we obtained DBS subscriber counts as of January 2004 for each zip code in the United States. We used this information to calculate the number of DBS subscribers in a cable franchise area, which, when divided by the number of housing units, was used to define the DBS penetration rate. We used the most recent data from the Census Bureau to obtain the following demographic information for each franchise area: housing units, median household income, proportions of urban and rural populations, housing units accounted for by structures with more than five units (multiple dwelling units), population density, and nonmetropolitan statistical areas. For average wage, we used May 2003 estimates for Installation, Maintenance, and Repair Occupations from the Bureau of Labor Statistics' (BLS) National Occupational Employment and Wage Estimates. We used metropolitan area data for most franchise areas, and state-level data for those franchise areas located outside of metropolitan areas. We used data from BIA MEDIA AccessPro™️ to determine the number of broadcast television stations in each television market. To define the dummy variable indicator of vertical integration, we used information on the corporate affiliations of the franchise operators provided in FCC's survey. We used this information in conjunction with industrywide information on vertical relationships between cable operators and suppliers of program content gathered by FCC in its Tenth Annual Report on the status of competition in the market for delivery of video programming. From Nielsen Media Research, we acquired information to determine the number of television households in each designed market area (DMA), or television market, and the DMA in which each cable franchise was located. We used information from the two DBS companies (DIRECTV®️ and EchoStar) to identify DMAs in which these companies provide local stations and, if local stations are available, when the companies initiated this service. We used this to construct a measure of local station availability, as well as alternative specifications presented in the final section. Based on a zip code associated with each cable franchise area, we determined the necessary satellite dish elevation for each area based on information available from the Web pages of the two DBS companies. The level of observation in our model is the local cable franchise. Many of the variables we used to estimate our model, such as each cable franchise's price, come directly from FCC's Cable Price Survey. However, we also created variables describing competitive, geographic, and economic conditions in each franchise area. For these variables, we used information from other sources. For example, we obtained median household income and the extent of multiple dwelling units from Census Bureau data, and derived the DBS penetration rate from information provided by the Satellite Broadcasting and Communications Association. Generally, these data are reported at other geographic levels, and we describe briefly the process by which we merged these different data sources. Cable franchise areas take a variety of jurisdictional forms, such as city or town, or unnamed, unincorporated area. As a consequence, they do not correspond in many cases to well-recognized geographical units, such as Census places, for which other data are readily available. Our approach to identifying the geographic extent of each franchise area and relating information processed at different geographic levels to each franchise area is similar to that we have used and described in detail in our previous reports. In general, we used information in FCC's survey identifying franchise community name and type (such as city or town) to match to Census geographic identification codes for particular places or county subdivisions that do correspond to Census geography. In particular, we used 2000 Census information on the number of housing units in these jurisdictions as the basis for our measure of DBS penetration. For other franchises, however, the link to Census records was not as direct. For franchises in unincorporated unnamed areas, for example, and those whose franchise areas represent a section of the associated community (which occurs in some large cities), we acquired additional information on the geographic boundaries of the franchise areas. The satellite subscriber information we obtained was organized by zip code. In order to link these subscriber counts to franchise area geographies, we determined the zip code or zip codes associated with each franchise. Because zip codes often do not share boundaries with other geographies, one zip code can be associated with more than one cable franchise area. Also, many franchises, particularly larger ones, span many zip codes. Therefore, we needed to identify the zip code or codes in each franchise area as well as the degree to which each of those zip codes is contained in each franchise area to calculate the degree of satellite penetration for each franchise area. We accomplished this by using software designed to relate various levels of census geography to one another. For most franchise areas--that is, those that correspond to census places, county subdivisions, or entire counties--we were able to use this software to relate census places, county subdivisions, or other census geographies directly to the zip codes that corresponded to those areas and to calculate the share of each zip code's population according to the 2000 Census that was contained in that area. We used these population shares to allocate shares of each zip code's total DBS subscribers to the relevant franchise area, and then summed the resulting subscribers across all zip codes in that franchise area. We defined the penetration by dividing this subscriber total by an estimate of the housing units in that franchise area in January 2004. As part of the process of identifying the zip codes associated with each franchise area, we identified a key zip code that we used for linking other data items. We used Census data organized at the zip code level to assign demographic data, such as income and the extent of multiple dwelling units, to each franchise area. We also used this key zip code to attach information concerning the proper satellite dish elevation. We assigned other information to each franchise on the basis of the franchise's county, state, or metropolitan area. We assigned wage data from BLS at the metropolitan or state level and we assigned nonmetropolitan status, percentage of urban population, and the Nielsen television market of each franchise at the county level. Information on the provision of local stations by DBS companies, which occurs at the television market level, was then assigned to each franchise. Table 2 provides basic statistical information on all of the variables included in the cable-satellite competition model. We calculated these statistics using 624 observations in our data set. We excluded those franchises sampled by FCC that were municipally operated or that competed directly with municipally operated franchises because we believe that these cable franchises are likely to be operated differently from the majority of other franchises. We employed the Three-Stage Least Squares (3SLS) method to estimate our model. Table 3 includes the estimation results for each of the four structural equations. All of the variables, except dummy variables, are expressed in natural logarithmic form. This means that coefficients can be interpreted as "elasticities"--the percentage change in the value of the dependent variable associated with a 1 percent change in the value of an independent, or explanatory, variable. The coefficients on the dummy variables are elasticities in decimal form. We found that several factors related to the geographical conditions influence the DBS penetration rate. Specifically, as shown in table 3, DBS penetration rates are likely to be significantly higher in nonmetropolitan areas. This could be associated with the historical development of satellite service, which had been marketed for many years in smaller and more rural areas. Additionally, the DBS penetration rate is higher in areas that require a relatively higher angle or elevation at which the satellite dish is mounted and is lower in areas where there are more multiple dwelling units. These two factors can be associated with the need of DBS satellite dishes to "see" the satellite: A dish aimed more toward the horizon (as opposed to aimed higher in the sky) is more likely to be blocked by a building or foliage, and people in multiple dwelling units often have fewer available locations to mount a satellite dish. Additionally, we found that several factors related to competitive conditions influence the DBS penetration rate. As shown in table 3, our model results indicate that in cable franchise areas where local broadcast stations are available from one or both DBS providers, the DBS penetration rate is approximately 12 percent higher than in areas where local stations are not available via satellite. This finding suggests that in areas where local stations are available from one or both DBS providers, consumers are more likely to subscribe to DBS service and, therefore, DBS appears to be more competitive with cable than in areas where local stations are not available from a DBS provider. We did not find that DBS companies' provision of local broadcast stations is associated with lower cable prices. In table 3, the estimate is, in fact, positive, although not statistically significant, and we therefore cannot reject the hypothesis that provision of local broadcast stations has no impact on cable prices. However, we found that cable prices were approximately 16 percent lower in areas where a second cable company-- known as an overbuilder--provides service. Finally, cable prices are higher in areas where the cable company provides more channels, indicating that consumers are generally willing to pay for additional channels and that providing additional channels raises a cable company's costs. Additionally, we found that DBS penetration rates are lower in cable franchise areas where a second wire-based competitor is present; in these areas, the DBS penetration rate is 37 percent lower compared with similar areas where a second wire-based competitor is not present. We considered alternative specifications under which we expanded the definition of local broadcast stations to account for (1) whether one or both DBS companies offer local stations and (2) the length of time that DBS companies have provided local stations. To conduct this analysis, we included several additional variables: "Both DBS companies provide" equals 1 if both DBS companies offer local stations in the cable franchise area, "One DBS company provides" equals 1 if only one DBS company offers local stations, "Long-term" equals 1 if either or both DBS companies have offered local stations in the cable franchise area for more than 3 years as of January 2004, "Short-term" equals 1 if local stations have been available for less than 3 years, "Both long-term" equals 1 if both DBS companies have offered local stations in the cable franchise area for more than 3 years as of January 2004, and "Both otherwise" equals 1 if local stations have otherwise been available from both DBS companies. We report the results of these alternative specifications only for the DBS penetration equation because we are primarily interested in their affects on DBS penetration and we found little impact on the other equations in the model. We present the results for four different specifications in table 4. In general, there is evidence that the longer that local stations have been available in a local area, the larger will be the increase in the local DBS penetration rate, and that the increase in the local DBS penetration rate is greater in those areas in which both DBS companies provide local stations.

Since its introduction in 1994, direct broadcast satellite (DBS) service has grown dramatically, and this service is now the principal competitor to cable television service. Although DBS service has traditionally been a rural service, passage of the Satellite Home Viewer Improvement Act of 1999 enhanced the competitiveness of DBS service in suburban and urban markets. GAO agreed to examine (1) how DBS subscribership changed since 2001; (2) how DBS penetration rates differ across urban, suburban, and rural areas; (3) how DBS penetration rates differ across markets based on the degree and type of competition provided by cable operators; and (4) the factors that appear to influence DBS penetration rates across cable franchise areas. To complete this report, GAO prepared descriptive statistics and an econometric model using data from the Federal Communications Commission's annual Cable Price Survey and the Satellite Broadcasting and Communications Association's subscriber count database. Since 2001, the number of households subscribing to DBS service has grown rapidly; thus the percentage of households subscribing to DBS service, the DBS penetration rate, has grown to over 17 percent of American households. The DBS penetration rate is highest in rural areas, but growing most rapidly in suburban and urban areas. Between 2001 and 2004, the DBS penetration rate grew 15 percent in rural areas to 29 percent of rural households, 32 percent in suburban areas to 18 percent of suburban households, and 50 percent in urban areas to 13 percent of urban households. The degree and type of competition influences the DBS penetration rate. In areas with no cable service, the DBS penetration rate is about 53 percentage points greater than in areas where cable service is available. Where cable service is available, cable operators increasingly offer advanced services. The DBS penetration rate is approximately 20 percentage points greater in areas where cable operators are not providing advanced services, compared with areas where these services are available. While relatively few areas have more than one wire-based cable operator, in these areas the DBS penetration rate is 8 percentage points lower than in areas with only one cable operator. In addition to the differences in DBS penetration rates across rural, suburban, and urban areas, and differences associated with the degree and type of cable competition, additional geographic and competitive factors also influence the DBS penetration rate. For example, the DBS penetration rate is lower in areas with a high prevalence of multiple-dwelling units, such as apartments. Additionally, the DBS penetration rate is higher in areas where DBS providers offer local broadcast stations (such as ABC and NBC affiliates) directly to their subscribers. The Federal Communications Commission provided technical comments on a draft of this report that we incorporated where appropriate.

In an earlier era, when there was less concern over the costs of health care, the process by which drugs reached patients was relatively simple. The patient went to a doctor, who, if convinced that the malady could be helped with medication, would prescribe a drug that the patient could obtain at the local pharmacy. If the patient's health insurance had a prescription drug benefit, the patient would be reimbursed for the purchase; if not, the patient would cover the costs out-of-pocket. The decisions regarding which drug would be prescribed were often left to physicians, while those regarding drug cost typically involved manufacturers and retail pharmacies. Further, the health insurer was usually not centrally involved in either decision. Today, the ways in which drugs are prescribed and paid for are considerably more complex. To a great extent, this complexity has been introduced in direct response to concerns with the rapid growth in health care expenditures. Just as with hospital and physician services in an earlier day, insurers have recently begun to take concrete steps to control the costs of pharmacy benefits. Some steps require patients to bear a larger share of the costs of drugs through increased copayments, while others reduce the utilization of drugs and rely more on less-costly types of drugs. The most important steps, however, are directed at minimizing both how much insurers pay manufacturers for drugs and how much they pay pharmacies for their services. Insurers take steps to reduce the acquisition costs of drugs by negotiating for discounts or rebates from drug manufacturers. A powerful tool in these negotiations is the formulary that the insurer or the PBM maintains. A formulary is a list of prescription drugs that are preferred by the insurer or the PBM. Drugs are included on formularies not only for reasons of medical effectiveness but also because of price. Because formularies can affect the utilization rates for drugs, it is in the interest of a drug manufacturer to have its products included. This is especially true when the insurer or PBM is successful in obtaining high rates of physician compliance with the formulary and when the insurer has a large number of enrollees. In these cases, the potential effect that placement on a formulary has on the sales and market share of a drug is so great that insurers can use such placement as a means of securing discounts or rebates from drug manufacturers. Insurers and PBMs also negotiate for discounts directly with pharmacies to try to control how much they reimburse for services. In these negotiations, the position of insurers is strengthened not by formularies but by their ability to influence which pharmacies their enrollees use. As with the negotiations with manufacturers, the position of the insurer or the PBM is related to the number of enrollees represented by the plan. The extent to which negotiated rebates and discounts with drug manufacturers and pharmacies have controlled costs can be substantial. For example, in our most recent examination of these strategies, a large insurer estimated that the combined savings that resulted from manufacturer rebates and pharmacy discounts exceeded $300 million.Many retail pharmacists believe that the means used to achieve these savings have placed them at a comparative disadvantage in the rapidly changing health care environment. The current environment is viewed with anxiety by many retail pharmacists. The success of insurers and other institutional buyers in using their consolidated buying power to reduce the price they pay for drugs has not been shared by retail pharmacists. As a consequence, retail pharmacies are sometimes charged more for similar products than are health insurers such as health maintenance organizations, self insured health plans, and other institutional buyers. The best evidence we were able to obtain that differential pricing existed comes from a recent study of drug pricing in Wisconsin. Table 1 summarizes the results from that study. As can be seen from the table, differences in prices of greater than 10 percent were found for more than one third of all products (27 out of 76 drugs), and in more than one half of those cases (21 percent of all cases), the differences could not be justified by volume of purchase. In placing these findings in a larger perspective, it is important to note that Wisconsin has what is often referred to as a "unitary pricing" law that "requires sellers to offer drugs . . . to every purchaser under the same terms and conditions afforded to the most favored purchaser." The data from Wisconsin support the conclusion of many that differential pricing exists. The differences in prices may well reflect the relative abilities of insurers and retail pharmacies to influence market share. That is, some purchasers of drugs, primarily those who can influence the specific drugs that are prescribed for large numbers of patients, may pay less for drugs because of that ability. The increasing concern among insurers with controlling costs and the consequent reliance on their consolidated purchasing power also have affected how much pharmacies are reimbursed for the drugs they sell to customers. As health insurers and the PBMs that represent them cover more people, they use the size of their member populations as leverage to help reduce the amounts that they reimburse pharmacies for prescriptions dispensed to those populations. Although a pharmacy can refuse to participate in an insurer's network of pharmacies willing to provide prescription discounts, it is difficult for the pharmacy to face the possibility of losing the business. For example, each of the two largest PBMs represents more than 40 million people nationwide. As we were told by one independent retail pharmacist, "either I agreed to the new reimbursement schedule, or I lose 40 percent of my patients." In addition to the pressures of how much retail pharmacists pay for drugs and how much they can charge for their services, they have been facing pressure from new sources of competition. The expansion of supermarkets into the pharmaceutical area has been under way for some time, but the more immediate threat to the viability of retail pharmacies may be posed by the reliance of insurers on mail order pharmacies. Mail order firms have made significant inroads into the market in recent years, especially in providing drugs for the chronically ill. In an effort to promote the use of mail order pharmacies, some insurers provide enrollees with considerable financial incentives. For example, the largest plan under the federal employee health benefits program provides enrollees drugs free of charge if they obtain them through the mail order program yet requires a 20-percent copayment from most enrollees for drugs purchased at retail pharmacies. All these pressures on retail pharmacies have had a considerable effect. For example, in the case described above, a change in pharmacy benefits that affected many of the plan's enrollees reduced payments to retail pharmacies. During the first 5 months of 1996, the total amount that retail pharmacies were paid for the prescriptions they dispensed to enrollees affected by the benefit change decreased by about 36 percent, or about $95 million, from the amount paid during the same period in 1995. Retail pharmacists have resorted to three different types of action in response to the changes in pharmaceutical pricing: litigation, adoption of competitive strategies, and calls for legislation. A large lawsuit regarding drug pricing was recently settled, at least in part. The suit was a class action by tens of thousands of independent and chain pharmacies against virtually all the leading manufacturers and wholesalers of brand-name prescription drugs. The pharmacies argued that the manufacturers and wholesalers, by granting discounts to managed care organizations that were not available to the pharmacies, were engaged in a price-fixing conspiracy in violation of federal antitrust law. The court rejected an initial settlement but approved a modified settlement with most of the manufacturer-defendants on June 21, 1996.(The wholesalers are not parties to this settlement because the court earlier granted summary judgment in their favor.) The litigation is not entirely over because not all parties have agreed to the settlement, and a number of issues remain on appeal in the Court of Appeals for the 7th Circuit. The modified settlement satisfied the concerns about future pricing conduct that led the court to reject the initial proposal. Specifically, the current settlement provides that (1) the manufacturers will not refuse discounts solely on the basis that the buyer is a retailer and (2) retail pharmacies and buying groups that are able to demonstrate an ability to affect market share will be entitled to discounts based on that ability, to the same extent that managed care organizations would get such discounts. In addition to pursuing legal remedies, retail pharmacies are beginning to adopt some strategies designed specifically to become more competitive in the new environment. Some pharmacies are offering services not traditionally found in them (such as food products and optical care), while some are trying to follow the lead of institutional drug purchasers. For example, some retailers are creating buying groups, and others are considering ways to influence the choice of drugs by contacting patients directly and informing them of the relative merits of the different drugs that might be available. If contacting patients directly is successful, it will provide retail pharmacies with the commodity that makes institutional buyers so powerful--namely, the ability to influence market share. Although we cannot predict how successful any of these strategies will be, the large chain pharmacies are more likely to succeed as they try to compete with managed care organizations and mail order pharmacies than are the smaller, independent retail pharmacies. Finally, retail pharmacists and their representatives have been strong proponents for legislative solutions. Depending on ideological affiliation, these are alternatively referred to as "unitary pricing" or "equal access to discount" laws, and they have been considered in one form or another by the majority of state legislatures. Although it is difficult to predict all the consequences of legislation in such a complex area as drug pricing, we can look to the last instance in which the federal government attempted a legislative solution to a problem involving drug costs: the Medicaid rebate on prescription drugs. In OBRA 1990, the Congress tried to reduce Medicaid's prescription drug costs by requiring that drug manufacturers give state Medicaid programs rebates for outpatient drugs. The rebates were based on the lowest of "best" prices that drug manufacturers charged other purchasers, such as health maintenance organizations and hospitals. In our study of this legislation, we found that the average best price for outpatient drugs paid by large purchasers increased. In its evaluation, the Congressional Budget Office concluded that the program had reduced Medicaid spending on prescription drug benefits by almost $2 billion. However, at the same time, the budget office study's conclusion was consistent with ours in that "spending on prescription drugs by non-Medicaid patients may have increased as a result of the Medicaid rebate program." Although the issues involved with the differential pricing between institutional and retail pharmacies are likely to be distinct from those the Congress confronted in the Medicaid prescription drug benefit, the lessons of OBRA 1990 cannot be ignored at a time when controlling health care costs is of such critical importance. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that the Subcommittee might have. For more information about this testimony, please call George Silberman, Assistant Director, at 202-512-5885. Other major contributors include David G. Bernet, Joel A. Hamilton, and John C. Hansen. Blue Cross FEHB Pharmacy Benefits (GAO/HEHS-96-182R, July 19, 1996). Pharmacy Benefit Managers: Early Results on Ventures with Drug Manufacturers (GAO/HEHS-96-45, Nov. 9, 1995). Medicaid: Changes in Best Price for Outpatient Drugs Purchased by HMOs and Hospitals (GAO/HEHS-94-194FS, Aug. 5, 1994). Prescription Drugs and the Elderly: Many Still Receive Potentially Harmful Drugs Despite Recent Improvements (GAO/HEHS-95-152, July 24, 1995). Prescription Drug Prices: Official Index Overstates Producer Price Inflation (GAO/HEHS-95-90, Apr. 28, 1995). Prescription Drugs: Spending Controls in Four European Countries (GAO/HEHS-94-30, May 17, 1994). Prescription Drugs: Companies Typically Charge More in the United States Than in the United Kingdom (GAO/HEHS-94-29, Jan. 12, 1994). Medicaid: Outpatient Drug Costs and Reimbursements for Selected Pharmacies in Illinois and Maryland (GAO/HRD-93-55FS, Mar. 18, 1993). Prescription Drug Prices: Analysis of Canada's Patented Medicine Prices Review Board (GAO/HRD-93-51, Feb. 17, 1993). Medicaid: Changes in Drug Prices Paid by HMOs and Hospitals Since Enactment of Rebate Provisions (GAO/HRD-93-43, Jan. 15, 1993). Prescription Drugs: Companies Typically Charge More in the United States Than in Canada (GAO/HRD-92-110, Sept. 30, 1992). Prescription Drugs: Changes in Prices for Selected Drugs (GAO/HRD-92-128, Aug. 24, 1992). Medicaid: Changes in Drug Prices Paid by VA and DOD Since Enactment of Rebate Provisions (GAO/HRD-91-139, Sept. 18, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 implications of prescription drug pricing for retail pharmacies, focusing on the: (1) changes in the process of getting prescription drugs from manufacturers to patients; and (2) consequences for and response of retail pharmacies to these changes. GAO noted that: (1) health insurers have used their consolidated buying power to obtain drug discounts not available to retail pharmacies; (2) health insurers and pharmacy benefit managers (PBM) use the size of their member populations as leverage to help reduce the amounts that they reimburse pharmacies for prescriptions dispensed to those populations; (3) retail pharmacies have been facing increased competition from mail order pharmacies; and (4) retail pharmacies have responded to the changes in pharmaceutical pricing by waging lawsuits against leading drug manufacturers and wholesalers, developing more competitive strategies for gaining business, and campaigning for legislative action.

The United States has more than 19,000 airports, ranging from busy commercial service airports such as Hartsfield-Jackson Atlanta International Airport that enplanes millions of passengers annually, to small grass airstrips that serve only a few aircraft each year. Of these, roughly 3,300 airports are designated by FAA as part of the national airport system and are therefore eligible for federal assistance for airport capital projects. The national airport system consists of two primary types of airports-- commercial service airports, which have scheduled service and board 2,500 or more passengers per year, and general aviation airports, which have no scheduled service and board fewer than 2,500 passengers. Federal law divides commercial service airports into various categories of airports, based on the number of passenger boardings, ranging from large hub airports to commercial service nonprimary airports (see fig. 1). The majority of passenger traffic occurs at large hub airports: almost 73 percent of all passengers in the United States boarded at the 30 large hub airports in 2015. The federal government provides grants to help fund airport capital development through its Airport Improvement Program (AIP). Congress appropriates funds for AIP and other FAA programs from the Airport and Airway Trust Fund (AATF), which is itself funded by a variety of aviation- related taxes, such as taxes on tickets, cargo, general aviation gasoline, and jet fuel. FAA's tool for identifying airports' future capital projects that are eligible for AIP grants is the National Plan of Integrated Airport Systems (NPIAS). FAA relies on airports, through their planning process, to identify individual projects for funding consideration. Federal law and FAA's rules establish which types of airport development projects are eligible for AIP's funding. Generally, most types of airfield improvements--such as runways, lighting, navigational aids, and land acquisition--are eligible. AIP-eligible projects for airport areas serving travelers and the general public--called "landside development"--include entrance roadways, pedestrian walkways and movers, and common space within terminal buildings, such as waiting areas. Hangars and interest expense on airport debt are not eligible for AIP grants. Some landside development projects--including revenue-producing terminal areas, such as ticket counters and concessions--are also ineligible. PFCs are another federally authorized source of funding that commercial airport sponsors can levy on passengers to help pay for capital development at national system airports. Commercial airports must designate which projects PFCs will fund and must seek and obtain FAA's approval to charge a PFC. Funding for both AIP and PFCs is linked to passenger activity. In this way, Congress aimed to direct funds to where they are needed most. Airports also fund their development with state and local contributions as well as airport generated funds, such as income from airports' tenants and commercial activities. Airport-generated revenue is typically used to finance the issuance of local debt such as tax-exempt bonds, which for larger commercial airports constitute more than half of their financing. Because of the size and duration of airport development--for example, planning, funding and building a new runway can take more than a decade and several hundred-million dollars to complete--long-term debt is used to help finance these types of projects. The FAA's estimate of the costs for infrastructure development at airports over the next 5 years is about $32.5 billion compared to the airport industry's estimate of almost $100 billion for the same period. In 2016, FAA estimated that airports have roughly $32.5 billion in planned development projects for the period 2017-2021, which represents a 3 percent, or $1 billion, decrease from its estimate for the 2015-2019 period. The FAA attributes the decline in capital development costs to a range of factors, including a reduction in current and future traffic relative to earlier predictions, the use and age of airport facilities, and costs related to changing aircraft technology. FAA reported a decrease in estimated costs for planned projects at most large and medium hubs, with increases at other hub types. For instance, according to the FAA, there is an increase in terminal projects at small airports, while FAA notes that many large and medium sized airports have terminal projects planned. Further, according to FAA's analysis, airports will experience decreased demands for building new airside capacity, such as runways, to reduce delays. The airport industry's estimate of 5-year planned development cost, as developed by Airports Council International-North America (ACI-NA), is three times FAA's. ACI-NA's most recent estimate of almost $100 billion in planned investment is a 32 percent increase over its 2015 5-year estimate of $75.5 billion. According to ACI-NA officials, of the nearly $100 billion in total planned development costs, $61 billion are for AIP-ineligible projects and $38.9 billion are for AIP-eligible projects (as compared to FAA's $32.5 billion estimate), with most of the ineligible projects for terminal or landside improvements such as ground access. The percentage increase in planned development estimates is greatest for large hub airports, where estimated costs have increased more than 50 percent, from about $40 billion to about $60 billion in ACI-NA's most recent estimate. For example, according to the latest ACI-NA report, the Los Angeles International Airport reported that its planned new development will cost about $10 billion between 2017 and 2021 for infrastructure projects. In contrast, most small airports reported single- digit increases in infrastructure costs, according to ACI-NA, although there are some exceptions. ACI-NA officials told us that a key driver for its increasing cost estimate is that airports have deferred some airport projects due to a lack of funding in the past. The principal reason why FAA's and ACI-NA's planned development costs differ so significantly is that the ACI-NA cost estimate encompasses substantially more projects than does FAA's, according to ACI-NA. As we have previously reported, the ACI-NA uses AIP-eligible and AIP-ineligible projects to develop its estimates, while the FAA only uses AIP-eligible projects. Additionally, ACI-NA cost estimates are made up of projects that have already identified funding sources as well as those that have not. According to ACI-NA officials, 77 percent of the cost of planned development for large hub airports in their most recent cost estimate has funding already arranged. In contrast, FAA's estimates only include projects without financing arranged. Additional reasons for differences in FAA's and ACI-NA's estimates are technical and methodological. First, the sources and methods for surveying information from the airports differ. FAA estimates are developed by reviewing information from airport plans that were available through 2015. The ACI-NA costs estimates are based on a survey of airports completed in 2017. Second, the FAA does not adjust its estimates for inflation, but the ACI-NA uses a 1.5 percent annual inflation adjustment. Without the inflation adjustment, ACI-NA's estimate would drop $4.2 billion to $95.7 billion in constant 2016 dollars. Third, the ACI- NA estimate includes contingency costs for potential design changes, whereas FAA's estimate does not. While FAA and ACI-NA cost estimates have long differed for the reasons outlined above, the most recent estimates diverge considerably, as shown in figure 2. The 5-year FAA estimate for 2017 through 2021 fell from the prior estimate to $32.5 billion, whereas ACI-NA's estimate increased by $24.4 billion to $99.9 billion, or three times FAA's estimate. In 2015, we estimated that in recent years national system airports had generated an average of $10 billion annually for capital development. These funds come from a variety of sources, as noted in figure 3. AIP grants: Since 2012, AIP authorizations have been unchanged, although the health of the AATF, which funds AIP, has improved. The AATF's balance has recovered in recent years, ending fiscal year 2016 with an uncommitted balance of $5.7 billion and a cash balance of $14.3 billion. AIP grants must be used for eligible and justified projects, which are planned and prioritized by airports, included in their capital improvement plans, and reviewed and approved by FAA staff and the Secretary of Transportation. The distribution system for AIP grants is complex. It is based on a combination of formula grants--which are often referred to as "entitlement grants" within this program--that go to all national-system airports, and discretionary grants that FAA awards for selected eligible projects. In 2015, we reported that, for fiscal years 2009 through 2013, national-system airports received an average of $3.3 billion annually in AIP grant funding. Grant awards in fiscal year 2016 totaled almost $3.3 billion. PFC collections: Congress last raised the PFC cap in 2000 to $4.50 per flight segment, with a limit on the total PFCs that a passenger can be charged per round trip of $18 total. Large and medium hub airports that collect PFCs of $3 or less per flight segment have their AIP entitlement funding reduced by 50 percent; any of these airports that collect PFCs of more than $3 have their AIP entitlement funding reduced by 75 percent. Most of these AIP reductions to large and medium airports are distributed to smaller airports through the AIP. We found in 2015 that for fiscal years 2009 through 2013, commercial airports had an annual average of $1.8 billion of their PFC collections available for capital projects after deducting interest payments on debt. Ninety percent of that amount was collected by larger airports. Of the $90 billion in FAA approved PFC collections, 34 percent has been committed for landside projects, such as terminals; 34 percent for the interest payments on debt used to pay for capital projects, and 18 percent for airside projects, such as runways and taxiways. As of January 2017, 96 of the top 100 airports have been approved to collect PFCs. State grants: Airports can also obtain funding for capital development projects from state grants. This money is often used to provide the airport's share of matching funds required for AIP-funded projects. According to the results of a survey we conducted in collaboration with the National Association of State Aviation Officials (NASAO), for fiscal years 2009 through 2013, states provided an annual average of $477 million to national system airports, with $345 million (72 percent) going to smaller airports and $131 million (28 percent) going to large and medium hub airports. Capital contributions: Capital contributions are funds contributed for infrastructure projects by the airport sponsor or entities that use the airport, such as airlines or tenants. According to FAA data on commercial airports' annual financial reports, for fiscal years 2009 through 2013, commercial airports received an annual average of $644 million in capital contributions. Of this amount, $419 million went to larger airports and $225 million went to smaller airports. Airport-generated net income: Airports generate both aeronautical revenues, such as revenues earned from leases with airlines and landing fees, and non-aeronautical revenues, such as earnings from terminal concessions and parking fees. We found that for fiscal years 2009 through 2013, airport-generated net income available for capital development projects averaged $3.8 billion annually--55 percent from aeronautical revenues and 45 percent from non-aeronautical revenues (see fig. 4). To leverage these funding sources, some airports also issue bonds to finance infrastructure projects, often for larger and longer-term developments. Bonds allow an airport to fund a project up front and pay for its cost, plus interest, over a much longer time frame compared to the construction of the project. Because many U.S. airports are owned by states, counties, cities, or public authorities, bonds issued by these entities to support airport projects may qualify as tax-exempt bonds for federal tax purposes. The tax-exempt status enables airports to issue bonds at lower interest rates than taxable bonds, thus reducing a project's financing costs. Tax-exempt bonds can be issued at lower rates because the federal income-tax exclusion on the interest paid by the purchasers can make these investments more attractive to investors than taxable bonds. Based on our analysis of data from Thomson Reuters on airport bond issuances, from 2009 to 2013, airports obtained an average of $6.3 billion per year for new projects by issuing bonds. Bond financing has traditionally been an option exercised by larger airports because they are more likely to have a greater and more certain revenue stream to support repayment of debt. Smaller airports tend to be less reliant on bonds and, to the extent that they do issue bonds, make greater use of general obligation bonds that are backed by the tax revenues of the airport sponsor, which is often a state or municipal government. Data from FAA's airport financial-reporting system indicate that from fiscal year 2009 to fiscal year 2013, 94 percent of bond proceeds--including both new bonds and refinancing--went to larger airports and 6 percent went to smaller airports. The total amounts of funding by source differ between larger and smaller airports. As shown in figure 5, larger airports are more dependent than are smaller airports on airport-generated net income and larger airports are less dependent than are smaller airports on AIP grants. In 2015, we estimated airports' planned capital-development costs for fiscal years 2015 through 2019 at $13 billion annually, which exceeded airports' average funding of $10 billion by roughly $3 billion in recent years ($2.7 billion in constant 2013 dollars). We have examined airport funding and planned development four times since 1998 and, as figure 6 shows, the difference between planned development and historical funding has never exceeded $3 billion. Note that the gap also tends to be proportionally greater for smaller airports. As we reported in 2015, airports have a number of options for addressing any shortfall in funding their capital development, including prioritizing capital development projects, financing projects, attempting to increase airport revenues, or entering into public-private partnerships. States and local communities can also choose to increase state grant funding. For individual airports, a common method for aligning funding with planned development is to prioritize projects. This generally entails decisions about which projects to move forward with and which to defer, but could also include scheduling a project in phases or reducing the scope of or cancelling a planned project. Another method that airports can use to align funding with capital development is to borrow money to fund a project. Most commonly, this consists of issuing a bond. However, as previously discussed, borrowing has traditionally been an option exercised by larger airports. To be able to finance projects, an airport's financial situation must be viewed positively enough to be able to borrow money at affordable rates in the bond market. Two of the airport financial- consulting firms with whom we spoke in 2015 noted that some airports are already leveraged to a large extent, and one bond-rating agency stated that taking on additional debt is always a risk. A third method for airports to fund capital development is to try to increase airport-generated net income. We have found in recent prior work that in addition to traditional commercial activities to generate non-aeronautical revenue, such as parking fees or terminal concessions, some airports have developed commercial activities with stakeholders from local jurisdictions and the private sector to help develop airport properties into retail, business, and leisure destinations. One approach to increasing funding for airports that has been advanced by airports and others is to increase or eliminate the current $4.50 cap on PFCs. However, any increase in PFCs is controversial and strongly opposed by airlines, which contend that airports currently have adequate access to funding for their development. We have previously found that increasing the PFC cap would significantly increase PFC collections available to airports. Specifically, in 2014, we developed an economic demand model to estimate the potential funding airports might generate using three different PFC amounts. The general approach of this analysis was to model airport collections and passenger traffic under various PFC cap levels. We modeled three different increases in the PFC cap amount, each starting in 2016: PFC cap of $6.47 (the 2016 equivalent of $4.50 indexed to the Consumer Price Index (CPI) starting in 2000 when the cap was first instituted); PFC cap of $8 based on the President's 2015 budget proposal; and PFC cap of $8.50 that would be indexed to inflation. Our analysis indicated that all three scenarios would significantly increase the potential amount of PFC collections in comparison to what would be available without a PFC increase, as shown in table 1. For example, we estimated that raising the PFC cap to $8.00 would result in an additional $2.6 billion in PFCs, an increase of 77 percent in PFC revenue in 2020. Because passenger traffic is highly concentrated at larger airports, PFC collections are similarly concentrated. Thus, larger airports would benefit most from a PFC increase. A hub level analysis of a PFC cap increase shows that large hub airports could receive nearly three-quarters of all PFCs, while large and medium hubs together could account for nearly 90 percent of total PFCs, similar to the current distribution. For example, under an $8 PFC, large hub airports could receive additional PFC revenues of $1.74 to $2.08 billion annually and medium hubs could receive additional PFC revenues of $372 to $435 million annually from 2016 to 2024. Small and non-hub airports could receive up to $212 million and $82 million in additional annual PFC revenues, respectively, from 2016 to 2024. While an increase in PFCs would mainly flow to the larger airports, smaller airports could also benefit from increased PFC collections. As previously noted, under current law, large and medium hubs' apportionment of AIP formula funds may be reduced, which in fiscal year 2014, resulted in a redistribution of approximately $553 million. The majority of this funding (87.5 percent) goes to the Small Airport Fund for redistribution among small airports. The remaining 12.5 percent became available as AIP discretionary funds, which FAA uses to award grants to eligible projects regardless of airport size. According to our model, while increasing the PFC cap could raise PFC revenue, it could decrease passenger demand. Such a decrease would also result in marginally slowing growth in revenues to the AATF. Assuming that the PFC increase is fully passed on to consumers and not absorbed through a reduced lower base in (before tax) fares, the higher cost of air travel could reduce passenger demand according to economic principles. Economic principles and past experience suggest that any increase in the price of a ticket--even if very small--will have an effect on some consumers' decisions on whether to take a trip. For example, an increase in the price by a few dollars may not affect the decision of a business flyer going for an important business meeting but could affect the decision of a family of four going on vacation. Under all three scenarios, AATF revenues, which totaled $14.3 billion in 2016 and are used to fund FAA activities, would likely continue to grow overall based on current projections of passenger growth; however, the modeled cap increases could reduce total AATF's revenues by roughly 1 percent because of reduced passenger demand. For example, under a $6.47 PFC, we estimated that AATF's revenues would total $105 million less in 2024 than they would total if the cap were not raised. For more than a decade, airlines and airports have hotly debated a PFC increase because it would give greater control over airport investment to airports. All else being equal, lower PFCs can provide airlines with more influence over airport infrastructure decisions and higher PFCs can provide airports more control over local capital-funding decisions, including the ability to decide how to apply PFC revenues to support capital projects and thus how those revenues might influence airline rates and charges. Generally, PFCs offer airports relative independence over investment decisions at their airports. While airports must notify and consult with the airlines on how they spend PFCs, as long as FAA approves, airlines cannot block these decisions. Airlines can choose to serve other airports, however, so airports still have an incentive to listen to airline concerns. Chairman Blunt, Ranking Member Cantwell, this concludes my statement for the record. For further information about this testimony, please contact Gerald L. Dillingham 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 statement. Key contributors to this testimony include Paul Aussendorf (Assistant Director), Amy Abramowitz, Dave Hooper, Malika Rice, Amy Suntoke, Melissa Swearingen, and Michelle Weathers. 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.

Roughly 3,300 airports in the United States are eligible for federal AIP grants from the FAA that can be used for certain types of projects, such as building runways and noise mitigation. To fund development, in addition to AIP grants, airports rely on locally generated revenues and federally authorized PFCs, which are added to the price of an airline ticket and have been capped at $4.50 per flight segment. The administration's call to boost spending on public infrastructure has renewed attention on the importance of maintaining and improving airport infrastructure. This testimony discusses: (1) the differences between estimates of airports' planned development costs, (2) the federal funding and other airport funding and revenues that may be available to defray development costs, and (3) the implications of increasing the cap on PFCs, among other objectives. This testimony is based on previous GAO reports issued from March 1998 through April 2015, with selected updates conducted through March 2017. To conduct these updates, GAO reviewed recent information on FAA's program activities and analyses outlined in FAA reports, and related airport industry estimates of infrastructure development costs. GAO also interviewed officials from FAA, and airport and airline trade associations. The Federal Aviation Administration's (FAA) estimate of the costs for planned capital development at airports over the next five years is about $32.5 billion, compared to the Airports Council International-North America's (ACI-NA) estimate of almost $100 billion, both for the period 2017-2021. The difference between these two estimates can be attributed to a number of factors, but most significantly to the types of projects included in the estimates. FAA's estimate is limited to projects that are eligible for Airport Improvement Program (AIP) grants that do not already have funding arranged, whereas ACI-NA's estimates include all projects regardless of AIP eligibility or whether funding is arranged. The figure below illustrates the disparity between the two estimates since 2005. Note that since 2015, FAA's estimate has decreased by $1 billion whereas ACI-NA's has increased by $24.4 billion. In addition to the AIP and state grants they receive, airports generate funds through airport-generated income and Passenger Facility Charges (PFC), among other sources. In 2015, GAO estimated that funding from these sources totaled an average of $10.3 billion annually (2013 dollars), $2.7 billion less than airports' planned development costs. Airports have a number of options for addressing any shortfall in funding their planned development costs, including prioritizing development projects, financing projects with long term debt, attempting to increase airport revenues, or entering into public-private partnerships. Increasing or eliminating the PFC cap would significantly increase PFC collections available to airports under three scenarios GAO modeled in prior work. However, according to GAO's model, an increase in the PFC could also marginally slow passenger growth and therefore the growth in tax revenues to the Airport and Airway Trust Fund (AATF), which is used to fund FAA programs. Such projected effects depend on key assumptions regarding the consumers' sensitivity to a PFC cap increase, whether the airlines decide to pass on the full increase to consumers, and the rate at which airports would adopt the increased PFC cap. Any increase in PFCs is strongly opposed by airlines which contend that an increase could reduce passenger demand.

OIOS was created in 1994 to assist the Secretary-General in fulfilling internal oversight responsibilities over UN resources and staff. The stated mission of OIOS is "to provide internal oversight for the United Nations that adds value to the organization through independent, professional, and timely internal audit, monitoring, inspection, evaluation, management consulting, and investigation activities and to be an agent of change that promotes responsible administration of resources, a culture of accountability and transparency, and improved program performance." OIOS is headed by an Under Secretary-General who is appointed by the Secretary-General--with the concurrence of the General Assembly--for a 5-year fixed term with no possibility of renewal. The Under Secretary- General may be removed by the Secretary-General only for cause and with the General Assembly's approval. OIOS's authority spans all UN activities under the Secretary-General. To carry out its responsibilities, OIOS is organized into four operating divisions: (1) Internal Audit Division I (New York); (2) Internal Audit Division II (Geneva); (3) Monitoring, Evaluation, and Consulting Division; and (4) Investigations Division. OIOS derives its funding from (1) regular budget resources, which are funds from assessed contributions from member states that cover normal, recurrent activities such as the core functions of the UN Secretariat; and (2) extrabudgetary resources, which come from the budgets for UN peacekeeping missions financed through assessments from member states, voluntary contributions from member states for a variety of specific projects and activities, and budgets for the voluntarily financed UN funds and programs. Management of the UN's rapidly growing spending on procurement involves several UN entities. The Department of Management controls the UN's procurement authority, and its 70-person UN Procurement Service develops UN procurement policies and procures items for UN headquarters. While the Procurement Service procures certain items for peacekeeping, about one-third of all UN procurement spending is managed by about 270 staff at the Department of Peacekeeping Operations' 19 widely dispersed field missions. These missions may not award contracts worth more than $200,000 without the approval of the Department of Management (based on advice from the Headquarters Committee on Contracts). UN procurement spending has more than tripled since 1997, peaking at $1.6 billion in 2005. Major items procured include air transportation services, freight forwarding and delivery services, motor vehicles and transportation equipment, and chemical and petroleum products. The sharp increase in UN procurement was due in part to a five- fold increase in the number of military personnel in peacekeeping missions. Peacekeeping expenditures have more than quadrupled since 1999, from $840 million to about $3.8 billion in 2005. Peacekeeping procurement accounted for 85 percent of all UN procurement in 2004. In September 2005, the UN World Summit issued an "outcome document," which addressed several management reform initiatives, including reforms for: ensuring ethical conduct; strengthening internal oversight and accountability; reviewing budgetary, financial, and human resources policies; and reviewing mandates. While the outcome document was endorsed by all UN member countries, there is considerable disagreement within the General Assembly over the process and implementation of the reforms. In December 2005, UN member states agreed to a $950 million spending cap on the UN's biennium budget for 2006-2007, pending progress on management reforms. These funds are likely to be spent by the middle of 2006, at which time the General Assembly will review progress on implementing reforms and decide whether to lift the cap and allow for further spending. The UN is vulnerable to fraud, waste, abuse, and mismanagement due to a range of weaknesses in existing oversight practices. The General Assembly mandate creating OIOS calls for it to be operationally independent. In addition, international auditing standards note that an internal oversight activity should have sufficient resources to effectively achieve its mandate. In practice, however, OIOS's independence is impaired by constraints that UN funding arrangements impose. In passing the resolution that established OIOS in August 1994, the General Assembly stated that the office shall exercise operational independence and that the Secretary-General, when preparing the budget proposal for OIOS, should take into account the independence of the office. The UN mandate for OIOS was followed by a Secretary-General's bulletin in September 1994 stating that OIOS discharge its responsibilities without any hindrance or need for prior clearance. In addition, the Institute of Internal Auditors' (IIA) standards for the professional practice of auditing, which OIOS and its counterparts in other UN organizations formally adopted in 2002, state that audit resources should be appropriate, sufficient, and effectively deployed. These standards also state that an internal audit activity should be free from interference and that internal auditors should avoid conflicts of interest. International auditing standards also state that financial regulations and the rules of an international institution should not restrict an audit organization from fulfilling its mandate. In addition to funding from the UN regular budget, OIOS receives extrabudgetary funding from 12 different revenue streams. Although the UN's regular budget and extrabudgetary funding percentages over the years have remained relatively stable, an increasing share of OIOS's budget is comprised of extrabudgetary resources (see fig. 1). OIOS's extrabudgetary funding has steadily increased over the past decade, from 30 percent in fiscal biennium 1996-1997 to 63 percent in fiscal biennium 2006-2007 (in nominal terms). The majority of OIOS's staff (about 69 percent) is funded with extrabudgetary resources. The growth in the office's budget is primarily due to extrabudgetary resources for audits and investigations of peacekeeping operations, including issues related to sexual exploitation and abuse. Total (in million) UN funding arrangements severely limit OIOS's flexibility to respond to changing circumstances and reallocate its resources among its multiple funding sources, OIOS locations worldwide, or among its operating divisions--Internal Audit Divisions I and II; the Investigations Division; and the Monitoring, Evaluation, and Consulting Division--to address changing priorities. In addition, the movement of staff positions or funds between regular and extrabudgetary resources is not allowed. For example, one section in the Internal Audit Division may have exhausted its regular budget travel funds, while another section in the same division may have travel funds available that are financed by extrabudgetary peacekeeping resources. However, OIOS would breach UN financial regulations and rules if it moved resources between the two budgets. According to OIOS officials, for the last 5 years, OIOS has consistently found it necessary to address very critical cases on an urgent basis. A recent example is the investigations of sexual exploitation and abuse in the Republic of Congo and other peacekeeping operations that identified serious cases of misconduct and the need for increased prevention and detection of such cases. However, the ability to redeploy resources quickly when such situations arise has been impeded by restrictions on the use of staff positions. OIOS is dependent on UN funds and programs and other UN entities for resources, access, and reimbursement for the services it provides. These relationships present a conflict of interest because OIOS has oversight authority over these entities, yet it must obtain their permission to examine their operations and receive payment for its services. OIOS negotiates the terms of work and payment for services with the manager of the program it intends to examine, and heads of these entities have the right to deny funding for oversight work proposed by OIOS. By denying OIOS funding, UN entities could avoid OIOS audits or investigations, and high-risk areas could potentially be excluded from timely examination. For example, the practice of allowing the heads of programs the right to deny funding to internal audit activities prevented OIOS from examining high-risk areas in the UN Oil for Food program, where billions of dollars were subsequently found to have been misused. In some cases, the managers of UN funds and programs have disputed the fees OIOS has charged after investigative services were rendered. For example, 40 percent of the $2 million billed by OIOS after it completed its work is currently in dispute, and since 2001, less than half of the entities have paid OIOS in full for the investigative services it has provided. According to OIOS officials, the office has no authority to enforce payment for services rendered, and there is no appeal process, no supporting administrative structure, and no adverse impact on an agency that does not pay or pays only a portion of the bill. OIOS formally adopted the IIA international standards for the professional practice of internal auditing in 2002. Since that time, OIOS has begun to develop and implement the key components of effective oversight. However, the office has yet to fully implement them. Moreover, shortcomings in meeting key components of international auditing standards can serve to undermine the office's effectiveness in carrying out its functions as the UN's main internal oversight body. Effective oversight demands reasonable adherence to professional auditing standards. OIOS has adopted a risk management framework to link the office's annual work plans to risk-based priorities, but it has not fully implemented this framework. OIOS began implementing a risk management framework in 2001 to enable the office to prioritize the allocation of resources to oversee those areas that have the greatest exposure to fraud, waste, and abuse. OIOS's risk management framework includes plans for organization- wide risk assessments to categorize and prioritize risks facing the organization; it also includes client-level risk assessments to identify and prioritize risk areas facing each entity for which OIOS has oversight authority. Although OIOS's framework includes plans to perform client- level risk assessments, as of April 2006, out of 25 entities that comprise major elements of its "oversight universe," only three risk assessments have been completed. As a result, OIOS officials cannot currently provide reasonable assurance that the entities they choose to examine are those that pose the highest risk, nor that their audit coverage of a client focuses on the areas of risk facing that client. OIOS officials told us they plan to assign risk areas more consistently to audits proposed in their annual work plan during the planning phase so that, by 2008, at least 50 percent of their work is based on a systematic risk assessment. Although OIOS's annual reports contain references to risks facing OIOS and the UN organization, the reports do not provide an overall assessment of the status of these risks or the consequence to the organization if the risks are not addressed. For instance, in February 2005, the Independent Inquiry Committee reported that many of the Oil for Food program's deficiencies, identified through OIOS audits, were not described in the OIOS annual reports submitted to the General Assembly. A senior OIOS official told us that the office does not have an annual report to assess risks and controls and that such an assessment does not belong in OIOS's annual report in its current form, which focuses largely on the activities of OIOS. The official agreed that OIOS should communicate to senior management on areas where the office has not been able to examine significant risk and control issues, but that the General Assembly would have to determine the appropriate vehicle for such a new reporting requirement. While OIOS officials have stated that the office does not have adequate resources, they do not have a mechanism in place to determine appropriate staffing levels to help justify budget requests, except for peacekeeping oversight services. For peacekeeping audit services, OIOS does have a metric--endorsed by the General Assembly--that provides one professional auditor for every $100 million in the annual peacekeeping budget. Although OIOS has succeeded in justifying increases for peacekeeping oversight services consistent with the large increase in the peacekeeping budget since 1994, it has been difficult to support staff increases in oversight areas that lack a comparable metric, according to OIOS officials. OIOS staff have opportunities for training and other professional development, but OIOS does not formally require or systematically track staff training to provide reasonable assurance that all staff are maintaining and acquiring professional skills. UN personnel records show that OIOS staff took a total of more than 400 training courses offered by the Office of Human Resources Management in 2005. Further, an OIOS official said that, since 2004, OIOS has subscribed to IIA's online training service that offers more than 100 courses applicable to auditors. Despite these professional development opportunities, OIOS does not formally require staff training, nor does it systematically track training to provide reasonable assurance that all staff are maintaining and acquiring professional skills. OIOS policy manuals list no minimum training requirement. OIOS officials said that, although they gather some information on their use of training funds for their annual training report to the UN Office of Human Resources Management, they do not maintain an officewide database to systematically track all training their staff has taken. UN funds are unnecessarily vulnerable to fraud, waste, abuse, and mismanagement because of weaknesses in the UN's control environment for procurement. Specifically, the UN lacks an effective organizational structure for managing procurement, has not demonstrated a commitment to improving its professional procurement workforce, and has failed to adopt specific ethics guidance for procurement officials. The UN has not established a single organizational entity or mechanism capable of comprehensively managing procurement. As a result, it is unclear which department is accountable for addressing problems in the UN's field procurement process. While the Department of Management is ultimately responsible for all UN procurement, neither it nor the UN Procurement Service has the organizational authority to supervise peacekeeping field procurement staff to provide reasonable assurance that they comply with UN regulations. Procurement field staff, including the chief procurement officers, instead report to the Peacekeeping Department at headquarters through each mission's chief administrative officer. Although the Department of Management has delegated authority for field procurement of goods and services to the Peacekeeping Department, we found that the Peacekeeping Department lacks the expertise, procedures, and capabilities needed to provide reasonable assurance that its field procurement staff are complying with UN regulations. The UN has not demonstrated a commitment to improving its professional procurement staff in the form of training, a career development path, and other key human capital practices critical to attracting, developing, and retaining a qualified professional workforce. Due to significant control weaknesses in the UN's procurement process, the UN has relied disproportionately on the actions of its staff to safeguard its resources. Given this reliance on staff and their substantial fiduciary responsibilities, management's commitment to maintaining a competent, ethical procurement workforce is a particularly critical element of the UN's internal control environment. Recent studies indicate that Procurement Service staff and peacekeeping procurement staff lack knowledge of UN procurement policies. Moreover, most procurement staff lack professional certifications attesting to their procurement education, training, and experience. The UN has not established requirements for headquarters and peacekeeping staff to obtain continuous training, resulting in inconsistent levels of training across the procurement workforce. More than half of the procurement chiefs told us that they had received no procurement training over the last year and that their training opportunities and resources are inadequate. All of them said that their staff would benefit from additional training. Furthermore, UN officials acknowledged that the UN has not committed sufficient resources to a comprehensive training and certification program for its procurement staff. In addition, the UN has not established a career path for professional advancement for procurement staff, which could encourage staff to undertake progressive training and work experiences. The UN has been considering the development of specific ethics guidance for procurement officers for almost a decade, in response to General Assembly directives dating back to 1998. While the Procurement Service has drafted such guidance, the UN has made only limited progress towards adopting it. Such guidance would include a declaration of ethics responsibilities for procurement staff and a code of conduct for vendors. We found weaknesses in key UN procurement processes or control activities. These activities consist of processes that are intended to provide reasonable assurance that management's directives are followed and include reviews of high-dollar-value contracts, bid protest procedures, and vendor rosters. The Chairman and members of the Headquarters Committee on Contracts stated that the committee does not have the resources to keep up with its expanding workload. The number of contracts reviewed by the committee has increased by almost 60 percent since 2003. The committee members stated that the committee's increasing workload was the result of the growth of UN peacekeeping operations, the complexity of many new contracts, and increased scrutiny of proposals in response to recent UN procurement scandals. Concerns regarding the committee's structure and workload have led OIOS to conclude that the committee cannot properly review contract proposals. Without an effective contract review process, the UN cannot provide reasonable assurance that high-value contracts are undertaken in accordance with UN rules and regulations. The committee has requested that its support staff be increased from four to seven, and its chairman has stated that raising the threshold for committee review would reduce its workload. The UN has not established an independent process to consider vendor protests, despite the 1994 recommendation of a high-level panel of international procurement experts that it do so as soon as possible. An independent bid protest process is a widely endorsed control mechanism that permits vendors to file complaints with an office or official who is independent of the procurement process. Establishment of such a process could provide reasonable assurance that vendors are treated fairly when bidding and would also help alert senior UN management to situations involving questions about UN compliance. In 1994, the UN General Assembly recognized the advantages of an independent bid protest process. Several nations, including the United States, provide vendors with an independent process to handle complaints. The UN has not updated its procurement manual since January 2004 to reflect current UN procurement policy. As a result, UN procurement staff may not be aware of changes to UN procurement procedures that have been adopted over the past 2 years. Also missing from the procurement manual is a section regarding procurement for construction. In June 2005, a UN consultant recommended that the UN develop separate guidelines in the manual for the planning and execution of construction projects. These guidelines could be useful in planning the UN's future renovation of its headquarters building. A Procurement Service official who helped revise the manual in 2004 stated that the Procurement Service has been unable to allocate resources needed to update the manual since that time. The UN does not consistently implement its process for helping to ensure that it is conducting business with qualified vendors. As a result, the UN may be vulnerable to favoring certain vendors or dealing with unqualified vendors. The UN has long had difficulties in maintaining effective rosters of qualified vendors. In 1994, a high-level group of international procurement experts concluded that the UN's vendor roster was outdated, inaccurate, and inconsistent across all locations. In 2003, an OIOS report found that the Procurement Service's roster contained questionable vendors. In 2005, OIOS concluded that the roster was not fully reliable for identifying qualified vendors that could bid on contracts. While the Procurement Service became a partner in an interagency procurement vendor roster in 2004 to address these concerns, OIOS has found that many vendors that have applied through the interagency procurement vendor roster have not submitted additional documents requested by the Procurement Service to become accredited vendors. In addition, most Peacekeeping Department field procurement officials with whom we spoke stated that they prefer to use their own locally developed rosters instead of the interagency vendor roster. Some field mission procurement staff also stated that they were unable to comply with Procurement Service regulations for their vendor rosters due to the lack of reliable vendor information in underdeveloped countries. OIOS reported in 2006 that peacekeeping operations were vulnerable to substantial abuse in procurement because of inadequate or irregular registration of vendors, insufficient control over vendor qualifications, and dependence on a limited number of vendors. To conduct our study of UN oversight, we reviewed relevant UN and OIOS reports, manuals, and numerous program documents, as well as international auditing standards such as those of the IIA and the International Organization of Supreme Auditing Institutions (INTOSAI). The IIA standards apply to internal audit activities--not to investigations, monitoring, evaluation, and inspection activities. However, we applied these standards OIOS-wide, as appropriate, in the absence of international standards for non-audit oversight activities. We met with senior Department of State (State) officials in Washington, D.C., and senior officials with the U.S. Missions to the UN in New York, Vienna, and Geneva. At these locations, we also met with the UN Office of Internal Oversight Services management officials and staff; representatives of Secretariat departments and offices, as well as the UN funds, programs, and specialized agencies; and the UN external auditors--the Board of Auditors (in New York) and the Joint Inspection Unit (in Geneva). We reviewed relevant OIOS program documents, manuals, and reports. To assess the reliability of OIOS's funding and staffing data, we reviewed the office's budget documents and discussed the data with relevant officials. We determined the data were sufficiently reliable for the purposes of this testimony. To assess internal controls in the UN procurement process, we used an internal control framework that is widely accepted in the international audit community and has been adopted by leading accountability organizations. We assessed the UN's control environment for procurement, as well as its control activities, risk assessment process, procurement information processes, and monitoring systems. In doing so, we reviewed documents and information prepared by OIOS, the UN Board of Auditors, the UN Joint Inspection Unit, two consulting firms, the UN Department of Management's Procurement Service, the UN Department of Peacekeeping Operations, and State. We interviewed UN and State officials and conducted structured interviews with the principal procurement officers at each of 19 UN field missions. Although OIOS has a mandate establishing it as an independent oversight entity--and OIOS does possess many characteristics consistent with independence--the office does not have the budgetary independence it requires to carry out its responsibilities effectively. In addition, OIOS's shortcomings in meeting key components of international auditing standards can serve to undermine the office's effectiveness in carrying out its functions as the UN's main internal oversight body. Effective oversight demands reasonable budgetary independence, sufficient resources, and adherence to professional auditing standards. OIOS is now at a critical point, particularly given the initiatives to strengthen UN oversight launched as a result of the UN World Summit in the fall of 2005. In moving forward, the degree to which the UN and OIOS embrace international auditing standards and practices will demonstrate their commitment to addressing the monumental management and oversight tasks that lie ahead. Failure to address these long-standing concerns would diminish the efficacy and impact of other management reforms to strengthen oversight at the UN. Long-standing weaknesses in the UN's internal controls over procurement have left UN procurement funds highly vulnerable to fraud, waste, abuse, and mismanagement. Many of these weaknesses have been known and documented by outside experts and the UN's own auditors for more than a decade. Sustained leadership at the UN will be needed to correct these weaknesses and establish a procurement system capable of fully supporting the UN's expanding needs. We recommend that the Secretary of State and the Permanent Representative of the United States to the UN work with member states to: support budgetary independence for OIOS, and support OIOS's efforts to more closely adhere to international auditing standards; and encourage the UN to establish clear lines of authority, enhance training, adopt ethics guidance, address problems facing its principal contract- review committee, establish an independent bid protest mechanism, and implement other steps to improve UN procurement priorities. In commenting on the official draft of our report on UN internal oversight, OIOS and State agreed with our overall conclusions and recommendations. OIOS stated that observations made in our report were consistent with OIOS's internal assessments and external peer reviews. State fully agreed with GAO's finding that UN member states need to ensure that OIOS has budgetary independence. However, State does not believe that multiple funding sources have impeded OIOS's budgetary flexibility. We found that current UN financial regulations and rules are very restrictive, severely limiting OIOS's ability to respond to changing circumstances and to reallocate funds to emerging or high priority areas when they arise. In commenting on the official draft of our report on UN Procurement, the Department of State stated that it welcomed our report and endorsed its recommendations. The UN did not provide us with written comments. This concludes my testimony. I would be pleased to take your questions. Should you have any questions about this testimony, please contact Director Thomas Melito, (202) 512-9601 or [email protected]. Other major contributors to this testimony were Phyllis Anderson, Assistant Director; Joy Labez, Pierre Toureille, Jeffrey Baldwin-Bott, Joseph Carney, Kristy Kennedy, Clarette Kim, and Barbara Shields.

The United States has strongly advocated that the United Nations (UN) reform its management practices to mitigate various program and financial risks. The findings of the Independent Inquiry Committee into the Oil for Food Program have renewed concerns about UN oversight, and the 2005 UN World Summit proposed actions to improve the UN's Office of Internal Oversight Services (OIOS). Furthermore, over the past decade, as UN procurement more than tripled to $1.6 billion in response to expanding UN peacekeeping operations, experts have called on the UN to correct procurement process deficiencies. We examined (1) whether UN funding arrangements for OIOS ensure independent oversight; (2) the consistency of OIOS's practices with key auditing standards; and (3) the control environment and processes for procurement. The UN is vulnerable to fraud, waste, abuse, and mismanagement due to a range of weaknesses in existing management and oversight practices. In particular, current funding arrangements adversely affect OIOS's budgetary independence and compromise its ability to investigate high-risk areas. Also, weaknesses in the control environment and UN procurement processes leave UN funds vulnerable to fraud, waste, and abuse. UN funding arrangements constrain OIOS's ability to operate independently as mandated by the General Assembly and required by international auditing standards OIOS has adopted. First, while OIOS is funded by a regular budget and 12 other revenue streams, UN financial rules severely limit OIOS's ability to respond to changing circumstances and reallocate resources among revenue streams, locations, and operating divisions. Thus, OIOS cannot always direct resources to high-risk areas that may emerge after its budget is approved. Second, OIOS depends on the resources of the funds, programs, and other entities it audits. The managers of these programs can deny OIOS permission to perform work or not pay OIOS for services. UN entities could thus avoid OIOS audits or investigations, and high-risk areas can be and have been excluded from timely examination. OIOS has begun to implement key measures for effective oversight, but some of its practices fall short of the applicable international auditing standards it has adopted. OIOS develops an annual work plan, but the risk management framework on which the work plans are based is not fully implemented. Moreover, OIOS annual reports do not assess risk and control issues facing the UN organization, or the consequences if these are not addressed. OIOS officials report the office does not have adequate resources, but they also lack a mechanism to determine appropriate staffing levels. Furthermore, OIOS has no mandatory training curriculum for staff. UN funds are vulnerable to fraud, waste, abuse, and mismanagement because of weaknesses in the UN's control environment for procurement, as well as in key procurement processes. The UN lacks an effective organizational structure for managing procurement, has not demonstrated a commitment to improving its procurement workforce, and has not adopted specific ethics guidance. While the UN Department of Management is responsible for UN procurement, field procurement staff are supervised by the UN Department of Peacekeeping Operations, which lacks the expertise and capacity to manage field procurement. Also, the UN has not established procurement training requirements or a career path, and has yet to adopt new ethics guidance for procurement staff, despite long-standing General Assembly mandates. In addition, the UN has not established an independent process to consider vendor protests despite a 1994 recommendation by a high-level panel to do so as soon as possible. Further, the UN does not consistently implement its process for helping to ensure it conducts business with qualified vendors.

Intellectual property is an important component of the U.S. economy, and the United States is an acknowledged global leader in its creation. However, the legal protection of intellectual property varies greatly around the world, and several countries are havens for the production of counterfeit and pirated goods. The State Department has cited estimates that counterfeit goods represent about 7 percent of annual global trade, but we would note that it is difficult to reliably measure what is fundamentally a criminal activity. Industry groups suggest, however, that counterfeiting and piracy are on the rise and that a broader range of products, from auto parts to razor blades, and from vital medicines to infant formula, are subject to counterfeit production. Counterfeit products raise serious public health and safety concerns, and the annual losses that companies face from IP violations are substantial. Eight federal entities, the Federal Bureau of Investigation (FBI), and the U.S. Patent and Trademark Office (USPTO) undertake the primary U.S. government activities to protect and enforce U.S. IP rights overseas. These eight entities are: Departments of Commerce, State, Justice, and Homeland Security; USTR; the Copyright Office; the U.S. Agency for International Development; and the U.S. International Trade Commission. They undertake a wide range of activities that fall under three categories: policy initiatives, training and technical assistance, and law enforcement. U.S. policy initiatives to increase IP protection around the world are primarily led by USTR, in coordination with the Departments of State, Commerce, USPTO, and the Copyright Office, among other agencies. These policy initiatives are wide ranging and include reviewing IP protection abroad, using trade preference programs for developing countries, and negotiating agreements that address intellectual property. Key activities to develop and promote enhanced IP protection in foreign countries through training or technical assistance are undertaken by the Departments of Commerce, Homeland Security, Justice, and State; the FBI; USPTO; the Copyright Office; and the U.S. Agency for International Development. A smaller number of agencies are involved in enforcing U.S. IP laws. Working in an environment where counterterrorism is the central priority, the FBI and the Departments of Justice and Homeland Security take actions that include engaging in multi-country investigations involving intellectual property violations and seizing goods that violate IP rights at U.S. ports of entry. Finally, the U.S. International Trade Commission has an adjudicative role in enforcement activities involving patents and trademarks. STOP is the most recent of several interagency IP coordination mechanisms that address IP policy initiatives, training and technical assistance, and law enforcement. Some of these have been effective, particularly the Special 301 process that identifies inadequate IP protection in other countries and the Intellectual Property Rights (IPR) Training Coordination Group. However, U.S. law enforcement coordination efforts through NIPLECC have had difficulties. STOP was, in part, a response to the need for further attention to IP enforcement. Our September 2004 report found that coordination efforts through the Special 301 process and the IPR Training Coordination Group have generally been considered to be effective by U.S. government and industry officials. "Special 301," which refers to certain provisions of the Trade Act of 1974, as amended, requires USTR to annually identify foreign countries that deny adequate and effective protection of IP rights or fair and equitable market access for U.S. persons who rely on IP protection. USTR identifies these countries with substantial assistance from industry and U.S. agencies and then publishes the results of its reviews in an annual report. Once a list of such countries has been determined, the USTR, in coordination with other agencies, decides which, if any, of these countries should be designated as Priority Foreign Countries, which may result in an investigation and subsequent actions. As our report notes, according to government and industry officials, the Special 301 process has operated effectively in reviewing IP rights issues overseas. These agency officials told us that the process is one of the best tools for interagency coordination in the government, and coordination during the review is frequent and effective. The IPR Training Coordination Group is a voluntary, working-level group comprised of representatives of U.S. agencies and industry associations involved in training and technical assistance efforts overseas for foreign officials. Meetings are held approximately every 4 to 6 weeks and are well attended by government and private sector representatives. The State Department leads the group, and meetings have included discussions on training "best practices," responding to country requests for assistance, and improving IPR awareness among embassy staff. According to several agency and private sector participants, the group is a useful mechanism that keeps participants informed of the IP activities of other agencies or associations and provides a forum for coordination. NIPLECC was created by the Congress in 1999 to coordinate domestic and international intellectual property law enforcement among U.S. federal and foreign entities. NIPLECC members are from five agencies and consist of: (1) Commerce's Undersecretary for Intellectual Property and Director of the United States Patent and Trademark Office; (2) Commerce's Undersecretary of International Trade; (3) the Department of Justice's Assistant Attorney General, Criminal Division; (4) the Department of State's Undersecretary for Economic and Agricultural Affairs; (5) the Deputy United States Trade Representative; and (6) the Department of Homeland Security's Commissioner of U.S. Customs and Border Protection. Representatives from the Department of Justice and USPTO are co-chairs of NIPLECC. Coordination efforts involving IP law enforcement through NIPLECC have not been as successful as other efforts. In our September 2004 report, we stated that NIPLECC had struggled to define its purpose and had little discernible impact, according to interviews with industry officials and officials from its member agencies, and as evidenced by NIPLECC's own annual reports. Indeed, officials from more than half of the member agencies offered criticisms of NIPLECC, remarking that it was unfocused, ineffective, and "unwieldy." We also noted that if the Congress wishes to maintain NIPLECC and take action to increase its effectiveness, it should to consider reviewing the council's authority, operating structure, membership, and mission. In the fiscal year 2005 Consolidated Appropriations Act, the Congress provided $2 million for NIPLECC expenses, to remain available through fiscal year 2006. The act also created the position of the Coordinator for International Intellectual Property Enforcement, appointed by the President, to head NIPLECC. The NIPLECC co-chairs are to report to the Coordinator. In July 2005, Commerce Secretary Gutierrez announced the presidential appointment filling the IP Coordinator position. Since then, NIPLECC has added an assistant, a policy analyst, part time legislative and press assistants, and detailees from USPTO and CBP. Since the Consolidation Appropriations Act, NIPLECC has held two formal meetings but has not issued an annual report since 2004. In October 2004 the President launched STOP, an initiative to target cross- border trade in tangible goods and strengthen U.S. government and industry IP enforcement actions. The initiative is led by the White House under the auspices of the National Security Council and involves collaboration among six federal agencies: the Departments of Commerce, Homeland Security, Justice, and State; USTR; and the Food and Drug Administration. STOP has five general objectives: (1) empower American innovators to better protect their rights at home and abroad, (2) increase efforts to seize counterfeit goods at our borders, (3) pursue criminal enterprises involved in piracy and counterfeiting, (4) work closely and creatively with U.S. industry, and (5) aggressively engage our trading partners to join U.S. efforts. The IP Coordinator is also serving as the coordinator for STOP. Both agency officials and industry representatives with whom we spoke consistently praised the IP Coordinator, saying that he was effectively addressing their concerns by speaking at seminars, communicating with their members, and heading U.S. delegations overseas. STOP has energized U.S. efforts to protect and enforce IP and has initiated some new efforts, however its long-term role is uncertain. One area where STOP has increased efforts is outreach to foreign governments. In addition, STOP has focused attention on helping small- and medium-sized enterprises to better protect their IP rights. Industry representatives generally had positive views on STOP, although some thought that STOP was a compilation of new and on-going U.S. agency activities that would have occurred anyway. STOP's lack of permanent status as a presidential initiative and lack of accountability mechanisms could limit its long-term impact. Agency officials participating in STOP cited several advantages to the initiative. They said that STOP energized their efforts to protect and enforce IP by giving them the opportunity to share ideas and support common goals. Officials said that STOP had brought increased attention to IP issues within their agencies and the private sector as well as abroad, and attributed that to the fact that STOP came out of the White House, thereby lending it more authority and influence. Another agency official pointed out that IP was now on the President's agenda at major summits such as the G-8 and the recent EU-U.S. summits. STOP has initiated some new efforts, including a coordinated U.S. government outreach to foreign governments that share IP concerns and enforcement capacities similar to the United States. For example, the United States and the European Union (EU) have formed the U.S.-EU Working Group on Intellectual Property Rights, and in June 2006, the United States and European Union announced an EU-U.S. Action Strategy for Enforcement of IP Rights meant to strengthen cooperation in border enforcement and encourage third countries to enforce and combat counterfeiting and piracy. One particular emphasis of STOP has been to help small- and medium- sized enterprises (SMEs) protect their IP in the United States and abroad through various education and outreach efforts. In 2002, we reported that SMEs faced a broad range of impediments when seeking to patent their inventions abroad, including cost considerations and limited knowledge about foreign patent laws, standards, and procedures. We recommended that the Small Business Administration (SBA) and the USPTO work together to make a range of foreign patent information available to SMEs. Within the last year, an SBA official told us that SBA began working with STOP agencies to distribute information through its networks and recently linked SBA's website to the STOP website, making information about U.S., foreign, and international laws and procedures accessible to its clients. Many industry representatives with whom we spoke viewed STOP positively, maintaining that STOP had increased the visibility of IP issues. For example, one industry representative noted a coordinated outreach to foreign governments that provided a more collaborative alternative to the Section 301 process, whose punitive aspects countries sometimes resented. Another indicated that his association now coordinates training with CBP that is specific to his industry as a result of contacts made through STOP. In addition, most private sector members with whom we spoke agreed that STOP was an effective communication mechanism between businesses and U.S. federal agencies on IP issues, particularly through the Coalition Against Counterfeiting and Piracy (CACP), a cross- industry group created by a joint initiative between the Chamber of Commerce and the National Association of Manufacturers. Private sector officials have stated that CACP meetings are their primary mechanism of interfacing with agency officials representing STOP. There were some industry representatives who questioned whether STOP had added value beyond highlighting U.S. IP enforcement activities. Some considered STOP to be mainly a compilation of ongoing U.S. IP activities that pre-dated STOP. For example, Operation Fast Link and a case involving counterfeit Viagra tablets manufactured in China, both listed as STOP accomplishments, began before STOP was created. In addition, some industry representatives believed that new activities initiated under STOP would have likely occurred without STOP. As a presidential initiative, STOP was not created by statute; has no formal structure, funding, or staff; and appears to have no permanence beyond the current administration. NIPLECC, on the other hand, is a statutory initiative, receives funds, and is subject to congressional oversight. Recently, the lines between NIPLECC and STOP have blurred, possibly lending STOP some structure and more accountability. For example, as mentioned before, NIPLECC's IP Coordinator is also the focal point for STOP. In addition, NIPLECC recently adopted STOP as the strategy it is required to promulgate under the Consolidated Appropriations Act of 2005. This legislation calls for NIPLECC to establish policies, objectives, and priorities concerning international intellectual property protection and intellectual property law enforcement; promulgate a strategy for protecting American intellectual property overseas; and coordinate and oversee implementation of these requirements. However, the nature of the relationship between STOP and NIPLECC is not clear. Although the IP Coordinator has recently reported in congressional hearings that NIPLECC adopted STOP as its strategy, there have been no formal announcements to the press, industry associations, or agency officials responsible for carrying out STOP activities. In addition, STOP documents do not refer to NIPLECC. Our meetings with agency and industry officials indicated that they are unclear about the relationship between STOP and NIPLECC. The absence of a clearly established relationship makes it difficult to hold NIPLECC accountable for monitoring and assessing the progress of IP enforcement under STOP. We believe that accountability mechanisms are important to oversight of federal agency efforts and can contribute to better performance on issues such as IP protection. One of STOP's five goals is to increase federal efforts to seize counterfeit goods at the border, but work we are conducting for this Subcommittee illustrates the kind of challenges that STOP faces in achieving its goals. CBP and ICE are responsible for border enforcement efforts, but their top priority is national security. CBP has taken several steps since fiscal year 2003, when it made IP matters a priority trade issue, to update and improve its border enforcement efforts. While CBP seizures of IP- infringing goods have grown steadily since fiscal year 2002, the total estimated value of seizures during that time generally did not exhibit similar growth. Additionally, some steps that CBP is taking to improve IP enforcement are works in progress whose impact on this STOP objective is uncertain. CBP's ability to effectively enforce IP rights at the border is also challenged by limited resources for such enforcement and by long- standing weaknesses in its ability to track the physical movement of goods entering the United States using the in-bond system. STOP documents cite increases in IP-related seizures as a positive indicator of its efforts to stop counterfeit goods at the border. The overall task of assessing whether particular imports are authentic has become more difficult as trade volume and counterfeit quality increase. The number of IP-related seizures has grown steadily, with CBP and ICE together making about 5,800 seizures in fiscal year 2002 and just over 8,000 seizures in fiscal year 2005. However, there is no corresponding trend in the estimated value of such seizures. The estimated value of goods seized in fiscal years 2002 and 2003 was $99 million and $94 million, respectively. This figure jumped to a peak of about $139 million in fiscal year 2004, but dropped back to the former level, about $93 million, in fiscal year 2005. According to CBP officials, the agency's goal is to focus its resources in part on high-value seizures, but a large percentage of annual seizure activity does not result in a significant seizure value. For example, nearly 75 percent of fiscal year 2005 seizures were small-scale shipments made at mail and express consignment facilities (facilities operated by companies that offer express commercial services to move mail and cargo, such as the United Parcel Service) or from individuals traveling by air, vehicle, or on foot. These seizures represented about 14 percent of total estimated seizure value in that year. Conversely, about 14 percent of fiscal year 2005 seizures involved large-scale shipments (i.e., containers) and accounted for about 55 percent of that year's estimated seizure value. The number of seizures made on goods emanating from China has risen from about 49 percent of the estimated domestic value of all IP seizures in fiscal year 2002 to about 69 percent in fiscal year 2005. While CBP seizes goods across a range of product sectors, in recent years, seizures tend to be concentrated in particular goods, such as apparel, handbags, cigarettes, and consumer electronics. CBP also seeks to increase seizures of goods involving public health and safety risks, and its data shows that the estimated domestic value of seized goods involving certain health and safety risks, specifically pharmaceuticals, electrical articles, and batteries, increased during fiscal years 2002-2005. However, seizures in these and certain other health and safety categories represented less than 10 percent of the total estimated domestic value of seizures in fiscal year 2005, and seizures of other potentially dangerous goods, such as counterfeit auto parts, remain relatively limited. For example, CBP estimated in a letter to an automotive industry trade association that it made 14 seizures in fiscal years 2003-2005 of certain automotive parts. A representative from another automotive industry trade association noted that CBP's ability to make seizures in this area depends on its receiving quality information about counterfeiters from companies. In various STOP documents, CBP cites steps it has taken to improve IP enforcement, but many of these are works in progress whose impact and effectiveness are undetermined. CBP identified IP matters as a priority trade issue in fiscal year 2003 and developed an agency-wide strategy for IP enforcement. The strategy addresses several components of IP enforcement, such as targeting (identifying high risk shipments), international coordination, communication to employees, and industry outreach. A CBP official who oversees the IP strategy told us that CBP seeks to perform IP enforcement more efficiently, and the strategy notes the importance of conducting IP enforcement while minimizing the burden on front line resources whose priority is national security. Several elements of the strategy were specifically designated as activities to support STOP. CBP's key STOP-related activity is the creation of a statistical computer model that is designed to identify container shipments that are at higher risk of involving IP rights violations. To develop the model, CBP examined elements of past seizures and container examinations and identified certain factors that were significant characteristics of IP-infringing imports and that could be used to identify future IP rights violations. CBP piloted this model on a nation-wide basis for about one month in February 2005, but the pilot revealed several issues that need to be addressed before the model can be implemented. CBP plans to pilot the model again for up to 3 months this summer at two land border ports and one seaport. CBP will use the results of the second pilot to further evaluate the viability of the model. Another STOP-related activity for CBP is the use of post-entry audits to assist with IP enforcement. CBP officials said using such audits for this purpose is a new approach that is designed to assess whether companies have adequate internal controls to prevent them from importing goods that infringe IP rights. Initiated in fiscal year 2005, these audits are a novel approach that is likely to work best with established importers, but they may be less effective for dealing with importers that are engaged in criminal activity and deliberately take steps to evade federal scrutiny. CBP selected 40 known and potential IP-infringing companies to audit in fiscal years 2005-2006, and by July 2006 had completed 17 of these audits. In three audits, CBP found that the companies possessed or had already sold infringing goods that were not seized at the border. In two of these cases, CBP imposed penalties on the companies totaling about $4.6 million. In the third case, the audit closed in September 2005, but the decision on whether to impose penalties is still pending in CBP. A CBP official said that some less significant IP-infringing activity was found in several other audits, but CBP chose not to impose penalties in these cases. CBP also found that internal controls to prevent IP rights violations were lacking or inadequate for most of the 17 companies, and has worked with them to improve these controls. A third STOP activity for CBP is the development of a system that allows companies to electronically record their IP rights through CBP's website. While trademark and copyright protection is obtained from USPTO and the Copyright Office, respectively, these rights must be separately recorded with CBP, for a fee. Recording with CBP provides CBP officials with information about the scope, ownership, and representation of protected IP rights being recorded. Although CBP officials have said recordation is important because it helps CBP effect legally defensible border enforcement, some companies fail to record their rights with CBP, either because they are unaware of the recordation requirement or because they choose not to. The electronic recordation system, implemented in December 2005, is designed to streamline the process; reduce processing times; and, ideally, increase the number of recordations. A link to the recordation system has been established on USPTO's website, and a link from the Copyright Office is planned. CBP expects that most paper-based applications will eventually be eliminated. While these are important steps, we have not yet evaluated the impact of the new recordation system. Several industry representatives have cited other concerns about recordation generally, such as long recordation processing times and the effective lack of border protection caused by the inability to record copyrights with CBP before such rights are issued by the Copyright Office. For example, one private sector representative said that during the 6 to 9 months it takes to process a copyright, pirated master CDs may be allowed to enter the United States because the rights holder has not yet been able to record the title with CBP. CBP and ICE priorities and resource allocations changed dramatically after September 2001, and our initial work indicates that some headquarters and field resources for IP enforcement have declined since then. As you indicated in your statement at the June 2005 IP hearing, the ultimate success of STOP, and of IP enforcement generally, depends on whether agencies are able to recruit, train, and retain the necessary workforce to meet their objectives. You also noted that prior hearings before this Subcommittee revealed that human capital issues were hindering federal enforcement of trade laws. At several border locations we visited, we found that resources for trade and IP enforcement are thinly spread, certain IP enforcement positions had been reduced or eliminated, and one location faced challenges in filling vacant CBP Officer positions. At CBP port operations, employees in two job categories are responsible for IP enforcement -- CBP Officers and Import Specialists. CBP Officers are responsible for targeting incoming shipments for security and trade purposes and conducting physical examinations of suspect goods. Import Specialists are responsible for assessing the actual value and composition of goods for duty and quota purposes and for making initial determinations of whether goods are believed to be in violation of U.S. IP rights laws. While CBP Officers are typically assigned to a single port of entry, Import Specialists assigned to a large port may be responsible for covering other smaller ports that report to the larger port. ICE field office agents investigate IP infringement cases. We have not yet gathered comprehensive data on the number of CBP Officers, Import Specialists, and ICE agents devoted to IP enforcement, but we found reduced resources, thinly spread, at several border locations that we have visited. At the Port of Los Angeles/Long Beach, the largest U.S. seaport by volume, two trade enforcement teams have been disbanded and their CBP Officers shifted to national security details. Port officials said that since the late 1990s, the number of CBP Officers performing trade-related examinations has dropped by about 43 percent, and the number of Import Specialists on an IP-devoted enforcement team has dropped by half. The Port of San Francisco services multiple port facilities, including two major seaports, two major airports, and seven smaller port locations. CBP Officers at the San Francisco air cargo facility said that 4 out of 13 CBP Officers are assigned to inspect cargo for trade violations. These 4 officers share coverage of a 7-day work week, such that about 2 CBP Officers perform trade inspections on any day. In 2001, there were about 12 CPB Officers assigned to trade inspections. San Francisco's Director of Field Operations told us that filling 33 vacancies within his approximately 450 CBP Officer positions is a high priority. Currently, there are 3 Import Specialists, down from 6 in 2003, that focus primarily on IP enforcement and service the seaports, airports, and smaller ports within the Port of San Francisco's area. ICE also performs IP enforcement and houses the National IPR Coordination Center (called the IPR Center) - a joint effort between ICE and the FBI intended to serve as a focal point for the collection of intelligence involving, among other things, copyright and trademark infringement. Currently, 9 of the 16 authorized ICE positions are filled and a 10th is slated to be filled. Neither of the 2 CBP authorized positions are filled. Additionally, in January 2006, 7 of 8 FBI positions were empty and the 8th position was filled by rotating FBI staff. In July 2006, an FBI official told us that no FBI staff were working at the IPR center because of limited physical space and pressing FBI casework, but that some staff would return in September 2006. The ICE field office in Los Angeles, one of the largest field offices in the country, had two commercial fraud enforcement teams before the formation of the Department of Homeland Security, but now has one. The number of agents working on commercial fraud enforcement cases, which include IP enforcement, dropped from about 14 to 9 since 2003. However, an official from this office said resource changes have not affected how the team addresses IP enforcement nor caused it to turn away any IP enforcement cases. The in-bond system has been identified by CBP and ICE officials as a mechanism that has been used to circumvent import and IP laws and regulations, presenting an enforcement challenge. A significant portion of goods received at U.S. ports do not immediately enter U.S. commerce but are instead shipped "in-bond" for official entry at other U.S. ports or are transported through the United States for export. When goods are shipped in-bond, they are subject to national security inspections at the port of arrival, but are exempt from U.S. duties or quotas and formal trade inspections until they reach the final port where they will officially enter U.S. commerce. For many years, GAO and others have noted weaknesses in the in-bond system used to monitor shipments between ports. CBP and ICE officials recognize that the in-bond system has been used by certain importers to bring counterfeit and pirated goods into the United States by avoiding official entry at the port of arrival and then diverting the goods afterwards. Some CBP officials said the in-bond system may contribute to imports of counterfeits by allowing some importers to "port shop" for ports that are less likely to identify IP violations. Indeed, CBP has made sizable IP-related seizures from the in-bond system, including 220 seizures valued at about $41 million in fiscal year 2004, representing nearly 30 percent of the total estimated domestic value of IP seizures in that year. In fiscal year 2005, there were 126 seizures valued at about $14 million, representing about 15 percent of estimated domestic value of IP seizures that year. We have found weaknesses in the past with the in-bond system and are currently conducting follow-up work to determine whether these weaknesses have been corrected. Our audit is still underway, but work to date indicates that some previously identified weaknesses in tracking and monitoring in-bonds remain. For example, in January 2004 GAO reported that CBP collects significantly less information on in-bond shipment than for regular entries and that this lack of information makes tracking in- bond shipments more difficult. In our recent work, CBP staff continue to observe that the limited information required from importers on in-bond shipments makes it difficult for CBP to ensure that the shipments have reached their proper destinations. Intellectual property protection is an issue that requires the involvement of many U.S. agencies, and the U.S. government has employed a number of mechanisms to combat different aspects of IP crimes, with varying levels of success. The STOP initiative, the most recent coordinating mechanism, has brought attention and energy to IP efforts within the U.S. government, and participants and industry observers have generally supported the new effort. At the same time, the challenges of IP piracy are enormous, and will require the sustained and coordinated efforts of U.S. agencies, their foreign counterparts, and industry representatives to be successful. Our initial observations on the structure of STOP suggest that it is not well suited to address the problem over the long term, as the presidential initiative does not have permanence or the accountability mechanisms that would facilitate oversight by the Congress. Our ongoing work on IP protection efforts at the U.S. border, one of the five areas identified by STOP, also illustrates the types of challenges that need sustained attention to make progress on the issue. We believe that our more detailed reports to be released in the near future will contribute to continuing Congressional oversight of these issues. 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 at this time. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

U.S. goods are subject to substantial counterfeiting and piracy, creating health and safety hazards for consumers, damaging victimized companies, and threatening the U.S. economy. In 2004, the Bush administration launched the Strategy for Targeting Organized Piracy (STOP)--a multi-agency effort to better protect intellectual property (IP) by combating piracy and counterfeiting. This testimony, based on a prior GAO report as well as from observations from on-going work, describes (1) the range and effectiveness of multi-agency efforts on IP protection preceding STOP, (2) initial observations on the organization and efforts of STOP, and (3) initial observations on the efforts of U.S. agencies to prevent counterfeit and pirated goods from entering the United States, which relate to one of STOP's goals. STOP is the most recent in a number of efforts to coordinate interagency activity targeted at intellectual property (IP) protection. Some of these efforts have been effective and others less so. For example, the Special 301 process--the U.S. Trade Representative's process for identifying foreign countries that lack adequate IP protection--has been seen as effective because it compiles input from multiple agencies and serves to identify IP issues of concern in particular countries. Other interagency efforts, such as the National Intellectual Property Law Enforcement Coordination Council (NIPLECC), are viewed as being less effective because little has been produced beyond summarizing agencies' actions in the IP arena. While STOP has energized IP protection and enforcement efforts domestically and abroad, our initial work indicates that its long-term role is uncertain. STOP has been successful in fostering coordination, such as reaching out to foreign governments and private sector groups. Private sector views on STOP were generally positive; however, some stated that it emphasizes IP protection and enforcement efforts that would have occurred regardless of STOP's existence. STOP's lack of permanent status and accountability mechanisms pose challenges for its long-term impact and Congressional oversight. STOP faces challenges in meeting some of its objectives, such as increasing efforts to seize counterfeit goods at the border--an effort for which the Department of Homeland Security's Customs and Border Protection (CBP) and Immigration and Customs Enforcement are responsible. CBP has certain steps underway, but our initial work indicates that resources for IP enforcement at certain ports have declined as attention has shifted to national security concerns. In addition, prior GAO work found internal control weaknesses in an import mechanism through which a significant portion of imports flow, and which has been used to smuggle counterfeit goods.

Prior to 1996, agencies generally did not have the authority to adjust civil monetary penalty maximums that were established in statute. Congress would occasionally adjust individual penalties or specific groups of penalties through various statutes but not all civil penalties. As a result, many penalties had not been changed for decades. When the Federal Civil Penalties Inflation Adjustment Act of 1990 (the 1990 Act) was enacted, Congress noted in the "Findings" section of the legislation that inflation had weakened the deterrent effect of many civil monetary penalties. The stated purpose of the 1990 Act was "to establish a mechanism that shall (1) allow for regular adjustments for inflation of civil monetary penalties; (2) maintain the deterrent effect of civil monetary penalties and promote compliance with the law; and (3) improve the collection by the federal government of civil monetary penalties." However, the act did not give agencies the authority to adjust their civil monetary penalties for inflation. In 1996, Congress enacted section 31001(s)(1) of DCIA, amending the 1990 Act to require agencies to issue regulations adjusting their covered penalties for inflation. The 1990 Act as amended by DCIA required agencies with covered penalties to adjust them by regulation published in the Federal Register by October 23, 1996, and at least once every 4 years thereafter. The 1996 Inflation Adjustment Act amendment limited the first such adjustment to 10 percent of the penalty amount. It required specific calculation and rounding procedures to be followed and excluded penalties under certain statutes (e.g., the Occupational Safety and Health Act of 1970, the Social Security Act, the Internal Revenue Code of 1986, and the Tariff Act of 1930). However, as we reported in March 2003, the 10 percent cap on initial adjustments prevented some agencies from fully adjusting for inflation in the hundreds of percentages since last set or adjusted by Congress. The 1990 Act was further amended in 2015 to improve the effectiveness of civil monetary penalties and to maintain their deterrent effect. Specifically, the Inflation Adjustment Act requires: 1. agencies to adjust each civil monetary penalty with an initial catch-up adjustment through an interim final rulemaking (IFR) in the Federal Register, no later than July 1, 2016, and to take effect no later than August 1, 2016; 2. agencies to include in the annual AFRs, submitted under OMB Circular A-136, Financial Reporting Requirements, information about the civil monetary penalties within the agencies' jurisdiction, including the inflation adjustment of the civil monetary penalty amounts; and 3. OMB to issue guidance to agencies for implementing the inflation adjustments. In response to the Inflation Adjustment Act, in February 2016, OMB issued OMB Memorandum M-16-06, Implementation of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, for agencies implementing the civil monetary penalty inflation adjustment requirements of the Inflation Adjustment Act and, in October 2016, revised OMB Circular A-136 to include guidance to federal agencies for including inflation adjustments in annual financial reporting. Consistent with OMB guidance for implementing inflation adjustments, federal agencies are responsible for identifying the civil monetary penalties that fall under the statutes and regulations they enforce. Agencies with questions on the applicability of the inflation adjustment requirement to an individual penalty should first consult with their offices of general counsel and then seek clarifying guidance from OMB if necessary. In addition, agencies may request OMB concurrence that they be allowed to adjust the amount of a civil monetary penalty by less than the amount required under the Inflation Adjustment Act (a reduced catch- up adjustment determination), if they demonstrate that the otherwise required increase of the penalty or penalty range would have a negative economic effect or that the social costs would outweigh the benefits. Consistent with the Inflation Adjustment Act, agencies should consult with OMB before proposing a reduced catch-up adjustment determination. We confirmed with OMB that it did not receive any requests from agencies to be allowed to adjust the amount of a civil monetary penalty by less than the required amount in 2016. Of the 52 federal agencies reviewed, we determined that 49 federal agencies were required to publish IFRs with the initial catch-up inflation adjustment amounts in the Federal Register. We excluded three agencies--the International Trade Commission and Postal Regulatory Commission based on their determination that they are not subject to the Inflation Adjustment Act provisions, and the Tennessee Valley Authority based on its determination that it currently has no civil monetary penalties to assess or enforce. We found that 34 of the 49 federal agencies subject to the Inflation Adjustment Act published IFRs with the initial catch-up inflation adjustment amounts in the Federal Register by the July 1, 2016, deadline. In addition, 9 of the 15 remaining agencies made the required publication after the July 1, 2016, deadline set by the Inflation Adjustment Act and by December 31, 2016. The remaining 6 agencies had not made the required publication as of December 31, 2016. Because of the complex nature of the initial catch-up inflation adjustments, OMB staff from the Office of Federal Financial Management, and the Labor Branch emphasized to us that its preference was for federal agencies to take the necessary time to publish accurate and complete initial catch-up inflation adjustments through IFRs, even if agencies were not able to meet the Inflation Adjustment Act publication deadline. In light of the challenges agencies faced in publishing on time and their efforts to publish accurate and complete initial catch-up adjustments, we are reporting on agencies that published these adjustments as of December 31, 2016; however, we do not consider these agencies to be in compliance with the July 1, 2016, deadline set by the Inflation Adjustment Act. The remaining 6 agencies subject to the Inflation Adjustment Act that did not publish IFRs with the initial catch-up inflation adjustment amounts by December 31, 2016, in the Federal Register were the 1. Merit Systems Protection Board (MSPB), 2. National Aeronautics and Space Administration (NASA), 3. National Endowment for the Arts (NEA), 4. General Services Administration (GSA), 5. National Transportation Safety Board (NTSB), and 6. U.S. Department of Agriculture (USDA). As a result of our inquiries, 3 of these federal agencies, MSPB, NASA, and NEA, subsequently published their initial catch-up inflation adjustment amounts in the Federal Register in June 2017. GSA officials told us that GSA had difficulties coordinating internally to timely submit its IFR and that, as of July 31, 2017, the projected timeframe to publish the initial catch-up inflation adjustment amounts in the Federal Register is within the next 90 days. In addition, NTSB officials stated that although NTSB has the statutory authority to assess civil penalties for violations, it has never sought to impose civil penalties. Thus, NTSB originally determined that it did not have to publish an initial catch-up inflation adjustment. However, as a result of our inquiries, NTSB officials told us that NTSB now plans to publish its initial catch-up inflation adjustment amounts in October 2017. USDA officials stated that USDA is in the process of preparing and reviewing a draft rulemaking and plans to begin its clearance process to submit an initial catch-up inflation adjustment rulemaking for publication in the Federal Register in 2017. Although GSA, NTSB, and USDA state that they plan to publish catch-up inflation adjustments in the Federal Register, it has now been over a year since the July 1, 2016, publication deadline set by the Inflation Adjustment Act. Without timely adjustments of their civil monetary penalties, there is an increased risk that agencies' civil monetary penalties are not keeping pace with inflation. Civil monetary penalties are a key method of regulatory enforcement, providing federal agencies authority to punish violators and serving as a deterrent to future violations. Civil monetary penalties can lose their ability to punish willful and egregious violators appropriately and to serve and protect the public as a deterrent to future violations if not timely adjusted for inflation. Figure 1 summarizes the status as of December 31, 2016, of the publication of the initial catch-up inflation adjustments for civil monetary penalties for the 52 federal agencies that we reviewed. Further details of each federal agency's status are provided in appendix II. Under the Inflation Adjustment Act and OMB Circular A-136, section II.5.11, Civil Monetary Penalty Adjustment for Inflation, federal agencies are directed to report in the 2016 AFRs information about the civil monetary penalties within agencies' jurisdiction, including the catch-up inflation adjustment of the civil monetary penalty amounts, and federal agencies must report this information if the agencies, or their subbureaus or divisions, enforce any civil monetary penalties. Of the 52 federal agencies that we reviewed, we found that 9 agencies are not subject to the requirements to report civil monetary penalties information in the AFR. Of the remaining 43 agencies, we found that 32 agencies reported information in the 2016 AFRs about their civil monetary penalties, including the catch-up inflation adjustment of the civil monetary penalty amounts, as directed by OMB guidance. The other 11 federal agencies did not report civil monetary penalty catch-up inflation adjustment information in the 2016 AFRs, as required by the Inflation Adjustment Act and consistent with OMB guidance. Officials from 8 of the 11 federal agencies told us that although their agencies had the authority to assess or enforce penalties within their jurisdictions, they had not actually assessed or enforced any civil monetary penalties during the reporting period. Some of these officials indicated that they interpreted the terms "assess" and "enforce" in the implementing guidance, and "enforce" in the reporting guidance, to mean that they imposed a civil monetary penalty. Therefore, they took the position that their agencies did not need to report civil monetary penalties information in the 2016 AFRs because they did not impose any civil monetary penalties during the reporting period. However, as a result of our inquiries, other agencies informed us that they plan to report civil monetary penalty information in the 2017 AFRs despite not having imposed civil monetary penalties during the reporting period. OMB staff stated that it is the agencies' responsibility to determine whether they "assessed" or "enforced" civil monetary penalties. The standards for internal control in the federal government state that the agency's management should externally communicate the necessary quality information to achieve its objectives. In addition, the Inflation Adjustment Act requires that the Director of OMB issue guidance to federal agencies on implementing the inflation adjustments required under the act. With clarified OMB guidance, the risk of agencies' inconsistent AFR reporting of civil monetary penalty adjustment information would be reduced. The remaining 3 federal agencies--the Federal Election Commission (FEC), Federal Maritime Commission (FMC), and National Indian Gaming Commission (NIGC)--did not report in the 2016 AFRs information about the civil monetary penalties, including the catch-up inflation adjustment of the civil monetary penalty amounts. Officials from FEC, FMC, and NIGC indicated that they inadvertently omitted the information on civil monetary penalty adjustments in the 2016 AFRs and that they should have reported civil monetary penalty information. All three agencies informed us that they plan to report the required civil monetary penalty information in the annual AFRs, starting with fiscal year 2017. Without timely and complete reporting of civil monetary penalty information in the AFRs, OMB and other decision makers may not have the information needed to help ensure the effectiveness of civil monetary penalties in enforcing statutes and preventing violations. Accordingly, it is important that agencies report such information in the AFRs. Figure 2 summarizes the status of reporting civil monetary penalties information in the AFRs of the 52 federal agencies that we reviewed for fiscal or calendar year 2016 (as applicable, as agencies may have different year-end reporting dates). Further details of each federal agency's reporting status are provided in appendix III. Civil monetary penalties prescribed by statute that are timely adjusted for inflation allow agencies to punish violators appropriately and serve as a deterrent to future violations. While most federal agencies subject to the Inflation Adjustment Act have followed the act's requirements and OMB's guidance, some agencies did not timely publish their civil monetary penalty catch-up inflation adjustments in the Federal Register or report their civil monetary penalty information in the 2016 AFRs. Specifically, three federal agencies have taken more than a year since the publication deadline set by the Inflation Adjustment Act to publish inflation catch-up adjustments in the Federal Register, and three other federal agencies have not yet reported civil monetary penalty information in the AFRs. In addition, agencies had differing interpretations of OMB's guidance related to civil monetary penalty inflation adjustment implementation that could result in inconsistent AFR reporting of civil monetary penalty adjustment information. Without timely adjustments of their civil monetary penalty amounts and their publication in the Federal Register, there is an increased risk that agencies' civil monetary penalties are not keeping pace with inflation. In addition, without timely and complete reporting of their civil monetary penalties in AFRs, decision makers may not have the information needed to help ensure the effectiveness of civil monetary penalties in enforcing statutes and preventing violations. To help ensure that agencies' civil monetary penalties are adjusted timely and keep pace with inflation, we are making the following three recommendations. 1. The Acting Administrator of the General Services Administration (GSA) should publish the initial catch-up inflation adjustment in the Federal Register. 2. The Acting Chairman of the National Transportation Safety Board (NTSB) should publish the initial catch-up inflation adjustment in the Federal Register. 3. The Secretary of Agriculture (USDA) should publish the initial catch- up inflation adjustment in the Federal Register. To help ensure timely and complete reporting of agencies' civil monetary penalty information in agency financial reports (AFR) and to provide the Office of Management and Budget (OMB) and other decision makers with the information needed to help ensure the effectiveness of civil monetary penalties in enforcing statutes and preventing violations, we are making the following four recommendations. 4. The Chairman of the Federal Election Commission (FEC) should publish civil monetary penalties within its jurisdiction, including any penalty adjustments, in FEC's 2017 AFR. 5. The Acting Chairman of the Federal Maritime Commission (FMC) should publish civil monetary penalties within its jurisdiction, including any penalty adjustments, in FMC's 2017 AFR. 6. The Chairman of the National Indian Gaming Commission (NIGC) should publish civil monetary penalties within its jurisdiction, including any penalty adjustments, in the Department of the Interior's 2017 AFR. 7. The Director of OMB should clarify its guidance related to civil monetary penalty inflation adjustment information that agencies are required to report in the AFRs. We provided a draft of this report to the six federal agencies to which we directed recommendations--FEC, FMC, GSA, NIGC, NTSB, and USDA--and to OMB. FMC, GSA, and NIGC provided written comments, which are reprinted in appendixes IV through VI, respectively. FMC neither agreed nor disagreed with our recommendation, but stated that FMC plans to publish updates to its civil monetary penalty information in its 2017 performance and accountability report. GSA agreed with our recommendation and stated that it is developing a comprehensive plan to address it. NIGC generally agreed with our findings and recommendations and provided a technical comment, which we incorporated as appropriate. Officials from FEC, NTSB, and USDA provided e-mail responses to our draft report. The Director of Congressional, Legislative and Intergovernmental Affairs at FEC stated in an e-mail that FEC had no comments. In an e-mail, the Governmental Affairs Liaison at NTSB neither agreed nor disagreed with our recommendation, but stated that NTSB plans to publish the initial catch-up inflation adjustment in October 2017, which we incorporated in the report. The Attorney-Advisor in the Office of General Counsel at USDA stated in an e-mail that USDA did not have any comments. OMB staff from the Office of Federal Financial Management, the Labor Branch, and General Counsel met with us to provide oral comments. OMB staff generally agreed with our recommendation; however, they suggested that we revise the recommendation to use more broad terms. We agreed with this suggestion and modified the report accordingly to allow OMB more flexibility to meet the intent of our recommendation. OMB staff also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Chairman of the Federal Election Commission, the Acting Chairman of the Federal Maritime Commission, the Acting Administrator of the General Services Administration, the Chairman of the National Indian Gaming Commission, the Acting Chairman of the National Transportation Safety Board, the Secretary of Agriculture, the Director of the Office of Management and Budget, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9399 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 VII. This report addresses to what extent federal agencies subject to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended (Inflation Adjustment Act), have complied with the requirement to (1) publish their initial catch-up inflation adjustments in the Federal Register and (2) report in the 2016 agency financial reports (AFR) information about the civil monetary penalties within the agencies' jurisdiction, including the inflation adjustment of the penalty amounts, as directed by the Office of Management and Budget's (OMB) guidance. To address our first objective, we obtained the population of 52 federal agencies that could be subject to the applicable provisions of the Inflation Adjustment Act from OMB's summary list. To assess the completeness of the population of the federal agencies identified by OMB, we compared OMB's summary with GAO's previously identified list of federal agencies reporting civil monetary penalties. We performed a broader electronic search in the Federal Register to identify any other federal agencies that published civil monetary penalty information from January 1, 2012, through December 31, 2016. Of the 52 federal agencies identified by OMB, we excluded three federal agencies--the International Trade Commission, Postal Regulatory Commission, and the Tennessee Valley Authority (TVA)--based on their determinations about the applicability of the Inflation Adjustment Act to their agencies. For the remaining 49 federal agencies, we electronically searched the Federal Register to determine whether the required interim final rulemakings (IFR) with civil monetary penalties, including catch-up inflation adjustments, were published from February 24, 2016 (issuance date of the OMB implementation guidance for fiscal year 2016), through August 1, 2016 (effective date established in the Inflation Adjustment Act for the new penalty levels). We conducted meetings with OMB staff from the Office of Information and Regulatory Affairs, the Office of Federal Financial Management, and the Labor Branch to gather information on federal agencies' activities and reporting in compliance with the Inflation Adjustment Act and in accordance with OMB guidance. We categorized federal agencies for our first objective by determining (1) whether the agency complied with the Inflation Adjustment Act to publish its initial catch-up inflation adjustments by July 1, 2016, and to take effect no later than August 1, 2016; (2) whether the agency published its initial catch-up inflation adjustments in calendar year 2016 (i.e., no later than December 31, 2016); (3) whether the agency is subject to the catch-up adjustment provisions of the Inflation Adjustment Act; and (4) whether the agency had applicable civil monetary penalties to assess or enforce. Some agencies stated that they were not required to publish any catch-up inflation adjustment of the civil monetary penalty amounts through an IFR because (1) they were not subject to the catch-up adjustment provisions of the Inflation Adjustment Act, (2) the authority under which they assess and enforce civil monetary penalties was expressly excluded by the act, or (3) they determined that they had no applicable civil monetary penalties under the act. We relied on the agencies' determinations regarding applicability and did not independently verify the information they provided. Also, we followed up with agencies that had not published their initial catch-up inflation adjustments through IFRs in the Federal Register. We contacted the appropriate officials within these agencies for explanations as to why their agencies did not publish the required IFRs with civil monetary penalty catch-up inflation adjustments and whether they believed that their agencies should have published the IFRs with this information. To address our second objective, we reviewed the 2016 AFRs of the 52 federal agencies identified by OMB staff to determine whether the information presented was in compliance with provisions of the Inflation Adjustment Act and consistent with the guidance in OMB Circular A-136, Financial Reporting Requirements. We conducted meetings with OMB staff and discussed the various formats agencies used to present the civil monetary penalty inflation adjustment information. OMB staff explained to us that their emphasis was on federal agencies reporting accurate and complete inflation adjustment information rather than strictly following the format in OMB Circular A-136. Further, OMB staff considered the civil monetary penalty inflation adjustment information table in OMB Circular A-136 only to be used as an illustrative example by federal agencies to facilitate their AFR reporting. Therefore, we considered agencies that reported civil monetary penalties, including catch-up inflation adjustment of the civil monetary penalty amounts, as being in compliance with the act, even if they did not strictly follow the OMB Circular A-136 table format example. Of the 52 federal agencies identified by OMB, we determined that certain agencies were not required to follow OMB Circular A-136 AFR reporting guidance. For example, we identified agencies established as government corporations (e.g., Corporation for National and Community Service, Federal Deposit Insurance Corporation, Pension Benefit Guaranty Corporation, and TVA) that were not required by OMB Circular A-136 to report civil monetary penalty information in the AFRs. Officials at the U.S. Postal Service, Consumer Financial Protection Bureau, Federal Reserve Board, International Trade Commission, and Postal Regulatory Commission stated that pursuant to certain laws or regulations, their agencies have determined that they are not required to report civil monetary penalty information in the AFRs. In total, we found 9 federal agencies that were not applicable for our analysis of the AFRs. For the remaining 43 federal agencies, we reviewed the agencies' 2016 AFRs to review civil monetary penalty inflation adjustment information. The Inflation Adjustment Act requires agencies to include in the AFRs submitted under OMB Circular A-136 information about the civil monetary penalties within the agencies' jurisdiction, including the inflation adjustment of civil monetary penalty amounts. OMB Circular A-136 states that agencies' AFRs must include a Civil Monetary Penalty Adjustment for Inflation section "if there is a civil monetary penalty enforced by the agency, subbureau, or division." Further, according to OMB Memorandum M-16-06, Implementation of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, "a civil monetary penalty is any monetary assessment levied for a violation of a Federal civil statute or regulation, assessed or enforceable through a civil action in Federal court or an administrative proceeding." We identified 8 federal agencies that stated that they did not impose a civil monetary penalty during the 2016 AFR reporting period. Based on our inquiries with OMB staff and responses from these 8 federal agencies, some agencies interpreted OMB's reporting requirements as applying only to those federal agencies that have assessed or enforced civil monetary penalties during the reporting periods. The selected federal agencies' staff confirmed to us that their agencies did not report the civil monetary penalty adjustment for inflation information in the 2016 AFRs because their agencies did not assess or enforce any civil monetary penalties during the 2016 AFR reporting period, as defined in the OMB Circular A-136 and OMB Memorandum M-16-06 guidance. As a result, we did not make any determination on these 8 federal agencies regarding compliance with the AFR reporting requirement provisions of the Inflation Adjustment Act. Additionally, we inquired with officials at federal agencies that had not reported the civil monetary penalties information in the AFRs consistent with OMB guidance. We contacted the appropriate official for explanations as to why their agencies did not report civil monetary penalties information, including the inflation adjustment of the penalty amounts, as directed by OMB guidance, and whether they believed their agencies should have reported such information in the agencies' AFRs. We focused our review on the extent to which agencies followed the IFR publication and the AFR reporting requirements of the Inflation Adjustment Act. We did not attempt to verify whether a penalty adjusted for inflation by an agency appropriately met the definition of a covered civil monetary penalty in the Inflation Adjustment Act or that the adjustment was the correct amount. We conducted this performance audit from December 2016 to August 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 1 summarizes the status for the interim final rulemaking (IFR) requirement of the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended (Inflation Adjustment Act), for each agency as of December 31, 2016, provided in the Office of Management and Budget's summary list of 52 federal agencies that could be subject to the applicable provisions of the Inflation Adjustment Act. USDA officials stated that USDA has been working with the Office of Management and Budget (OMB) to publish its initial catch-up adjustment for inflation through an IFR in the Federal Register since August 2016 and expects to finalize the publication in 2017. DHS and DOL jointly published catch- up adjustment for inflation through IFR for the H-2B Temporary Non- agricultural Worker Program. Publication date: July 6, 2016 Effective date: July 6, 2016 Publication date: July 20, 2016 Effective date: August 1, 2016 GSA officials stated that GSA plans to publish its catch-up adjustment for inflation through an IFR in the Federal Register within 90 days after July 31, 2017. As a result of our inquiries, MSPB published its catch-up adjustment for inflation through a final rule in the Federal Register on June 5, 2017. As a result of our inquiries, NASA published its catch-up inflation adjustment through an IFR in the Federal Register on June 26, 2017. As a result of our inquiries, NEA published its catch-up inflation adjustment through an IFR in the Federal Register on June 15, 2017. Publication date: July 6, 2016 Effective date: August 1, 2016 NTSB officials stated that NTSB plans to publish its catch-up adjustment for inflation in the Federal Register in October 2017. HUD stated that it delayed the effective date of its IFR to August 16, 2016, because 42 U.S.C. SS 3535(o)(3) requires that "Any regulation implementing any provision of the Department of Housing and Urban Development Reform Act of 1989 that authorizes the imposition of a civil money penalty may not become effective until after the expiration of a public comment period of not less than 60 days." Because DOI and DOT are each listed as an organizational unit in OMB's summary list, we categorized the publishing status of these units as a whole rather than listing each component separately. While some components published IFRs by July 1, 2016, with an August 1, 2016, effective date, we categorized DOI and DOT as having published after the required date because at least one component for each of these units published its IFR after July 1, 2016; had an effective date after August 1, 2016; or both. We provided the publication date and effective date for each component in the remarks column. ITC officials stated that the Tariff Act, the authority under which ITC assesses and enforces civil monetary penalties, is expressly excluded from the catch-up adjustment provisions of the Inflation Adjustment Act, and ITC is therefore not required to publish an IFR. PRC officials stated that PRC is not subject to catch-up adjustment provisions of the Inflation Adjustment Act as it is not considered to be a federal agency under 5 U.S.C. SS 105, the definition applicable to the Inflation Adjustment Act. In addition, PRC officials stated that PRC had no applicable civil monetary penalties under the act because its civil monetary penalties do not have a specific monetary amount or a maximum amount. TVA officials stated that TVA determined that it had no applicable civil monetary penalties under the act. Because TVA no longer receives appropriations as of 1999, TVA concluded that with its self- funding status, it would be impossible for recipients of TVA funds to incur penalties. Table 2 summarizes federal agencies' reporting of civil monetary penalty information in 2016 agency financial reports as required by the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended (Inflation Adjustment Act), provided in the Office of Management and Budget's summary list of the 52 federal agencies that could be subject to the applicable provisions of the Inflation Adjustment Act, for fiscal or calendar year 2016 (as applicable, as agencies may have different year-end reporting dates). In its fiscal year 2016 AFR, USDA disclosed that it has not finalized and published a final rule to make inflation adjustments as of November 2016 and thus did not include any current catch-up inflation adjustment information. DHS and DOL separately reported the civil monetary penalties information in their respective AFRs. FCA officials stated that FCA did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. FCSIC included civil monetary penalty information in its 2016 annual report issued on June 9, 2017. FHFA officials stated that FHFA did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. MSPB officials stated that MSPB did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. NEA officials stated that NEA did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. NIGC officials stated that NIGC is an independent federal regulatory agency within DOI. NIGC's financial information is consolidated and reported in DOI's AFR. NTSB officials stated that NTSB did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. OGE officials stated that OGE did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. RRB officials stated that RRB did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. STB officials stated that STB did not assess or enforce any civil monetary penalties during the reporting period and therefore did not report this information in its AFR. CFPB officials stated that CFPB is not required to follow OMB Circular A-136 under Section 1017(a)(4)(E) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. PRC officials stated that PRC is not subject to the AFR reporting provision of the Inflation Adjustment Act as it is not considered to be a federal agency under 5 U.S.C. SS 105, the definition applicable to the act. In addition, PRC officials stated that PRC had no applicable civil monetary penalties under the act because its civil monetary penalties do not have a specific monetary amount or a maximum amount. In addition to the contact named above, Shirley Abel (Assistant Director), Jeremy Choi (Auditor-in-Charge), Vincent Gomes, Maxine Hattery, Jason Kelly, Vivian Kim, and Diana Lee made key contributions to this report.

The IAA includes a provision for GAO to annually submit to Congress a report assessing the compliance of agencies with the inflation adjustments required by the act. Specifically, GAO's objectives were to determine to what extent federal agencies subject to the IAA have complied with the requirements to (1) publish in the Federal Register their initial catch-up inflation adjustments and (2) report in the 2016 AFRs information about civil monetary penalties, including the catch-up inflation adjustment of the civil monetary penalty amounts. GAO obtained the population of 52 federal agencies identified by OMB that could be subject to the applicable provisions of the IAA and, for those subject to the requirements, electronically searched the Federal Register and reviewed the 2016 AFRs. The Federal Civil Penalties Inflation Adjustment Act of 1990, as amended (the IAA) calls for federal agencies to (1) adjust civil monetary penalties for inflation with an initial catch-up inflation adjustment published in the Federal Register and (2) report in the 2016 agency financial reports (AFR) civil monetary penalty information, including the catch-up inflation adjustment. The act also requires the Office of Management and Budget (OMB) to issue implementation guidance. Most federal agencies subject to the IAA complied with the provisions of the act to publish their initial catch-up inflation adjustments in the Federal Register no later than July 1, 2016. However, certain federal agencies with civil monetary penalties covered by the IAA did not comply with the statutory requirement. GAO found that six federal agencies did not publish their civil monetary penalty initial catch-up inflation adjustment amounts by December 31, 2016. As a result of GAO inquiries, three of these six subsequently published their catch-up adjustments for inflation in the Federal Register . In addition, most federal agencies subject to the IAA complied with the provisions of the act to report civil monetary penalty information in the 2016 AFRs, including the catch-up inflation adjustment. However, certain federal agencies with civil monetary penalties covered by the IAA did not comply with the statutory requirements. Specifically, three federal agencies did not report, in the 2016 AFRs, required information about the civil monetary penalty catch-up inflation adjustment in the 2016 AFRs. GAO also found that OMB had not provided clear guidance regarding federal agencies' reporting on civil monetary penalty information in the AFRs. As a result, officials from federal agencies had different interpretations, which could result in inconsistent AFR reporting of such information. GAO recommends that (1) six federal agencies take the necessary actions to meet IAA requirements and (2) OMB clarify its guidance regarding federal agencies' reporting on civil monetary penalties in AFRs. Two of the agencies did not comment on their respective recommendations, while the remaining four all indicated that they were taking actions to address the recommendations made to them. OMB generally agreed with the recommendation addressed to it but suggested a revision to use more broad terms. GAO modified the recommendation accordingly to allow OMB flexibility to meet the intent of the recommendation.

In a March 1999 white paper detailing modernization plans for the bomber fleet, the Air Force advised Congress that it needed 93 B-1Bs, including 70 combat-coded aircraft by the end of fiscal year 2004, to meet DOD's strategy of being prepared to win two nearly simultaneous major theater wars. In June 2001, the Air Force proposed reducing the fleet from 93 to 60 aircraft and reducing the number of combat-coded aircraft to 36. Table 1 compares the force structure before and after OSD's June 2001 decision to reduce and consolidate the B-1B fleet. Partly in response to concerns expressed by Members of Congress about OSD's June 2001 decision to eliminate the B-1B mission at Mountain Home, McConnell, and Robins Air Force Bases, the Air Force identified and announced new missions for these locations in September 2001. Planning for the new missions is well underway, and the units are expected to transition to their new missions in the fourth quarter of fiscal year 2002. Mountain Home's current F-15E squadron will be increased from 18 to 24 aircraft, and its 7 KC-135 tankers will be relocated to the Air National Guard unit at McConnell Air Force Base. The Air National Guard unit at McConnell will be redesignated as the 184th Air Refueling Wing and will have 10 KC-135R tankers. The Guard unit at Robins Air Force Base will transition to the 116th Air Control Wing and have 19 Joint Surveillance Target Attack Radar System aircraft. As you know, we have issued numerous reports on the B-1B bomber in response to a variety of congressional concerns. In February 1998, for example, we reported that the Air Force could save millions of dollars without reducing mission capability by assigning more B-1Bs to the reserve component. A list of related GAO products can be found at the end of this report. The decision to reduce the B-1B force was not based on a formal analysis of how a smaller B-1B force would impact DOD's ability to meet wartime requirements. Air Force officials explained that their decision to reduce the fleet from 93 to 60 was made in response to an OSD suggestion to eliminate the entire B-1B fleet and to address significant funding shortages in the B-1B modification program. Furthermore, the decision was not vetted through established DOD budget processes that normally involve a wider range of participants and generally allow more time for analysis of proposed changes. Senior Air Force officials believe, based on their military judgment, that the decision will not adversely affect DOD's ability to implement the national security strategy. With regard to the Air Force's analysis of basing alternatives, a lack of Air Force guidance led Air Force officials in the Office of the Deputy Chief of Staff for Plans and Programs to develop their own methodology to determine where to base the reduced B-1B fleet. These officials did not document their methodology at the time the decision was made and could not replicate the calculations used to make the basing decision. However, our review of documents prepared (at our request) after the decision was made suggests the Air Force used an inconsistent methodology and incomplete costs when estimating the savings generated from the consolidation. As a result, it is not clear whether they chose the most cost-effective alternative. In May 2001, as it considered changes to the fiscal year 2002 DOD budget previously submitted to Congress by the prior administration, senior OSD officials suggested eliminating the entire B-1B fleet that had experienced long-standing survivability and reliability problems. OSD officials in offices such as the Program Analysis and Evaluation did not undertake any analysis of the impact of the proposed B-1B retirements on the Air Force's ability to meet war-fighting requirements. At that time, the OSD Comptroller estimated that eliminating the B-1B would save approximately $4.5 billion in fiscal years 2002 through 2007. The savings would be achieved by eliminating the B-1Bs from both the active and Guard fleets and canceling the B-1B modernization program, according to an official in the Comptroller's office. Acknowledging that it lacked sufficient funding to complete planned upgrades to all 93 aircraft, but at the same time believing that some B-1Bs should be retained, the Air Force proposed reducing the size of the fleet from 93 to 60 and reinvesting the savings in upgrades to the remaining 60 aircraft. According to the Secretary of the Air Force and the Chief of Staff of the Air Force, the proposal was budget-driven. The Chief of Staff told us that if the Air Force reduced the number of aircraft to 60, it would have sufficient funds to upgrade the remaining aircraft to make them more usable in combat. The Air Force did no formal analysis of the impact of a smaller B-1B fleet on its ability to meet current and future war-fighting requirements when it proposed this reduction. Senior Air Force leaders told us that they are comfortable with the proposed reduction because they believe that 60 upgraded aircraft will provide significantly more capability in terms of effectiveness, survivability, and maintainability than is available today. The Under Secretary of Defense (Comptroller) included the reduction in the amended 2002 DOD budget request after discussions with the Secretary of Defense and the Deputy Secretary of Defense. The decision to reduce the number of B-1Bs was not fully vetted through the DOD Planning, Programming, and Budgeting System. Under established DOD procedures, the service sends its budget to the Office of the Under Secretary of Defense (Comptroller) where issue area experts review it. Potential changes in the form of draft program budget decisions are circulated to the services, the Joint Staff, the Director of Program Analysis and Evaluation, and various assistant secretaries of defense who are in a position to evaluate the impact of the potential budget decisions on the national military strategy and the objectives of the Secretary of Defense. Their comments are provided to the Comptroller who considers them, finalizes the program budget decision, and forwards it to the Deputy Secretary of Defense for signature. According to an official in the Comptroller's office, in this instance, the Comptroller approved the program budget decision that reduced and consolidated the B-1B fleet after discussions with the Secretary of Defense and the Deputy Secretary of Defense. A draft program budget decision was not circulated to the Office of the Director, Program Analysis and Evaluation, the Joint Staff, or the Air Force according to representatives of these offices. Air Force officials told us they were surprised when senior OSD officials decided to implement the B-1B fleet reduction in June 2001. While Air Force officials recommended reducing the fleet, they did not know that the recommendation was to be included in the fiscal year 2002 amended budget until just a few days before OSD officials transmitted the budget to Congress and made it public. These same officials told us that they were also surprised that the consolidation was to be implemented by October 1, 2001. They believed that they needed about 1 year to implement the decision. As a result of the short time frame between the OSD decision to implement the Air Force's proposal to reduce and consolidate the B-1Bs and the release of the amended fiscal year 2002 budget, Air Force officials told us the Air Force did not have time to determine if the Guard units would get new missions and identify those meet with Members of Congress from the affected states to explain the decision. The decision to reduce the fleet and complete the consolidation by October 1, 2001, concerned Members of Congress. As a result, Congress delayed implementation until the Air Force completed a review of bomber force structure and provided information on alternative missions and basing plans. According to the legislation, the Air Force could begin implementing the fleet reduction and consolidation 15 days after providing the required report to Congress. The report was delivered to Congress in February 2002. Among other things, the report provided a summary of the (1) Air Force's reasons for reducing the B-1B fleet, (2) follow-on missions for the affected units, and (3) details of the B-1B modernization program. The Air Force began relocating and retiring B-1Bs in July 2002. Air Force officers in the Office of the Deputy Chief of Staff for Plans and Programs said they considered a number of basing options before recommending that the remaining aircraft be consolidated at two active duty bases. However, they did not document the options considered at the time the decision was made and could not provide a comprehensive list of options considered. In early 2002, at our request, they prepared a paper that outlined some of the options they believed were considered. According to the paper, the Air Force considered options that would have consolidated the aircraft at two active bases and one Guard base, one Guard base and one active base, or two active duty bases. The option selected continues to house B-1Bs at two active duty bases--26 at Ellsworth Air Force Base and 32 at Dyess Air Force Base.According to Air Force officials, they selected this option because they believed it was the most cost-effective option available. Specifically, they believed they would achieve significant economies of scale by consolidating the aircraft at the two largest B-1B bases, which were located in the active component. Air Force headquarters staff told us they had no written guidance or directives to assist them when they completed the cost analysis for assessing where to locate the aircraft, and the officers at Air Force headquarters responsible for evaluating basing options said they received no guidance from their senior leaders. Consequently, they developed their own approach for determining where the B-1Bs should be retained. The Air Force did not document its methodology at the time the consolidation decision was made but attempted to reconstruct it in early 2002 at our request. At that time, however, Air Force officials were unable to replicate the savings estimates they had developed or provide a complete explanation of the methodology used to make the basing decision. Our review of the documentation provided to us by Air Force officials in early 2002 suggests the Air Force may have used an inconsistent methodology and incomplete costs when estimating potential savings for various basing options. According to Air Force officials, for options that stationed aircraft at both active and Guard locations, the potential savings estimates were based solely on the anticipated reductions in the cost of flying hours that would result from the smaller B-1B force. Other operations and maintenance costs that would have been saved by reducing the number of B-1Bs or eliminating a B-1B unit were not included in the estimates for these options. Such costs include depot maintenance, travel, and contractor logistics support. However, for options that stationed the aircraft at active bases only and eliminated both Guard units, Air Force officials included the projected flying hour savings from the smaller fleet and the Guard's B-1B nonflying hour operations and maintenance costs in the savings estimates. Air Force officials could not explain why they estimated the cost savings in this manner. However, they noted that while they obtained complete operations and maintenance data for the Guard units, they did not obtain similar data for the active units. Using this methodology, the Air Force estimates for options that included a mix of active and Guard units understated the savings that could result from reducing and consolidating the fleet. Air Force officials said they considered other factors when they assessed the basing options. One factor was the impact that the consolidation might have on the individual B-1B bases. Air Force officials told us that they realized that they would have to select an option that included Ellsworth Air Force Base because, without the B-1B, Ellsworth would have no mission and the Air Force had no authority to close the base. A second factor was the need to avoid generating requirements for construction of new facilities since this would reduce the potential savings from the consolidation and might require the Air Force to seek construction funds from Congress. Several other factors that could have been considered but were not include: actual flying hour costs, mission capable rates, and aircrew experience levels for the active and Guard units. According to Air Force officials, the Air Force did not consider these factors because they believed the active and Guard units had similar capabilities. In comparing their assigned missions, flying hour costs, mission capable rates, aircrew experience, and operational readiness inspections, we found that Guard units (1) were assigned responsibility for substantially the same types of missions as their active duty counterparts, (2) had lower flying hour and higher mission capable rates during fiscal years 1999-2001, and (3) had more experienced crewmembers than the active duty units in terms of hours flown. We also found that active and Guard units received similar scores in their most recent operational readiness inspections. With the exception of an additional 24 hours to recall and mobilize Guard personnel prior to deployment, the kinds of missions assigned to Guard B-1B units and their active duty counterparts are substantially the same. For example, the Guard and active duty units have similar wartime mission responsibilities, and each of the B-1B units is assigned to support either Central or Pacific theater commanders during wartime. Additionally, during peacetime, both active and Guard B-1B units are scheduled to be available to meet ongoing contingency operation needs for 90 days every 15 months under the Air Force's Aerospace Expeditionary Force concept. In the past, however, the two Guard B-1B units have worked together to support operational requirements during this period so that each unit is responsible for a 45-day period rather than the full 90-day period, which places less strain on volunteer Guardsmen and their employers. We compared the flying hour costs between active duty and Guard B-1B units for fiscal years 1999-2001 and found that Guard costs averaged about 27 percent lower than active duty costs. The Air Force calculates flying hour costs by dividing the cost of fuel and parts by the number of hours each unit flies the aircraft. Specifically, the Air Force considers the cost of aviation fuel, oil, and lubricants; depot-level reparables, which are expensive parts that can be fixed and used again, such as hydraulic pumps, navigational computers, engines, and landing gear; and consumable supplies, which are inexpensive parts, such as nuts, bolts, and washers, which are used and then discarded. Table 2 shows the cost per flying hour for active and Air National Guard B-1B units for fiscal years 1999-2001. Our analysis showed that the Guard's lower cost per flying hour was due in large part to its significantly lower costs for depot-level reparables (see table 3). The Guard attributed its lower reparables costs to the higher experience levels of its maintenance personnel. Apprentice mechanics in the Guard averaged over 10 years of military experience compared to slightly more than 2 years of military experience among apprentice active duty mechanics. Officials said that more experienced maintenance personnel are often able to identify a problem part and fix it at the unit, when appropriate, instead of purchasing a replacement part from the Air Force supply system. Our analysis also showed that the lower costs of consumables in the Guard also contributed to the lower flying hour costs (see table 4). Guard officials said that they are able to keep the costs of consumables down because their experienced maintenance crews are often able to isolate, identify, and fix malfunctioning parts without pulling multiple suspect parts off the aircraft. As a result, fewer consumable supplies are used. Flying hour costs represent only a portion of the overall costs of operating and maintaining B-1B bombers. Costs such as pilot training, test equipment, and depot maintenance are not included in the flying hour cost. As we noted earlier, the Air Force did not consider these costs or the historical flying hour costs detailed previously when it made its basing decision. The Guard's reported mission capable rates were higher than the active duty's reported rates between fiscal year 1999 and 2001. The Air Force designates a weapon system as mission capable when it can perform at least one of its assigned combat missions. The mission capable rate specifically measures the percentage of time a unit's aircraft are available to meet at least one of its missions. On average, the Guard units' B1-B fleet was available between 62 and 65 percent of the time during fiscal years 1999 through 2001. During those same years, the active duty mission capable rate performance averaged between 52 and 60 percent (see fig. 1). According to Air Combat Command officials, the active duty units' mission capable rate gain in fiscal year 2001 was primarily due to (1) increased aircraft availability following completion of an extensive modification program and (2) improvements in the Air Force's inventory of spare parts. In the 2 years prior to fiscal year 2001, both active and Guard B-1Bs underwent extensive modifications at the depot that improved the aircraft's survivability and equipped the aircraft with more advanced munitions. During this time, large portions of the B-1B fleet were at the depot for extended periods. According to Air Combat Command officials, active duty B-1B units experienced reduced mission capable rates because maintaining a normal operating tempo with fewer aircraft required each aircraft to be flown more frequently and resulted in more wear and tear to each aircraft. However, the Guard units' mission capable rates were less affected. Both Air Combat Command and Guard unit officials agreed that during this time the higher experience levels of Guard maintenance personnel and the Guard's lower operating tempo lessened the impact of having large portions of the fleet at the depot on the Guard units' mission capable rates. The Air Force completed most of these modifications by the end of fiscal year 2000, and the gap between the active and Guard mission capable rates narrowed in fiscal year 2001. According to Air Combat Command officials, the overall shortage of spare parts experienced by the Air Force during the late 1990s also negatively affected the active duty B-1B units' mission capable rates prior to fiscal year 2001. Although increased funding led to an improvement in the spare parts inventory by fiscal year 1999, it took about 12 to 24 months for the improvements to be reflected in the units' reported mission capable rates according to Air Staff officials. According to Guard officials, Guard B-1B units were less affected by the shortage of spare parts because their more experienced maintainers could sometimes repair rather than replace problematic components. The Air National Guard's B-1B pilots and weapon systems officers are generally more experienced than their active duty counterparts. The Air Force designates aircrew members as "experienced" based on the total number of flying hours they have accumulated both overall and in the B-1B. A crewmember's experience level determines the amount of training (i.e., flying hours and sorties) he or she is required to complete each year, which, in turn, drives the unit's overall flying hour program. For example, units with a higher number of inexperienced aircrew members would require a higher allocation of flying hours to meet training requirements each year. In comparing the Guard and active B-1B aircrew experience levels, we found that the majority of Air National Guard pilots were designated as experienced. However, this was not the case for pilots assigned to active operations squadrons at Dyess and Ellsworth. Table 5 shows the percentage of experienced pilots by unit location. Many of the Guard pilots also had other flying experience that enhanced their ability to pilot the B-1B. For example, many had prior active duty flying experience or flew other aircraft for the Guard. This experience contributed to the pilots' overall qualifications, thereby permitting them to be designated as experienced more quickly than their active duty counterparts. The picture was similar for the B-1B's weapon systems officers. For example, more than 80 percent of the Air National Guard's weapons system officers were considered experienced, while in the active Air Force only about 40 percent were considered experienced. Like the Guard pilots, most of the Guard's weapon systems officers also had experience flying other military aircraft that enhanced their ability in the B-1B. Table 6 shows the percentage of experienced weapon systems officers by unit location. The Air Force conducts periodic inspections of each of its operational units to evaluate the unit's readiness to perform its wartime mission. The readiness inspections, conducted by the Air Combat Command Inspector General staff, are intended to create a realistic environment for evaluating the units' sustained performance and contingency response. The bomb units are evaluated in four major areas: initial response, employment, mission support, and ability to survive and operate in a hostile environment. The Guard B-1B units scored as high or higher than did the active duty units in the most recent readiness inspections. Specifically, the B-1B bomb units at two active locations (Dyess and Ellsworth) and one Guard location (McConnell) each received excellent ratings overall in their most recent inspections. The Inspector General completed an inspection of Robins' initial response capabilities in July 2001 and rated the unit as excellent. However, the Inspector General did not complete its inspection of the three remaining areas since the Air Force had already decided to remove the B-1Bs from Robins. Additionally, the Mountain Home wing, which includes B-1Bs, had not undergone an operational readiness inspection at the time of our review. Major decisions involving force structure need to be supported by solid analysis to document that a range of alternatives has been considered and that the decision provides a cost-effective solution consistent with the national defense strategy. DOD's Planning, Programming, and Budgeting process establishes a consultation process for civilian and military leaders to use in reviewing alternatives to the services' current force structure. However, the decision to reduce the B-1B did not fully adhere to this process because key offices such as the Office of Program Analysis and Evaluation and the Joint Staff did not have an opportunity to review and comment on the proposal and conduct analysis before it was approved. Moreover, although Air Force and OSD officials are comfortable with the decision, based on their military judgment, neither the Air Force nor OSD conducted any formal analysis to provide data on how a range of B-1B force size alternatives would impact DOD's ability to meet potential wartime requirements. By following its established budget process more closely in the future and allowing experts from various offices to review and analyze force structure proposals, DOD could provide better assurance to Congress that future force structure decisions are well-supported and are in the nation's long-term interest. In addition, the lack of an established Air Force methodology for assessing the costs associated with potential basing options led officials to use incomplete costs when estimating the projected savings for some of the basing options considered. By focusing solely on flying hour costs for some basing options, Air Force officials did not consider other operations and maintenance savings that a reduction in the number of aircraft or the number of B-1B units would generate. As a result, the Air Force may have understated the cost savings of the options that retained B-1Bs in both the Air National Guard and the active components. A more structured cost estimating methodology would ensure that that the Air Force considers all appropriate costs in calculating the savings for future aircraft realignments. To provide an analytical basis for future aircraft realignment decisions, we recommend that the Secretary of Defense direct the Secretary of the Air Force to develop a methodology for assessing and comparing the costs of active and reserve units so that all potential costs are fully considered when evaluating potential basing options and making future basing decisions. In written comments on a draft of this report, DOD did not agree with our recommendation that the Air Force develop a methodology for assessing and comparing costs to evaluate basing options because it believes that such a methodology exists. Furthermore, DOD believes that the Air Force used a methodology that considered all costs as well as noncost factors when it made its basing decision and that cost-effectiveness, while an important criterion, should not be the sole consideration in making basing decisions. DOD's comments are included in this report as appendix II. After we received DOD's comments, we asked the department to provide documentation describing its methodology for comparing active and reserve unit costs. DOD referred us to the instruction that outlines its Planning, Programming and Budgeting System. This instruction describes DOD's process for developing the department's overall plans and budget; however, it does not identify a methodology for assessing and comparing the costs associated with active and reserve units. DOD also noted that the Air Force's Total Ownership Cost database encompasses all cost factors related to active and reserve costs and ensures that any comparison of active and reserve units is done equitably. During our audit work, we assessed whether the Total Ownership Cost database could be used to compare total operations costs for B-1Bs located at Guard and active duty units. We determined, however, that not all indirect costs for B-1B units in the Guard were included in the database, making it impossible to compare the operating costs of Guard and active units equitably. Therefore, we are retaining our recommendation that the Secretary of Defense direct the Secretary of the Air Force to develop a methodology. In commenting on our presentation of flying hour costs, DOD acknowledged the Guard's lower flying hour costs, but it stated that including additional costs would result in more comparable flying hour costs for Guard and active duty units. DOD suggested using the direct and indirect costs included in the Air Force's Total Ownership Cost database to calculate flying hour costs. In conducting our analysis of flying hour costs, we relied on the Air Force's definition. The Air Force defines flying hour costs as the cost of fuel, depot-level reparables, and consumable parts divided by the number of hours flown. The Air Force does not include other costs such as software maintenance costs, contractor support costs, or military personnel costs when it calculates the cost per flying hour. DOD is correct when it states that there are other costs associated with operating a B-1B and our report recognizes that fact. In commenting on our analysis of active and Guard mission capable rates, DOD noted that the difference between active and Guard mission capable rates is not solely attributable to the experience level of Guard personnel. The department also noted that the Guard operates newer model B-1B aircraft while the active duty units operate older model aircraft and identified this as a factor contributing to lower active duty rates. While we recognize that the oldest aircraft in the fleet (1983 and 1984 models) are concentrated in the active units at Dyess Air Force Base, our analysis shows that those aircraft constitute only about one-third (33 percent) of Dyess' fleet and only about one-fifth (or 20 percent) of the active B-1B fleet overall. Active units at Ellsworth and Mountain Home operate newer 1985 and 1986 model aircraft--the same models as those operated by the two Guard units. While aircraft age may have some effect on mission capable rates, we do not believe, based on our analysis, that this effect is significant for the B-1B force. We are sending copies of this report to the Secretary of Defense, the Secretary of the Air Force, and interested congressional committees. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions on this report or wish to discuss these matters further, please call me on 202-512-4300. Key contacts and staff acknowledgments are listed in appendix III. To determine what types of analyses the Department of Defense (DOD) and the Air Force did of wartime requirements and basing options before deciding on the number of aircraft to retain and where to base them, we obtained and analyzed the only contemporaneous documents that were available from the Air Force--a briefing presented to the Secretary and the Chief of Staff of the Air Force on the fleet reduction and consolidation and a memorandum from the Secretary of the Air Force to the Under Secretary of Defense (Comptroller) outlining the Air Force's proposal to reduce and consolidate the fleet. Additionally, because the Air Force had no documents explaining its methodology for evaluating the various basing options it considered, we asked the Air Force, in early 2002, to document its methodology. The Air Force provided us with a statement explaining the methodology; however, it was unable to provide us with the cost figures used to estimate the savings. As a result, we could not verify the savings estimates that the Air Force attributed to each option. To supplement our document review, we interviewed several Air Force officials who were located in the Washington, D.C., area to determine what role each may have played in the decision to reduce the fleet and consolidate it at two bases. The officials were the Chief of Staff, U.S. Air Force; the Deputy Chief of Staff, Plans and Programs, U.S. Air Force; the former Director of the Air National Guard; and the Assistant for Operational Readiness, Air National Guard. We also spoke with officials responsible for overseeing the B-1B program in the Office of the Deputy Chief of Staff, Air and Space Operations, U.S. Air Force, Washington, D.C, to determine if any analysis of current and future wartime requirements had been completed prior to the decision. We also had numerous meetings with officials in the Office of the Deputy Chief of Staff, Plans and Programs, who were responsible for developing the basing options and estimating the savings that would result for each option to discuss their methodology and the decision process. We also met with representatives of the Air Combat Command at Langley Air Force Base, Virginia, to determine if they had any role in the decision to either reduce the number of B-1Bs or consolidate them at two active duty bases. Finally, we met with representatives of the Under Secretary of Defense (Comptroller); the Director, Program, Analysis, and Evaluation; and the Joint Staff to determine if they had completed any analysis of the Office of Secretary of Defense suggestion to eliminate the B-1B fleet or the Air Force's proposal to reduce the fleet. In addition, we reviewed the 1999 and 2001 Air Force bomber white papers and the 2001 Quadrennial Defense Review to gather insight on current and future B-1B wartime requirements and copies of congressional testimonies by the Secretary of Defense, the Deputy Secretary of Defense, the Secretary of the Air Force, and the Chief of Staff of the Air Force to document DOD's rationale for making the B-1B decision. To compare the flying hour costs and the capabilities of the various active and Air National Guard B-1B units, we collected and analyzed flying hour cost data for fiscal years 1999-2001 from the five B-1B units. To verify the data from these sources, we collected and analyzed cost data for the same years from the Air Combat Command; the Air Force Cost Analysis Agency, Washington, D.C.; and the Directorate of Logistics, Air National Guard, Andrews Air Force Base, Maryland. We also collected and analyzed (1) mission capable rate data for fiscal years 1999-2001 from the Air Combat Command and the two Guard units and (2) collected and analyzed data on aircrew and maintenance crew experience from the Air Combat Command and the Air National Guard Bureau. To determine if there were significant differences in active and Guard units' wartime missions, we reviewed the wartime taskings of all five B-1B units. To compare the units' participation in peacetime activities, we reviewed documents provided by officials at the Air Expeditionary Force Center, Langley Air Force Base, Virginia. We reviewed and compared the operational readiness inspections for the bomb wings located at Dyess, Ellsworth, and McConnell Air Force Bases and the partial operational readiness inspection for the bomb wing at Robins Air Force Base. The Inspector General staff completed an inspection of Robins' initial response capabilities in July 2001 but did not complete its inspection of the three remaining areas since the Air Force had already decided to remove the B-1Bs from Robins. The wing at Mountain Home had not undergone an operational readiness inspection at the time we completed our review. Our work also included visits to three B-1B units to interview officials and obtain documents: 184th Bomb Wing, McConnell Air Force Base, Kansas; 7th Bomb Wing, Dyess Air Force Base, Texas; and 116th Bomb Wing, Robins Air Force Base, Georgia. In addition to those named above, Sharron Candon, Judith Collins, Penney Harwell, Jane Hunt, Ken Patton, and Carol Schuster made key contributions to this report. Air Force Bombers: Moving More B-1s to the Reserves Could Save Millions without Reducing Mission Capability. GAO/NSIAD-98-64. Washington, D.C.: February 26, 1998. Air Force Bombers: Options to Retire or Restructure the Force Would Reduce Planned Spending. GAO/NSIAD-96-192. Washington, D.C.: September 30, 1996. Embedded Computers: B-1B Computers Must Be Upgraded to Support Conventional Requirements. GAO/AIMD-96-28. Washington, D.C.: February 27, 1996. B-1B Conventional Upgrades. GAO/NSIAD-96-52R. Washington, D.C.: December 4, 1995. B-1B Bomber: Evaluation of Air Force Report on B-1B Operational Readiness Assessment. GAO/NSIAD-95-151. Washington, D.C.: July 18, 1995. Air Force: Assessment of DOD's Report on Plan and Capabilities for Evaluating Heavy Bombers. GAO/NSIAD-94-99. Washington, D.C.: January 10, 1994. Strategic Bombers: Issues Relating to the B-1B's Availability and Ability to Perform Conventional Missions. GAO/NSIAD-94-81. Washington, D.C.: January 10, 1994. The U.S. Nuclear Triad: GAO's Evaluation of the Strategic Modernization Program. GAO/T-PEMD-93-5. Washington, D.C.: June 10, 1993. Strategic Bombers: Adding Conventional Capabilities Will Be Complex, Time-Consuming, and Costly. GAO/NSIAD-93-45. Washington, D.C.: February 5, 1993. Strategic Bombers: Need to Redefine Requirements for B-1B Defensive Avionics System. GAO/NSIAD-92-272. Washington, D.C.: July 17, 1992. Strategic Bombers: Updated Status of the B-1B Recovery Program. GAO/NSIAD-91-189. Washington, D.C.: May 9, 1991. Strategic Bombers: Issues Related to the B-1B Aircraft Program. GAO/T-NSIAD-91-11. Washington, D.C.: March 6, 1991.

The B-1B began operations in 1986 as a long-range heavy bomber designed primarily to carry nuclear munitions. Although the B-1B's nuclear mission was withdrawn in October 1997, the Air Force continues to rely on the B-1B to support conventional wartime missions. The B-1B has the largest payload of the Air Force's three bombers, and recent modifications have provided the capability to deliver near precision munitions. Future upgrades to the B-1B are expected to provide greater flexibility by enabling it to carry three different types of bombs simultaneously and eliminate some of its long-term survivability and maintainability problems by improving its radar warning systems, jamming ability, and other electronic countermeasures. In May 2001, the Office of the Secretary of Defense suggested retiring the entire B-1B fleet by October 2001. In June 2001, the Air Force proposed an alternative that reduced the B-1B fleet from 93 to 60 aircraft and consolidated them at two active duty locations instead of the three active duty and two National Guard locations that housed the aircraft. Congress delayed implementation of the fleet reduction until the Air Force completed a review of bomber force structure and provided a report on alternative missions and basing plans. The Air Force began consolidating the fleet in July 2002. GAO found that Air Force officials did not conduct a formal analysis to assess how a reduction in B-1B bombers from 93 to 60 would affect the Department of Defense's ability to meet wartime requirements. Nor did they complete a comprehensive analysis of potential basing options to know whether they were choosing the most cost-effective alternative. A comparison of active and Guard units' missions, flying hour costs, and capabilities showed that active and Guard units were responsible for substantially the same missions but Guard units had lower flying hour costs and higher mission-capable rates than their active duty counterparts. Additionally, the Guard's B-1B aircrew members were generally more experienced, in terms of the number of hours flown, than the active duty B-1B aircrews because most Guard aircrew members served on active duty prior to joining the Air National Guard.

Property owners in certain coastal regions subject to hurricanes and flooding may have to purchase at least two, and sometimes more, different types of insurance policies. Flood insurance is offered by NFIP, while insurance for wind-related damages is generally offered by private insurance companies or state-sponsored insurers. NFIP was established in 1968 in part to provide some insurance protection for flood victims because the private insurers were and still are largely unwilling to insure for flood risks. The National Flood Insurance Act of 1968, as amended, allows homeowners to purchase up to $250,000 of NFIP coverage on their dwellings and up to an additional $100,000 for personal property such as furniture and electronics. Business owners may purchase up to $500,000 of coverage for dwellings and $500,000 on the contents. Exclusions under the flood policy include damages caused by wind or a windstorm. FEMA, which administers NFIP, is responsible for the management and oversight of NFIP and is assisted in performing these functions by a program contractor. While NFIP provides the flood insurance policy and holds the risk, private property-casualty insurers, known as WYO insurers, sell and service approximately 95 percent of NFIP's flood policies. WYO insurers retain a portion of the premium for selling flood policies and receive fees for performing other administrative services for NFIP, but do not have any exposure to claims losses. A WYO insurer may or may not also provide coverage for wind-related risks on the same property. After an event occurs, policyholders normally contact a WYO insurer to initiate a flood damage claim. If the claimant also has a policy for wind damage from the same WYO insurer, the company generally adjusts losses pertaining to both types of damages, those caused by wind and those caused by flooding. In such cases, the WYO insurer must determine and apportion the damages caused by wind that it insures, along with those caused by flooding, insured by NFIP. To settle flood claims, insurance companies work with certified flood adjusters. When flood losses are reported, the WYO insurers assign flood adjusters to assess damages. The WYO insurers may use their own staff adjusters or contract with independent adjusters or adjusting firms to perform the flood adjustments. These adjusters are responsible for assessing damage, estimating losses, and submitting required reports, work sheets, and photographs to the insurance company, where the claim is reviewed and, if approved, processed for payment. Both the insurance industry and NFIP incurred unprecedented storm losses from the 2005 hurricane season. State insurance regulators estimated that property-casualty insurers had paid out approximately $22.4 billion in claims tied to Hurricane Katrina (excluding flood), as of December 31, 2006. However, industry observers estimate that insured losses tied to Hurricane Katrina alone (other than flood) could total more than $40 billion, depending on the outcome of outstanding claims and ongoing litigation. NFIP estimated that it had paid approximately $15.7 billion in flood insurance claims as of January 31, 2007, encompassing approximately 99 percent of all flood claims received. For hurricane-damaged properties, NFIP does not know whether both wind and flooding contributed toward damages nor the apportionment of damages between them, limiting its ability to monitor the accuracy of flood payments and address potential conflicts of interest that may arise in certain damage scenarios. Based on our preliminary review, we found that NFIP did not systematically collect and analyze data on wind-related damage when collecting flood claims data on properties subjected to both high winds and flooding, such as those damaged in the aftermath of Hurricanes Katrina and Rita. Further, such information is not sought even when the same insurance company serves as both the NFIP WYO insurer and the insurer for wind-related risks, posing a potential conflict in certain damage scenarios where properties are subjected to both types of perils. Without information on both wind and flood damages to the property, NFIP may not know on certain hurricane-damaged properties whether the amount it paid for a claim was limited to flood damage. As mentioned earlier, NFIP's WYO insurer may also insure the same property for wind-related damages. In this situation, a potential conflict of interest can materialize because the WYO insurer has a financial interest in the outcome of the claims adjustment it performs on behalf of NFIP. Conversely, if the policy for wind-related risks were issued by another insurer, the same potential conflict of interest would not exist because the flood and wind damages would be assessed and determined separately by different insurers. WYO insurers are required to submit flood damage claims data in accordance with NFIP's Transaction Record Reporting and Processing (TRRP) Plan, for inclusion into NFIP's claims database. In our review of data elements in NFIP's claims database, we found that NFIP does not require WYO insurers, which are responsible for adjusting the flood claim, to report information on property damages in a manner that could allow NFIP to differentiate how these damages (to the building or its contents) were divided between wind and flooding, even when the WYO insurer is also the wind insurer for the property. Specifically, the TRRP Plan for WYO insurers instructs them to include only flood-related damages in the data fields on "Total Building Damages" and "Total Damage to Contents." Further, the "Cause of Loss" data field does not incorporate an option to explicitly identify property damages caused by wind or partially caused by wind (e.g. combined wind and flood, hurricane, windstorm, etc.). As a result, WYO insurers do not report total property damages in a manner that 1) identifies the existence of wind damage or 2) discerns how damages were divided between wind versus flooding for properties that were subjected to a combination of both perils. Further, NFIP program contractors stated that they do not systematically track whether the WYO insurer processing a flood claim on a property is also the wind insurer for that property. This lack of transparency over both the wind and flood damages on hurricane- damaged properties limits NFIP's ability to verify that damages paid for under the flood policy were caused only by the covered loss of flooding. NFIP's normal claims processing activities, which do not incorporate a means to systematically collect information on wind-related damages, were further stressed during the 2005 hurricane season. For both Hurricanes Katrina and Rita, FEMA estimates that it has paid approximately $16.2 billion in claims, with average payments of over $95,000 and $47,000, respectively. As we reported in December of 2006, in an effort to assist policyholders, NFIP approved expedited claims processing methods that were unique to Hurricanes Katrina and Rita. Some expedited methods included the use of aerial and satellite photography and flood depth data in place of a site visit by a claims adjuster for properties where it was likely that covered damages exceeded policy limits. Under other expedited methods, FEMA also authorized claims adjustments without site visits where only foundations were left and square foot measurements of the dwellings were known. Such expedited procedures facilitated the prompt processing of flood claims payments to policyholders following the unprecedented damage of the 2005 hurricanes. However, once these flood claims were processed, as was the case for other flood claims on hurricane-damaged properties, NFIP did not systematically collect wind damage claims data tied to flood-damaged properties on an after-the-fact basis. Hence, NFIP does not know the extent to which wind contributed to total property damages. FEMA officials stated that they do not have access to wind damage claims data from the WYO insurers. Specifically, a letter from FEMA to GAO stated that: "FEMA's opinion is that, where flood insurance payments have been made, FEMA is permitted to review the background claims data in order to ensure that insurance claims payments are appropriately allocated to flood losses as opposed to wind-related losses. Such data may include the adjuster's report(s) and any engineering reports that support (or fail to support) the allocation of loss to flood versus wind damage. FEMA may request summaries and analyses of this information at any time to ensure proper processing of flood claims. Conversely, claims paid by a WYO company that do not involve flood insurance proceeds (and the data related thereto) are not accessible by FEMA, and indeed, do not need to be, as there would have been no improper allocation of flood insurance proceeds for wind losses. Moreover, the attempt to access this unrelated data may be found to violate various privacy protections." Hence, NFIP does not systematically collect data on wind damages for properties for which a flood claim has been received. As a result, for hurricane damaged properties subjected to both high winds and flooding, NFIP may not have all the information it needs to ensure that its claims payment was limited to only flood damage. FEMA's reinspection program, which helps validate the adjustment process and flood payments made, provides limited information that could enable FEMA to better validate the claims payments it makes for flood damage when wind is also a factor. Based on our preliminary review, the reinspection program does not systematically evaluate the apportionment of damages between wind and flooding, even when a potential conflict of interest may arise with the WYO insurer. Along with flood claims data collected from WYO insurers that service flood policies, FEMA, through its program contractor, operates a reinspection program to monitor and oversee claims adjustments and address concerns about flood payments. The stated purpose of the reinspection program is to reevaluate the flood adjustment and claim payment made on a given property to determine whether or not NFIP paid the correct amount for flood-related damages. This is accomplished through on-site reinspections and reevaluations of a sample of flood claim adjustments. However, we found that FEMA's reinspection program did not systematically incorporate a means for identifying whether nor the extent to which wind-related damages contributed to the losses. Without the ability to examine damages caused by both wind and flooding, the reinspection program is limited in its ability to assess whether NFIP paid only the portion of damages it was obligated to pay under the flood policy. During our study, we reviewed hundreds of reinspection files for properties with flood claims tied to Hurricanes Katrina and Rita. We found that the reinspection files did not confirm that the claim paid actually reflected only the damage covered by the flood insurance policy versus damage caused by other, uncovered damages, such as wind. Rather, the reinspection files generally contained limited and inconsistent documentation concerning the presence or extent of wind-related damages on properties without additional documentation that would enable FEMA to evaluate both the wind and flood damage information together. Specifically, the reinspection files reviewed did not consistently document whether or not damages were caused by a combination of both wind and flooding. The reinspection activities focused on reevaluating the extent to which building and content damages were caused by flooding. While some of the reinspection files included documentation as to whether or not damage was caused by a combination of wind and flooding, most did not. Information reviewed from 740 reinspection files revealed that nearly two- thirds of these reinspection reports did not include documentation to indicate whether damages were caused by a combination of both wind and flooding or only flooding. We found that approximately 26 percent included documentation indicating damage was caused only by flooding, while approximately 8 percent of the reinspection files included documentation that damages were caused by a combination of wind and flooding. In cases where reinspectors indicated that damages were caused by a combination of wind and flooding, insufficient data existed to assess the extent that wind contributed to the damages. That is, information about the wind damage during the reinspection process was not documented or analyzed in a systematic fashion. Hence, the reinspection activities did not systematically document or validate the presence or extent of wind damage in combination with flood damage in order to verify that flood payments were limited to flood damage. Moreover, as we have previously reported, FEMA does not choose a statistically valid sample for its reinspection process. Therefore, the results could not be projected to the universe of properties for which flood claims were made. We also noted that on-site reinspections of properties with flood claims tied to Hurricanes Katrina and Rita were generally conducted several months after the event. Such delays, while understandable considering the scope and magnitude of devastation resulting from these hurricanes in 2005, further limited NFIP's ability to reevaluate the quality and accuracy of the initial damage determination, given the ongoing natural and manmade events that continued to alter the damage scene. Finally, we explored whether NFIP could use data collectively gathered by state insurance regulators on property-casualty claims resulting from the 2005 hurricane season to match with NFIP flood claims data. We found that while Florida, Mississippi, Louisiana, Alabama, and Texas collected some aggregate information about claims from the property-casualty insurers, such data would have been of limited value to NFIP to evaluate the accuracy of its flood claims payments in any systematic way. Except for Florida, which had previously collected aggregate claim data from property-casualty insurers for major hurricane events, the other states used a special data call, based on Florida's system, to collect this aggregate claims data from the property-casualty insurers. However, the information collected was not in sufficient geographic detail to allow a meaningful evaluation of wind versus flood damage assessments and apportionments made by insurers. That is, claims data reported by property-casualty insurers through this mechanism were either reported on a statewide or county/parish-level basis that did not allow it to be matched with corresponding flood claims data on a community-level (e.g. zip code) or a property-level basis. In summary, based on our preliminary review, NFIP does not collect the information it needs to help evaluate whether it has paid only what it is obligated to pay under the flood policy for properties subjected to both high winds and flooding, such as those damaged by hurricanes Katrina and Rita. For these properties, NFIP did not systematically collect enough information to know whether there was wind damage, much less enough to understand how much of the damage was determined to have been caused by wind and how much was caused by flooding. Without the ability to collect information that documents both the flood and wind damage, NFIP's capacity to evaluate the accuracy of its payments is limited. As mentioned earlier, this is particularly important in situations where the WYO insurer also insures the property for wind damages. This creates a potential conflict of interest when the same insurer makes both the wind and flood damage assessments, because the insurer is effectively apportioning losses between itself and NFIP. Obtaining both the flood and wind adjustment claims data, whether from the same WYO insurer that services both or from different insurers, would be necessary to NFIP to verify the accuracy of the payments made for flood claims. Information collected and assessed through FEMA's claims reinspection program is also of limited usefulness in confirming or validating the accuracy of flood payments made by NFIP on properties damaged by both wind and flooding. Without the additional information about wind damage on properties for which flood claims were also filed, NFIP may not be certain whether it has paid only for the flood damages to these properties. Finally, we determined that using hurricane claims data collected by state insurance regulators would not have provided data on a property- or community-level basis to help NFIP determine how much damage was caused by wind versus flooding, and how these damages were apportioned between the two perils. The lack of both wind and flood claims data limits NFIP's ability to assess whether payments made on flood claims from the 2005 hurricane season were accurate. Mr. Chairmen, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittees may have. For additional information about this testimony please contact Orice M. Williams on (202) 512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Lawrence D. Cluff, Assistant Director; Tania Calhoun; Emily Chalmers; Rudy Chatlos; Chir-Jen Huang; Barry Kirby; and Melvin Thomas. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Disputes between policyholders and property-casualty insurers over coverage from the 2005 hurricane season highlight challenges in determining the appropriateness of claims for multiple-peril events. In particular, events such as hurricanes that can cause both wind and flood damages raise questions about the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) covered only damages caused by flooding. As a result, the Subcommittees asked GAO to provide preliminary views on (1) the information available to and obtained by NFIP through its claims process in determining flood damages for properties that sustained both wind and flood damages, and (2) the information collected by FEMA as part of the NFIP claims reinspection process. GAO collected data from FEMA, reviewed reinspection reports, reviewed relevant policies and procedures, and interviewed agency officials and others knowledgeable about NFIP. NFIP does not collect and analyze both wind and flood damage claims data in a systematic fashion, which may limit FEMA's ability to assess whether flood payments on hurricane-damaged properties are accurate. Instead, NFIP focuses only on the flood claims data to determine whether the amount actually paid on a claim reflects the damages caused by flooding. Flood claims data, collected by NFIP through the write-your-own (WYO) insurers--including those that sell and service both the wind and flood policies--do not include information on total damages to the property from all perils. That is, NFIP does not systematically collect information on wind damages from the WYO insurer when a flood claim is received. FEMA officials state that they do not have authority to collect wind damage claims data from WYO insurers, even when the insurer services both the wind and flood policies on the same property. As a result, for hurricane-damaged properties, such as those damaged by Hurricanes Katrina and Rita, NFIP does not have all the information it needs to ensure that its claims payments were limited to damage caused by flooding. Concerns over the processing of these flood claims are heightened when the same insurance company serves as both NFIP's WYO insurer and the property-casualty (wind) insurer for a given property. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating a potential conflict of interest. The lack of both flood and wind damage data also limits the usefulness of FEMA's quality assurance reinspection program for NFIP flood claims. GAO found that the NFIP reinspection program did not incorporate a means for collecting and analyzing both the flood and wind damage data together in a systematic fashion to reevaluate the extent to which wind and flooding were deemed to have contributed toward damages to the property. Further, we explored whether the wind-related claims data collectively gathered by state insurance regulators would be useful to NFIP to reevaluate damage assessments. We determined that this information would be of limited value to NFIP in reevaluating wind versus flood damage determinations made because such data is not collected in enough geographic detail to match with the corresponding flood claims data on a property- or community-level basis. Without the ability to examine damages caused by both wind and flooding, the reinspection program is limited in its ability to confirm whether NFIP paid only for losses caused by flooding.

General aviation encompasses all civil aviation except scheduled passenger and cargo operations (i.e., commercial) and excludes military operations. It includes air medical-ambulance operations, flight schools, corporate aviation, and privately owned aircraft. Altogether, more than 200,000 aircraft--from small aircraft with minimal payload capacities to business jets and large jets typically used by commercial airlines, such as the Boeing 747--operate at more than 19,000 facilities, including heliports. The sole common characteristic of general aviation operations is that flights are on demand rather than routinely scheduled. General aviation operations take place at more than 5,000 public use airports, almost all of which serve general aviation exclusively. However, general aviation operations may also take place alongside scheduled airline operations at larger commercial airports. TSA, part of the Department of Homeland Security (DHS), is the primary agency responsible for civil aviation security, which includes general aviation operations. TSA provides the general aviation community with guidance on threats and vulnerabilities, and enforces regulatory requirements for specific airports with general aviation operations. However, because of competing needs for commercial aviation security funding and the vastness and diversity of the general aviation network, the bulk of the responsibility for assessing and enhancing security at the general aviation airports falls on airport operators. In 2004, TSA issued voluntary Security Guidelines for General Aviation Airports. These guidelines are intended to provide general aviation airport owners, operators, and users with recommendations for security concepts, technology, and enhancements. In addition, airport operators are encouraged to perform a self-administered risk assessment of their airports based on a measurement tool provided by TSA. TSA recommends that general aviation airports use this tool to determine what security enhancements may be most appropriate to make given the airport's location, number of based aircraft, runway length, and number of annual operations. Based on the results of these self-assessments, the operators can decide whether to implement the appropriate countermeasures suggested, such as fencing; perimeter controls; locks on aircraft, hangars, or both; closed-circuit television (CCTV); lighting; access control systems; and other security features. In addition to issuing suggested security guidelines, TSA has implemented security requirements that are typically related to an airport's location and size of aircraft. For example, pilots flying to and from general aviation airports within Washington, D.C., airspace must follow security measures including background checks and adherence to specific security procedures. For general aviation flights to and from Ronald Reagan Washington National Airport, TSA officials also inspect crew members and passengers, including performing background checks, and their baggage. In addition, TSA requires private charter services using aircraft that either (1) have a maximum takeoff weight greater than 100,309 pounds (45,500 kilograms) or (2) have 61 or more passenger seats to implement a security program that includes passenger screening through metal detection devices, X-ray screening for carry-on and checked baggage, and hiring a certified passenger and baggage screening workforce. Individual operators are generally responsible for conducting these requirements rather than airport officials. In addition, TSA encourages the general aviation community and the public to be vigilant about general aviation security by suggesting specific security awareness and measures for reporting suspicious activity and securing aircraft and aircraft facilities. Examples include aircraft with unusual modifications or activity; pilots appearing to be under the control of others; unfamiliar persons loitering around the field; suspicious aircraft lease or rental requests; anyone making threats; and unusual, suspicious activities or circumstances. The TSA program also advises aircraft operators to (1) always keep their aircraft locked, (2) refrain from leaving keys in unattended aircraft, (3) use secondary locks or aircraft disablers, and (4) lock hangars when they are unattended. The Implementing Recommendations of the 9/11 Commission Act of 2007 requires TSA to develop a standardized threat and vulnerability assessment program for general aviation airports and to implement a program to perform such assessments on a risk-managed basis at general aviation airports. From January through April 2010, TSA invited approximately 3,000 general aviation airport operators to complete its online General Aviation Airport Vulnerability Assessment Survey. The survey was intended to highlight the security conditions and vulnerabilities of the general aviation community. According to TSA, the results of the survey were calculated to discover the general strengths and weaknesses in the general aviation community, and to show an overall picture of general aviation security measures at a national level and by regions. In addition, TSA stated that the survey results may be used to show a need to develop grants or other means of funding to improve general aviation security measures. The 13 airports we visited had multiple security measures in place to protect against unauthorized access. The 3 airports that handle commercial flights in addition to general aviation flights (airports 11, 12, and 13 in figure 1) had implemented nearly all of the security measures we assessed. These 3 airports are required to follow TSA regulations because of their commercial flights. However, we identified potential vulnerabilities at the 10 general aviation airports that could allow unauthorized access to aircraft or airport grounds, facilities, or equipment. These vulnerabilities include security measures discussed specifically in TSA's 2004 Security Guidelines for General Aviation Airports, which offered suggestions for general aviation airports to voluntarily enhance their security. Security measures varied across the airports we visited, as well as by the type of security measure. Of the 10 general aviation airports, nearly all had in place or partially in place the following security measures: perimeter fencing or natural barriers, lighting around hangars, aircraft and hangars locked and secured, and CCTV cameras in areas related to unauthorized access. None of the 10 general aviation airports had perimeter lighting in place, and only 1 of the general aviation airports had an intrusion detection system, as discussed below. Figure 1 shows the security measures we observed during our on-site assessments at 13 selected airports. In their technical comments, officials from some airports mentioned security measures that were implemented after we conducted our assessments or that we did not observe in place during our assessments; as such, we were unable to verify that these security measures are in place at the airports in question. For example, an official from airport 1 informed us that the airport has implemented sign-in and sign-out procedures for tracking transient pilots. In addition, an official from airport 9 stated that law enforcement officers provide training on aircraft and hangar security to operators and tenants at the airport. Fencing. All but one airport had complete or partial perimeter fencing or was protected in part by a natural barrier, such as a body of water. TSA's guidelines suggest that fencing, natural barriers, or other physical barriers can be used to deter and delay the access of unauthorized persons onto sensitive areas of airports--such as terminal areas, aircraft storage, and maintenance areas--and also designed to be a visual and psychological deterrent as well as a physical barrier. One airport had no perimeter fencing in place. While we did not seek to systematically test the effectiveness of security measures in place at all the airports we visited, at this airport our investigators were able to freely drive onto the runway and bring their car next to a jet aircraft. They were not stopped or approached by any airport security, management, or personnel or other individuals while they approached and drove around near the aircraft. According to an official from this airport, it is one of many open field airports located in the United States. He added that pilot vigilance plays a key role in the airport's security, as pilots are responsible for maintaining awareness of suspicious individuals on airport grounds. Figures 2 and 3 show our investigators driving their car onto the runway of this airport and approaching the jet aircraft mentioned above. Although 12 of the 13 airports had full or partial perimeter fencing, or other barriers in place, the fencing at 6 airports was partially bordered by bushes or trees, partially obstructed from view, or located next to a parking lot. TSA's suggested guidelines caution that such factors may limit the effectiveness of perimeter fencing. For example, bushes or other growth can obstruct surveillance of the surrounding areas, and a parking lot may enable someone to use a vehicle to crash through the fence. According to TSA's suggested security guidelines, such incidents have occurred. Figures 4 and 5 show perimeter fencing located next to trees or a parking lot. Lighting. All 13 airports we visited had lighting around their hangars, and all but 3 airports had lighting at designated access points. Ten of the airports we visited--the 10 airports that handle general aviation but not commercial aviation--did not have lighting along their outer perimeters. TSA's suggested guidelines note the effectiveness of lighting in deterring and detecting individuals seeking unauthorized access to airports, but caution that such lighting should not interfere with aircraft operations. The three airports we visited that did have perimeter lighting in place serve a combination of commercial and general aviation traffic. Perimeter lighting provides both a real and psychological deterrent, and allows security personnel to maintain visual-assessment capability during darkness. At several airports we visited, airport managers or other officials stated that streetlights in the neighborhoods surrounding their airports-- lights that are not operated or controlled by airport management-- provided lighting of the perimeter. Secured aircraft. All 13 airports we visited had measures at least partially in place so that aircraft and hangars were locked and secured. The 3 airports that serve a combination of commercial and general aviation traffic all had these measures in place. At several general aviation airports, we found that keeping aircraft (4 of 10), hangars (7 of 10), or both locked and secured was the responsibility of individual aircraft or facility operators, owners, or tenants rather than airport management. Two of the airports we visited are located in New Jersey; at these airports, officials informed us that state law requires all aircraft to be secured through the use of two locks. TSA's suggested guidelines note that securing aircraft is the most basic method of enhancing airport security, and that employing multiple methods of securing aircraft makes it more difficult for unauthorized individuals to gain access to aircraft. On-site security. While most of the airports we visited had on-site law enforcement or other security--such as private security guards--in place, several airports either had no on-site security at all or had on-site security present only during certain times of day, usually in the late evening and early morning. However, the three airports we visited that serve a combination of commercial and general aviation traffic all had this measure in place. Officials from several airports we visited stated that law enforcement officers conduct regular patrols of their airports or respond to emergencies within 3 to 5 minutes; however, these law enforcement officers are not on-site at these airports at all times. The presence of on- site security helps to prevent or impede attempts of unauthorized access, and could include inspection of vital perimeter and access points. TSA's guidelines suggest that airports consider having local law enforcement officers regularly or randomly patrol ramps and aircraft hangar areas, potentially with increased patrols during periods of heightened security. Detecting intruders. Nearly all of the airports we visited--12 of 13--had CCTV cameras installed to monitor for unauthorized access; at 2 of these 12 airports, the CCTV cameras were monitored by individual operators. At one airport, the CCTV cameras were aimed at the administration building and other areas, but not at the perimeter or designated access points. Most of the airports we visited (9 of 13) lacked an intrusion detection system, which may consist of building alarms, CCTV monitoring, or both. TSA guidance states that such systems can replace the need for physical security personnel to patrol an entire facility or perimeter. For example, if an intrusion is detected, the system administrator could notify police, airport management, and other officials. The 3 airports that serve a combination of commercial and general aviation traffic all had CCTV cameras and intrusion detection systems in place. At the time of our visit, an official from airport 4 stated that his airport would soon have an intrusion detection system. Designated access point controls. Eleven of the 13 airports we visited had controls in place or partially in place at designated access points. All 3 airports that serve commercial and general aviation flights had designated access controls in place. TSA's suggested guidelines note that access point controls should be able to differentiate between an authorized and an unauthorized user, and may be the determining factor in the overall effectiveness of perimeter security in the area of the access point. The airport mentioned above without any perimeter fencing effectively has no access point controls, aside from gates being closed overnight, as was demonstrated when our investigators drove onto the runway unchallenged. An official from this airport informed us that there are gates at the main access points, which are shut when security personnel are on- site from 10:00 p.m. to 6:00 a.m. Another airport had access gates, but they open for all visitors through the use of motion detectors. According to an official from this airport, the motion-controlled access gates allow for individuals to access the airport while keeping wildlife out. At a third airport, there were vehicle access controls that required a code to enter the airport, but there were no pedestrian access controls to prevent individuals from entering onto the ramp area of the airport. An official from this airport told us that individual operators are primarily responsible for controlling those access points. Effective access controls at dedicated vehicle and pedestrian access points help to detect threats and to reduce the possibility that unauthorized individuals will gain access to airports or aircraft. Screening. Most of the airports we visited did not implement physical screening of passengers and their baggage (8 of 13) or of packages and cargo (11 of 13) on general aviation flights. However, officials at multiple airports told us that pilots typically are familiar with their passengers and may escort them to the aircraft. TSA's suggested guidelines related to passengers on general aviation flights state that prior to boarding, the pilot in command should ensure that the identity of all occupants is verified, all occupants are aboard at the invitation of the owner or operator, and all baggage and cargo is known to the occupants. Further, TSA notes that passengers on general aviation flights are generally better known to airport personnel and aircraft operators than most passengers on commercial flights. Two of the 3 airports providing combined commercial and general aviation services implement screening of passengers and their baggage and of cargo and packages. At the third airport, although passenger and baggage screening is conducted, airport officials stated that because they do not perform significant handling of cargo and packages, they do not screen these items. According to airport officials, several incidents of unauthorized access have occurred within approximately the past 10 years at three of the airports we visited. One airport provided documentation detailing two incidents. According to a local police report supplied by airport management and information provided by an airport official, in June 2002 an airline security guard observed a suspicious individual outside the airport's perimeter, near a hangar being constructed. When airport security personnel spotted the individual, he jumped over the perimeter fence onto the airport grounds, and fled into a wooded area covering parts of the perimeter. Local police were called but could not locate the individual after an extensive search. In a 2004 incident, an intoxicated man drove his car onto airport grounds and down a taxiway at high speeds before airport authorities and law enforcement officials apprehended him. While the airport had vehicle access controls, the driver circumvented the controls by following closely behind an authorized vehicle that entered the airport through a gate. Neither of these incidents involved unauthorized individuals accessing aircraft. According to an official from this airport, corrective measures were put in place after each incident. The 2002 incident assisted airport management in developing new security procedures and policies, and the 2004 incident resulted in security training related to vehicle access point controls, among other improvements. Officials from two other airports described incidents of unauthorized access but did not provide documentation. One airport had two incidents in which aircraft were stolen or removed from the airport without approval: one aircraft was flown to another city in the same state by a teen who knew the combination to the locked hangar in which the aircraft was stored, and the second aircraft was recovered in Mexico. According to an official from this airport, no corrective actions were taken in response to the incident with the teen because he was well known to the aircraft owner and had actually received the combination to the lock from the aircraft owner. The airport also did not implement any corrective actions in response to the incident in which a stolen aircraft was flown to Mexico. However, the airport official stated that the absence of additional aircraft thefts since this incident demonstrates the effectiveness of the airport's existing security measures. At a second airport, unauthorized individuals drove two Corvettes onto the taxiway after obtaining the security code for the vehicle access gate. An official from this airport informed us that the airport requested that local police conduct more frequent patrols in response to this incident. Officials from 7 of the 13 airports indicated that there were no incidents of unauthorized access at their airports within the past 10 years. We did not receive information about incidents of unauthorized access from officials at the 3 airports with both commercial and general aviation operations. We did not pursue this inquiry because it was not our primary objective. We met with TSA officials in January 2011 to brief them on the results of our assessments. These officials generally agreed with our findings. According to TSA officials, improvements in general aviation security as a result of TSA's vulnerability assessment surveys will need to be narrowly focused on security measures that can be implemented at a large number of airports yet still prove effective, given the limited resources that may be made available. In written comments on our report, DHS generally concurred with the overall content and results of our report and indicated that TSA will work in partnership with the general aviation community to support their efforts to address the issues we identified. However, DHS noted TSA security requirements that are not discussed in the Background section of our report. Specifically, TSA requires certain operators of aircraft weighing over 12,500 pounds maximum takeoff weight, based on the type of operation, to adopt a security program and perform security measures, such as checking passenger names against the No-Fly and Selectee Lists, designating security coordinators, and having crewmembers undergo security threat assessments. While our report focused on the physical security measures in place at the specific airports we visited and was not intended to include a comprehensive discussion of all TSA general aviation security initiatives, we acknowledge that TSA has additional security initiatives in place beyond those discussed in our report. DHS also stated that TSA is in the process of issuing a rulemaking for additional security requirements for large general aviation aircraft. According to DHS, TSA expects the release of this rulemaking to further enhance aviation security and codify many of the best practices already implemented by the general aviation industry. In addition, DHS stated that while most airports would readily implement the security measures recommended by TSA, they are unable to put additional security measures in place primarily because of a lack of funding. DHS comments are reprinted in appendix III. As mentioned above, we provided officials from all 13 airports an opportunity to comment on our findings as they related to their specific airports. As appropriate, we incorporated their technical comments into our report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, the Assistant Secretary of the Transportation Security Administration, selected congressional committees, and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning 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. Major contributors to this report are provided in appendix IV. To determine what physical security measures selected airports with general aviation operations have to prevent unauthorized access, we performed on-site assessments at a nonrepresentative selection of 13 airports that exhibit at least two of the following characteristics that potentially affect an airport's security posture under TSA guidelines: (1) airport is a public use airport, (2) airport location is within 30 nautical miles of a mass population center of at least 1 million people, (3) based aircraft over 12,500 pounds are located at the airport, (4) airport has at least one runway with a length of at least 5,000 feet, and (5) over 50,000 annual aircraft operations--takeoffs and landings--occur at the airport. We selected airports from a variety of geographic locations and in clusters that would allow us to combine multiple on-site assessments on each visit, and that represented a range in the number of annual aircraft operations. Our selection of airports also includes 3 airports with both commercial and general aviation operations, and that operate under Transportation Security Administration (TSA) security requirements. We traveled to each of the 13 airports we selected and conducted an assessment of the physical security in place to prevent unauthorized access to the airports and aircraft located at the airports. We assessed each airport's security measures against TSA's 2004 voluntary security guidelines and other criteria based on our expertise in performing security assessments and a review of industry guidance. The security measures we assessed are primarily focused on outer airport perimeter security and curbside-to-planeside security. Physical security is just one aspect of overall security provisions. For the purposes of this report, we defined physical security as the combination of operational and security equipment, personnel, and procedures used to prevent unauthorized individuals from gaining access to aircraft or airport facilities and grounds. We did not test the effectiveness of the security, nor did we assess measures not directly related to physical security, such as pilot background checks or other intelligence-gathering activities. Although we focused on measures implemented by airports and therefore under direct control of airport management, we gave partial credit when individual aircraft or facility operators, owners, or tenants were responsible for implementing certain security measures. At each airport we visited, we interviewed airport management and other officials with knowledge of the security measures. We conducted our on-site assessments with advance notice to airport officials; we did not conduct any undercover testing on this engagement. During our visits, we also obtained photographic evidence of security measures; requested documentation related to any specific incidents of unauthorized access at each airport; and attempted to obtain information on each airport's procedures, if any, for screening passengers, their carry-on items, and packages or cargo by requesting documentation pertaining to their security procedures and measures. Since TSA does not require the implementation of security measures for airports with only general aviation operations, our assessments are not meant to imply that any of the general aviation airports we visited have failed to implement required security measures. Rather, our assessments are meant to illustrate the variation in security conditions at the selected general aviation airports. We acknowledge that the specific security measures we selected for the purpose of our assessments are not the only security measures that general aviation airports can implement to attempt to prevent unauthorized access. For example, a state government can also impose requirements on general aviation operations within its jurisdiction; however, the examination of specific state laws, regulations, or other requirements applicable to general aviation operations was not part of our methodology. Moreover, fixed-base operators at these 13 airports may have additional security measures in place to prevent unauthorized access that we did not observe during our visits. We generally did not attempt to interview officials from individual operators. We did not test the effectiveness of the security measures that we found in place at the airports we visited. The results of our assessments cannot be projected to all general aviation airports nationwide. We received technical comments from officials representing the 13 airports we visited and incorporated these comments into our report as appropriate. We conducted work for this engagement from April 2010 to May 2011 in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency. To perform our security assessment of general aviation airports, we identified 14 key security measures that we determined would help airports to protect against the risk of unauthorized access. The security measures we assessed are primarily focused on outer airport perimeter security and curbside-to-planeside security. We based their selection on our expertise in performing security assessments, a review of security features described in TSA's 2004 Security Guidelines for General Aviation Airports, and a review of industry guidance. A strong physical security system uses layers of security to deter, detect, delay, and deny intruders: Deter. Physical security measures that deter an intruder are intended to reduce the intruder's perception that an attack will be successful--an armed guard posted at airport access gates, for example. Detect. Measures that detect an intruder could include video cameras and alarm systems. They could also include roving guard patrols. Delay. Measures that delay an intruder increase the opportunity for a successful security response. These measures include barriers such as perimeter fences. Deny. Measures that can deny an intruder include vehicle and pedestrian screening that only permits authorized individuals to access sensitive areas of the airport. Some security measures serve multiple purposes. For example, a perimeter fence is a basic security feature that can deter, delay, and deny intruders. However, a perimeter fence on its own will not stop a determined intruder. This is why, in practice, layers of security should be integrated in order to provide the strongest protection. Thus, a perimeter fence should be combined with an intrusion detection system that would alert security officials if the perimeter has been breached. A strong system would then tie the intrusion detection alarm to the closed-circuit television (CCTV) network, allowing security officers to immediately identify intruders. Table 1 shows the security measures we focused on during our assessment work. In addition to the contact named above, the following staff members made significant contributions to this report: Gregory D. Kutz, Director; Cindy Brown-Barnes, John Cooney, and Andy O'Connell, Assistant Directors; John R. Ahern, Christopher W. Backley; Betsy Isom; Maria Kabiling; Barbara Lewis; Olivia Lopez; Steve Martin; Flavio J. Martinez; George Ogilvie; Barry Shillito; and Tim Walker.

General aviation accounts for three-quarters of U.S. air traffic, from small propeller planes to large jets, operating among nearly 19,000 airports. While most security operations are left to private airport operators, the Transportation Security Administration (TSA), part of the Department of Homeland Security (DHS), provides guidance on threats and vulnerabilities. In 2004, TSA issued suggested security enhancements that airports could implement voluntarily. Unlike commercial airports, in most cases general aviation airports are not required to implement specific security measures. GAO was asked to perform onsite assessments at selected airports with general aviation operations to determine what physical security measures they have to prevent unauthorized access. With advance notice, GAO investigators overtly visited a nonrepresentative selection of 13 airports, based on TSA-determined risk factors. Three of the airports also serve commercial aviation and are therefore subject to TSA security regulations. Using TSA's voluntary recommendations and GAO investigators' security expertise, GAO determined whether certain security measures were in place. GAO also requested documentation of incidents of unauthorized access. Results of GAO's assessments cannot be projected to all general aviation airports and are not meant to imply that the airports failed to implement required security measures.. The 13 airports GAO visited had multiple security measures in place to protect against unauthorized access, although the specific measures and potential vulnerabilities varied across the airports. The 3 airports also supporting commercial aviation had generally implemented all the security measures GAO assessed, whereas GAO identified potential vulnerabilities at most of the 10 general aviation airports that could allow unauthorized access to aircraft or airport grounds, facilities, or equipment. For example, 12 of the 13 airports had perimeter fencing or natural barriers as suggested by TSA; but at 6 of the airports fencing was partially bordered by bushes or trees or located next to a parking lot, which can obstruct surveillance or allow someone to scale or topple the fence. GAO found that none of the 10 general aviation airports had lighting along their perimeters. Perimeter lighting provides both a real and psychological deterrent, and allows security personnel to maintain visual assessment during darkness. However, officials at several airports stated that neighborhood street lights provided perimeter lighting, and all 13 airports had lighting around their hangars. The 10 general aviation airports' use of intrusion monitoring varied, with closed-circuit TV (CCTV) cameras and onsite law enforcement being more prevalent than an intrusion detection system, which can consist of multiple monitors including building alarms and CCTV. TSA guidance states that such systems can reduce or replace the need for physical security personnel to patrol an entire facility or perimeter. According to airport officials, several incidents of unauthorized access have occurred within approximately the past 10 years at three of the airports, though they were unable to provide documentation in all cases. Three incidents did not involve access to aircraft, but rather to airport grounds. In separate incidents, two airplanes were stolen or taken from one airport but later recovered. Airport officials informed GAO that they took corrective actions in response to these incidents as appropriate. DHS generally concurred with GAO's findings and indicated that TSA will work in partnership with the general aviation community to address vulnerabilities. DHS also noted that a lack of funding will be a challenge for most airports. GAO shared its findings with officials at the 13 airports it visited and incorporated their comments as appropriate.

The public faces a risk that critical services could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, airline flights grounded, and national defense affected. The many interdependencies that exist among governments and within key economic sectors could cause a single failure to have adverse repercussions. While managers in the government and the private sector are taking many actions to mitigate these risks, a significant amount of work remains, and time frames are unrelenting. The federal government is extremely vulnerable to the Year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations. This challenge is made more difficult by the age and poor documentation of the government's existing systems and its lackluster track record in modernizing systems to deliver expected improvements and meet promised deadlines. Unless this issue is successfully addressed, serious consequences could ensue. For example: Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Payments to veterans with service-connected disabilities could be severely delayed if the system that issues them either halts or produces checks so erroneous that it must be shut down and checks processed manually. The military services could find it extremely difficult to efficiently and effectively equip and sustain their forces around the world. Federal systems used to track student loans could produce erroneous information on loan status, such as indicating that a paid loan was in default. Internal Revenue Service tax systems could be unable to process returns, thereby jeopardizing revenue collection and delaying refunds. The Social Security Administration process to provide benefits to disabled persons could be disrupted if interfaces with state systems fail. In addition, the year 2000 also could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years that contain embedded computer systems to control, monitor, or assist in operations. For example, heating and air conditioning units could stop functioning properly and card-entry security systems could cease to operate. Year 2000-related problems have already been identified. For example, an automated Defense Logistics Agency system erroneously deactivated 90,000 inventoried items as the result of an incorrect date calculation. According to the agency, if the problem had not been corrected (which took 400 work hours), the impact would have seriously hampered its mission to deliver materiel in a timely manner. In another case, the Department of Defense's Global Command Control System, which is used to generate a common operating picture of the battlefield for planning, executing, and managing military operations, failed testing when the date was rolled over to the year 2000. Our reviews of federal agency Year 2000 programs found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks remain and a great deal more work is needed. Our reports contained numerous recommendations, which the agencies have almost universally agreed to implement. Among them were the need to complete inventories of systems, document data exchange agreements, and develop contingency plans. Audit offices of some states also have identified significant Year 2000 concerns. Risks include the potential that systems supporting benefit programs, motor vehicle records, and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected. These audit offices have made recommendations including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. Data exchanges between the federal government and the states are also critical to ensuring that billions of dollars of benefits payments are made to millions of recipients. Consequently, in October 1997 the Commonwealth of Pennsylvania hosted the first State/Federal Chief Information Officer (CIO) Summit. Participants agreed to (1) use a four-digit contiguous computer standard for data exchanges, (2) establish a national policy group, and (3) create a joint state/federal working group. America's infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. Key economic sectors that could be seriously affected if their systems are not Year 2000 compliant are information and telecommunications; banking and finance; health, safety, and emergency services; transportation; utilities; and manufacturing and small business. The information and telecommunications infrastructure is especially important because it (1) enables the electronic transfer of funds, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Illustrations of Year 2000 risks follow. According to the Basle Committee on Banking Supervision--an international committee of banking supervisory authorities--failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Moreover, the Chair of the Federal Financial Institutions Examination Council, a U.S. interagency council composed of federal bank, credit union, and thrift institution regulators, stated that banking is one of America's most information-intensive businesses and that any malfunctions caused by the century date change could affect a bank's ability to meet its obligations. He also stated that of equal concern are problems that customers may experience that could prevent them from meeting their obligations to banks and that these problems, if not addressed, could have repercussions throughout the nation's economy. According to the International Organization of Securities Commissions, the Year 2000 presents a serious challenge to the world's financial markets. Because they are highly interconnected, a disruption in one segment can spread quickly to others. FAA recently met with representatives of airlines, aircraft manufacturers, airports, fuel suppliers, telecommunications providers, and industry associations to discuss the Year 2000 issue. Participants raised the concern that their own Year 2000 compliance would be irrelevant if FAA were not compliant because of the many system interdependencies. Representatives went on to say that unless FAA were substantially Year 2000 compliant on January 1, 2000, flights would not get off the ground and that extended delays would be an economic disaster. Another risk associated with the transportation sector was described by the Federal Highway Administration, which stated that highway safety could be severely compromised because of potential Year 2000 problems in operational transportation systems. For example, date-dependent signal timing patterns could be incorrectly implemented at highway intersections if traffic signal systems run by state and local governments do not process four-digit years correctly. One risk associated with the utility sector is the potential loss of electrical power. For example, Nuclear Regulatory Commission staff believe that safety-related safe shutdown systems will function but that a worst-case scenario could occur in which Year 2000 failures in several nonsafety-related systems could cause a plant to shut down, resulting in the loss of off-site power and complications in tracking post-shutdown plant status and recovery. With respect to the health, safety, and emergency services sector, according to the Department of Health and Human Services, the Year 2000 issue holds serious implications for the nation's health care providers and researchers. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. In addition, according to the Gartner Group, health care is substantially behind other industries in Year 2000 compliance, and it predicts that at least 10 percent of mission-critical systems in this industry will fail because of noncompliance. One of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. In September 1997, the Gartner Group surveyed 2,400 companies in 17 countries and concluded that "hirty percent of all companies have not started dealing with the year 2000 problem." Although there are many national and international risks related to the year 2000, our limited review of these key sectors found a number of private-sector organizations that have raised awareness and provided advice. For example: The Securities Industry Association established a Year 2000 committee in 1995 to promote awareness and since then has established other committees to address key issues, such as testing. The Electric Power Research Institute sponsored a conference in 1997 with utility professionals to explore the Year 2000 issue in embedded systems. Representatives of several oil and gas companies formed a Year 2000 energy industry group, which meets regularly to discuss the problem. The International Air Transport Association organized seminars and briefings for many segments of the airline industry. In addition, information technology industry associations, such as the Information Technology Association of America, have published newsletters, issued guidance, and held seminars to focus information technology users on the Year 2000 problem. As 2000 approaches and the scope of the problems has become clearer, the federal government's actions have intensified, at the urging of the Congress and others. The amount of attention devoted to this issue has increased in the last year, culminating with the issuance of a February 4, 1998, executive order establishing the President's Council on Year 2000 Conversion. The Council Chair is to oversee federal agency Year 2000 efforts as well as act as spokesman in national and international forums, coordinate with state and local governments, promote appropriate federal roles with respect to private-sector activities, and report to the President on a quarterly basis. This increased attention could help minimize the disruption to the nation as the millennium approaches. In particular, the President's Council on Year 2000 Conversion can initiate additional actions needed to mitigate risks and uncertainties. These include ensuring that the government's highest priority systems are corrected and that contingency plans are developed across government. Agencies have taken longer to complete the awareness and assessment phases of their Year 2000 programs than is recommended. This leaves less time for critical renovation, validation, and implementation phases. For example, the Air Force has used over 45 percent of its available time completing the awareness and assessment phases, while the Gartner Group recommends that no more than about a quarter of an organization's Year 2000 effort should be spent on these phases. Consequently, priority-setting is essential. According to OMB's latest report, as of February 15, 1998, only about 35 percent of federal agencies' mission-critical systems were considered to be Year 2000 compliant. This leaves over 3,500 mission-critical systems, as well as thousands of nonmission-critical systems, still to be repaired, and over 1,100 systems to be replaced. It is unlikely that agencies can complete this vast amount of work in time. Accordingly, it is critical that the executive branch identify those systems that are of the highest priority. These include those that, if not corrected, could most seriously threaten health and safety, the financial well-being of American citizens, national security, or the economy. Agencies must also ensure that their mission-critical systems can properly exchange data with other systems and are protected from errors that can be introduced by external systems. For example, agencies that administer key federal benefits payment programs, such as the Department of Veterans Affairs, must exchange data with the Department of the Treasury, which, in turn, interfaces with financial institutions, to ensure that beneficiary checks are issued. As a result, completing end-to-end testing for mission-critical systems is essential. OMB's reports on agency progress do not fully and accurately reflect the federal government's progress toward achieving Year 2000 compliance because not all agencies are required to report and OMB's reporting requirements are incomplete. For example: OMB had not, until recently, required independent agencies to submit quarterly reports. Accordingly, the status of these agencies' Year 2000 programs has not been monitored centrally. On March 9, 1998, OMB asked 31 independent agencies, including the Securities and Exchange Commission and the Pension Benefit Guaranty Corporation, to report on their progress in fixing the Year 2000 problem by April 30, 1998. OMB plans to include a summary of those responses in its next quarterly report to the Congress. However, unlike its quarterly reporting requirement for the major departments and agencies, OMB does not plan to request the independent agencies to report again until next year. Since the independent agencies will not be reporting again until April 1999, it will be difficult for OMB to be in position to address any major problems. Agencies are required to report their progress in repairing noncompliant systems but are not required to report on their progress in implementing systems to replace noncompliant systems, unless the replacement effort is behind schedule by 2 months or more. Because federal agencies have a poor history of delivering new system capabilities on time, it is essential to know agencies' progress in implementing replacement systems. OMB's guidance does not specify what steps must be taken to complete each phase of a Year 2000 program (i.e., assessment, renovation, validation, and implementation). Without such guidance, agencies may report that they have completed a phase when they have not. Our enterprise guide provides information on the key tasks that should be performed within each phase. Mr. Chairman, in your December 1997 letter to OMB, you expressed similar concerns that OMB reports be more comprehensive and reliable. In January 1998, OMB asked agencies to describe their contingency planning activities in their February 1998 quarterly reports. These instructions stated that contingency plans should be established for mission-critical systems that are not expected to be implemented by March 1999, or for mission-critical systems that have been reported as 2 months or more behind schedule. Accordingly, in their February 1998 quarterly reports, several agencies reported that they planned to develop contingency plans only if they fall behind schedule in completing their Year 2000 fixes. Agencies that develop contingency plans only for systems currently behind schedule, however, are not addressing the need to ensure the continuity of a minimal level of core business operations in the event of unforeseen failures. As a result, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test effective contingency plans. Contingency plans should be formulated to respond to two types of failures: those that can be predicted (e.g., system renovations that are already far behind schedule) and those that are unforeseen (e.g., a system that fails despite having been certified as Year 2000 compliant or a system that cannot be corrected by January 1, 2000, despite appearing to be on schedule today). Moreover, contingency plans that focus only on agency systems are inadequate. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure. One weak link anywhere in the chain of critical dependencies can cause major disruptions. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. In its latest governmentwide Year 2000 progress report, issued March 10, 1998, OMB clarified its contingency plan instructions. OMB stated that contingency plans should be developed for all core business functions. Today, we are issuing an exposure draft of a guide to help agencies ensure the continuity of operations through contingency planning. The CIO Council worked with us in developing this guide and intends to adopt it for federal agency use. OMB's assessment of the current status of federal Year 2000 progress has been predominantly based on agency reports that have not been consistently verified or independently reviewed. Without such independent reviews, OMB and others, such as the President's Council on Year 2000 Conversion, have no assurance that they are receiving accurate information. OMB has acknowledged the need for independent verification and asked agencies to report on such activities in their February 1998 quarterly reports. While this has helped provide assurance that some verification is taking place through internal checks, reviews by Inspectors General, or contractors, the full scope of verification activities required by OMB has not been articulated. It is important that the executive branch set standards for the types of reviews that are needed to provide assurance regarding the agencies' Year 2000 actions. Such standards could encompass independent assessments of (1) whether the agency has developed and is implementing a comprehensive and effective Year 2000 program, (2) the accuracy and completeness of the agency's quarterly report to OMB, including verification of the status of systems reported as compliant, (3) whether the agency has a reasonable and comprehensive testing approach, and (4) the completeness and reasonableness of the agency's business continuity and contingency planning. The CIO Council's Subcommittee on the Year 2000 has been useful in addressing governmentwide issues. For example, the Year 2000 Subcommittee worked with the Federal Acquisition Regulation Council and industry to develop a rule that (1) establishes a single definition of Year 2000 compliance in executive branch procurement and (2) generally requires agencies to acquire only Year-2000 compliant products and services or products and services that can be made Year 2000 compliant. The subcommittee has also established subgroups on (1) best practices, (2) state issues and data exchanges, (3) industry issues, (4) telecommunications, (5) buildings, (6) biomedical and laboratory equipment, (7) General Services Administration support and commercial off-the-shelf products, and (8) international issues. The subcommittee's effectiveness could be further enhanced. For example, currently agencies are not required to participate in the Year 2000 subcommittee. Without such full participation, it is less likely that appropriate governmentwide solutions can be implemented. Further, while the subcommittee's subgroups are currently working on plans, they have not yet published these with associated milestones. It is important that this be done and publicized quickly so that agencies can use this information in their Year 2000 programs. It is equally important that implementation of agency activities resulting from these plans be monitored closely and that the subgroups' decisions be enforced. Another governmentwide issue that needs to be addressed is the availability of information technology personnel. In their February 1998 quarterly reports, several agencies reported that they or their contractors had problems obtaining and/or retaining information technology personnel. Currently, no governmentwide strategy exists to address recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work. To date, the CIO Council has not addressed this issue although it is considering asking the Office of Personnel Management to review the possibility of obtaining waivers to rehire retired federal personnel. Given the sweeping ramifications of the Year 2000 issue, other countries have set up mechanisms to solve the Year 2000 problem on a nationwide basis. Several countries, such as the United Kingdom, Canada, and Australia, have appointed central organizations to coordinate and oversee their governments' responses to the Year 2000 crisis. In the case of the United Kingdom, for example, a ministerial group is being established, under the leadership of the President of the Board of Trade, to tackle the Year 2000 problem across the public and private sectors. These countries have also established public/private forums to address the Year 2000 problem. For example, in September 1997, Canada's Minister of Industry established a government/industry Year 2000 task force of representatives from banking, insurance, transportation, manufacturing, telecommunications, information technology, small and medium-sized businesses, agriculture, and the retail and service sectors. The Canadian Chief Information Officer is an ex-officio member of the task force. It has been charged with providing (1) an assessment of the nature and scope of the Year 2000 problem, (2) the state of industry preparedness, and (3) leadership and advice on how risks could be reduced. This task force issued a report in February 1998 with 18 recommendations that are intended to promote public/private-sector cooperation and prompt remedial action. In the United States, the President's recent executive order could serve as the linchpin that bridges the nation's and the federal government's various Year 2000 initiatives. While the Year 2000 problem could have serious consequences, there is no comprehensive picture of the nation's readiness. As one of its first tasks, the President's Council on Year 2000 Conversion could formulate such a comprehensive picture in partnership with the private sector and state and local governments. Many organizational and managerial models exist that the Conversion Council could use to build effective partnerships to solve the nation's Year 2000 problem. Because of the need to move swiftly, one viable alternative would be to consider using the sector-based approach recommended recently by the President's Commission on Critical Infrastructure Protection as a starting point. This approach could involve federal agency focal points working with sector infrastructure coordinators. These coordinators would be created or selected from existing associations and would facilitate sharing information among providers and the government. Using this model, the President's Council on Year 2000 Conversion could establish public/private partnership forums composed of representatives of each major sector that, in turn, could rely on task forces organized along economic-sector lines. Such groups would help (1) gauge the nation's preparedness for the year 2000, (2) periodically report on the status and remaining actions of each sector's Year 2000 remediation efforts, and (3) ensure the development of contingency plans to ensure the continuing delivery of critical public and private services. In conclusion, while the Year 2000 problem has the potential to cause serious disruption to the nation, these risks can be mitigated and disruptions minimized with proper attention and management. Continued congressional oversight through hearings such as this and those that have been held by other committees in both the House and the Senate can help ensure that the Year 2000 problem is given the attention that it deserves and that appropriate actions are taken to address this crisis. Mr. Chairman and Ms. Chairwoman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittees may have at this time. Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, Exposure Draft, March 1998). Year 2000 Readiness: NRC's Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation's Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems' Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration's Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computers Systems: Risks of VBA's Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). 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Pursuant to a congressional request, GAO discussed year 2000 risks and actions that should be taken by the President's Council on Year 2000 Conversion. GAO noted that: (1) the federal government is extremely vulnerable to the year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations; (2) unless this issue is successfully addressed, serious consequences could ensue, for example: (a) unless the Federal Aviation Administration takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs; (b) payments to veterans with service-connected disabilities could be severely delayed if the system that issues them either halts or produces checks so erroneous that it must be shut down and checks processed manually; (c) the military services could find it extremely difficult to efficiently and effectively equip and sustain its forces around the world; (d) federal systems used to track student loans could produce erroneous information on loan status, such as indicating that a paid loan was in default; (e) Internal Revenue Service tax systems could be unable to process returns, thereby jeopardizing revenue collection and delaying refunds; and (f) the Social Security Administration process to provide benefits to disabled persons could be disrupted if interfaces with state systems fail; (3) the year 2000 could also cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years that contain embedded computer systems to control, monitor, or assist in operations; (4) GAO's reviews of federal agency year 2000 programs found uneven progress; (5) one of the largest, and largely unknown, risks relates to the global nature of the problem; (6) agencies have taken longer to complete the awareness and assessment phases of their year 2000 programs than is recommended; (7) this leaves less time for critical renovation, validation, and implementation phases; (8) the Chief Information Officers Council's Subcommittee on the year 2000 has been useful in addressing governmentwide issues; (9) given the sweeping ramifications of the year 2000 issue, other countries have set up mechanisms to solve the year 2000 problem on a nationwide basis; and (10) there is no comprehensive picture of the nation's readiness and, as one of its first tasks, the President's Council on Year 2000 Conversion could formulate such a comprehensive picture in partnership with the private sector and state and local governments.

Head Start is administered by HHS and was begun in 1965 as part of the "War on Poverty." The program was built on the philosophy that effective intervention in children's lives could best be accomplished through family and community involvement, as evidenced by the broad range of services, which include educational, medical, dental, mental health, nutritional, and social services, offered to Head Start families. In 1992, the Congress added a requirement that Head Start offer family literacy services. Today Head Start dwarfs all other federal early childhood programs both in funding support and the size of the population served. In the year 2000, Head Start served about 846,000 families and about 923,000 children. Although it began as a summer program with a budget of $96.4 million, Head Start funding today totals more than $6 billion. Head Start grantees operate programs in every state, primarily through locally based service providers. Recognizing that the years from conception to age three are critical to human development, the Congress established Early Head Start in 1994, a program that serves expectant mothers, as well as infants and toddlers. Over the course of its 36-year history, Head Start has served over 19 million children. In contrast, Even Start is substantially smaller than Head Start. First funded in 1989 under Title I of the Elementary and Secondary Education Act, Even Start also has a much shorter history of serving needy children and families than its HHS counterpart. The program's approach is rooted in the philosophy that the educational attainment of parents in particular and the quality of the family's environment in general are central to a child's acquisition of literacy skills and success in school. Administered by Education, Even Start's budget has expanded considerably, from about $15 million at the program's beginning, to $250 million in the year 2002. During its 1999-2000 program year, Even Start served about 31,600 families and 41,600 children in programs around the country. In addition, the Congress established separate Head Start and Even Start migrant and Native American programs. These programs are not covered in this report. See figure 1 for a comparison of the numbers of children and families served by both programs. See figure 2 for a comparison of Head Start and Even Start appropriations over the last decade, 1990-2002. Although Head Start is administered by HHS, President Bush, as part of his emphasis on child literacy and school readiness, proposed transferring Head Start from HHS to Education. President Carter advocated a similar transfer in 1978. Opponents of the move argue that the social and human services component of Head Start is just as important as the educational program in achieving school readiness and the overall well being of the child. They have expressed concern that moving the program to Education would result in a narrower menu of services almost exclusively educational in nature. The separate legislation governing Head Start and Even Start established programs that overlap somewhat in goals, target population and services, but also have a number of significant differences. Even Start and Head Start similarly target disadvantaged populations, seeking to improve their educational outcomes. While both programs are required to provide education and literacy services to children and their families, Head Start's goal is to prepare children to enter school while Even Start's goal is to improve family literacy and education. Both programs measure achievement of their goals for children against similar criteria or measures, but only Even Start has developed measures to gauge adults' educational attainment and literacy. Although the programs have similar legislative provisions, the federal government administers Head Start and directly funds local Head Start programs while the states administer Even Start and allocate federal funds to local Even Start programs. The separate legislation establishing Head Start and Even Start created overlapping programs, although there are many legislative differences between the two programs (see table 1). Both programs were created to address a similar problem, poor educational outcomes and economic prospects for low-income people. However, Head Start's goal is to promote school readiness by enhancing the social and cognitive development of low-income children. Even Start's goal is to improve the literacy and education in the nation's low-income families. The legislation creating each program specifies the broad target group as low-income people; however, each program's legislation specifically targets a different group of low-income individuals. Consistent with its school readiness goal, Head Start specifically targets poor preschool age children and their families. The regulations governing Head Start require that at least 90 percent of the children enrolled in Head Start come from families with incomes at or below the federal poverty guidelines or from families eligible for public assistance. Consistent with its family literacy goal, Even Start is authorized to serve low-literate parents and their young children. To participate in Even Start, the parent or parents must be eligible for participation in adult education and literacy activities under the Adult Education and Family Literacy Act. For example, at least one parent must not be enrolled in school and must lack a high school diploma or its equivalent or lack the basic skills necessary to function in society.The parent must also have a child who is below age 8. Although Even Start targets low-income families, its legislation does not specifically limit participation to low-income individuals nor does it define "low-income," as does Head Start. However, the legislation creating Even Start does require that priority for funding be given to families who are in need of such services as indicated by their poverty and unemployment status. In line with its focus on literacy, Even Start legislation does assign priority for funding to families who are in need of such services as indicated by parent illiteracy, limited-English proficiency and other need related indicators. Although both programs target young children, there are differences in the ages the two programs are authorized to serve. Head Start is authorized to serve children at any age prior to compulsory school attendance. In 1994, as part of Head Start, the Congress established Early Head Start to ensure that infants and toddlers are served in greater numbers. This program is also authorized to provide services to pregnant women. Even Start is authorized to serve preschool age children as well, but unlike Head Start, it is also authorized to serve school-age children to age 8. Even Start is not authorized to serve pregnant women who do not have children below the age of 8. Head Start grantees are also required to reserve 10 percent of their enrollment for children with disabilities. Even Start has no such requirement. With respect to services, Head Start historically has been authorized to provide services that specifically support children's development, such as early childhood education, nutrition, health, and social services. Head Start legislation has long required that local programs provide parent involvement activities that ensure the direct participation of parents in the development, conduct, and overall program direction of local programs. However, in 1992, the Congress added a requirement that Head Start provide family literacy services, if these services are determined to be necessary. In the 1998 reauthorization of Head Start, the Congress clarified the definition of family literacy, requiring that Head Start family literacy services be of sufficient intensity and duration to make sustainable changes in a family. The legislation also required that family literacy programs integrate early childhood education, parenting education, parent and child interactive literacy activities, and adult literacy services. The same definition of family literacy services is found in Even Start's legislation. Even Start legislation also requires that it integrate early childhood education, adult literacy or adult basic education and parenting education into a unified family literacy program. Head Start and Even Start have some similar measures to assess children's progress but different measures for adult literacy and educational attainment (see table 2). For example, to measure children's cognitive growth, both programs measure language development. As shown in table 2, Even Start measures adult literacy and educational attainment by measuring gains in math and reading and by counting the number of participants earning a high school diploma or its equivalent. Head Start measures adults' progress toward their educational, literacy and employment goals, by the number who are employed as Head Start staff-not a direct measure of adult literacy or educational attainment. According to HHS performance standards, Head Start is an important place for employment opportunities for parents and a vehicle for providing additional skills for parents who are seeking employment or who are already employed. Head Start and Even Start are managed and operated in fundamentally different ways (see fig. 3). First, Head Start is administered by the federal government and Even Start is administered by the states. Unlike some other social programs, the federal government (HHS) directly funds local Head Start programs. Many organizations that receive Head Start grant funding deliver services to Head Start participants. In some cases, the organization that receives the grant contracts with other organizations to deliver services to Head Start participants. HHS' 10 regional offices, which are geographically dispersed throughout the nation, are responsible for program oversight and management. Even Start is administered by the states, with the federal government allocating the funds to the states. The states are responsible for oversight and management of local programs and make decisions about which programs to fund. Second, although Head Start and Even Start are both formula programs, the formulas for allocating funds differ. Although the formulas for both programs are multifaceted and complex, Head Start funding is based in part on the number of children in a state under age 5 living in poverty. The Even Start formula is based, in part, on the number of poor school-age children, ages 5 to 17, in a state. Third, Head Start and Even Start legislation have different requirements for the types of local organizations that are eligible to receive funding. For Head Start, local community organizations are authorized to administer Head Start services. Even Start's legislation gives school districts a central role in delivering services. The law requires local organizations to form partnerships with school districts in order to receive funds. Thus, eligible entities are school districts in partnership with nonprofit community based organizations, institutions of higher education, or other nonprofit organizations. Finally, Head Start and Even Start have different matching fund requirements and different requirements for the sources of these matching funds. Head Start grantees annually may receive up to 80 percent of total funding from the federal Head Start program funds. The remaining 20 percent must come from nonfederal sources and may include such in-kind contributions as space, staff, supplies and equipment. In contrast, Even Start grantees receive a maximum of 90 percent of their total funding in the first year from the federal Even Start program, but in subsequent years this share declines. In the ninth and subsequent years of the grant, the family literacy programs are expected to largely operate independent of Even Start funding, receiving only a maximum of 35 percent of total funding from the federal Even Start program (see table 3). However, matching funds, which also include in-kind contributions, may come from other non-Even Start federal sources, such as Adult Education Act funds. In 1999-2000, both Head Start and Even Start grantees served poor families with young children, but the parents they served had different education and literacy needs and the extent to which parents received services to meet those needs differed. Even Start parents were much more likely than Head Start parents to lack a high school diploma and speak a language other than English. According to agency data, parents who enrolled their children in Head Start expected primarily to receive education services for their young children, whereas Even Start parents sought education and literacy services for themselves as well. At the sites we visited, both programs provided early childhood development and education services, as well as health and nutrition support to young children, but we found that adults participating in Even Start programs were more likely to need and thus receive a range of adult education and literacy services. According to agency data, both Head Start and Even Start grantees primarily served poor families with young children, although Even Start served infants and toddlers to a larger degree than Head Start. Almost all Head Start children were under age 5-95 percent-and most were 4 years old. About one percent of the participants were pregnant women. About two-thirds of Even Start children were under age 5, and the remaining one- third were school-age children, 5 and older (see table 4). In both programs, these young children came from very poor families. Most Head Start and Even Start families reported incomes of less than $15,000. While Even Start participation is not restricted by income, grantees give priority for services to families at or below federal guidelines for poverty, families receiving public assistance, and families with no earned income. Almost one-third of the families served by Head Start and Even Start received government assistance, such as Temporary Assistance to Needy Families, according to program year 1999-2000 data. While both programs primarily served very poor families with young children, the families differed in their parent educational attainment, ethnicity and primary language. For example, the proportion of Even Start parents without high school diplomas was substantially higher than those participating in Head Start. About 86 percent of Even Start parents reported that they had not completed high school, compared to about 27 percent of Head Start parents. Hispanic children represented about a quarter of the children attending Head Start programs and almost half of the children attending Even Start programs. These differences in ethnicity were accompanied by differences in the primary languages of children participating in each program. Even Start children were much less likely to speak English as their primary language than Head Start children, according to agency data. The vast majority-about three-fourths-of Head Start children spoke English as their primary language, compared to a little over half of Even Start children. For about one-third of Even Start children, Spanish was the primary language, compared to only one-fifth of Head Start children. In part, the tendency of Even Start children to speak English as a second language may reflect their parents' immigration from non-English speaking countries. According to Education's data, about two-thirds of parents with children in Even Start have lived outside of the United States, about one- fifth have lived in the United States 5 years or less, and about a third of Even Start parents were educated outside the United States. Head Start and Even Start both provided children with similar early learning and other developmental and support services. Head Start served primarily 3 and 4 year olds, while Even Start served a greater percentage of children below the age of 2. However, the extent to which parents of enrolled children received education and literacy services differed between these two programs. According to Head Start and Even Start program data, both programs provided young children with early childhood education services that included developmentally appropriate learning activities. Both programs offered home-based instruction and center-based, half-day programs several days per week, which often included meals, snacks, and health care support, such as mental health, vision, immunizations, and screenings. There are some differences, however, in services offered to children. For example, as we saw in Niceville, Florida, the Even Start program offered home-based, afterschool reading support and other learning activities for school-aged children. Although there were few differences in services for children, the major difference among these programs was the extent to which adults need and thus received education and literacy services. Only the Even Start programs we visited considered adult education and literacy services to be among their primary services. According to Education's data, Even Start grantees provided such services as basic adult education, adult secondary education services, general equivalency diploma (GED) preparation, and English language instruction. Many Even Start programs provided flexible hours of instruction, such as evening and weekend instruction, to accommodate the scheduling needs of parents. Parents most often participated in GED preparation services and English language instruction. About half of the parents indicated that obtaining their GED was a primary reason for Even Start enrollment, although learning English, improving their chances of getting a job, improving parenting skills, and obtaining early learning experiences for their children were also important, according to Education's data. This was true of the eight Even Start parents we spoke with during our site visits who also told us that their primary reason for enrolling in Even Start was to obtain adult education and literacy services. Two of the Even Start programs we visited enrolled large numbers of primarily Spanish speaking parents and other sites we visited enrolled many recent immigrants with limited English skills. Many of these Even Start parents received English language instruction. In Frederick, Maryland for example, the Even Start official said that many parents with limited proficiency in English had enrolled in the program to improve their English language skills. Often, she said, parents participate only long enough to acquire the basic skills needed to find a job. Most of the adults participating in Even Start-almost three quarters-were unemployed, according to Education's data, allowing Even Start programs to enroll both the parent and the child in a program that consisted of child and adult education and literacy, parenting education, and interactive literacy activities between the parent and child. At the Even Start sites we visited, adults often received instruction during the day as their children simultaneously received early childhood services nearby, often in the same building. They also participated in joint learning activities (see fig. 4). For example, at the Frederick, Maryland, Even Start program, parents and children arrived together at the community center, which houses both the child development center and adult and family literacy center. Parents dropped off their children at the child development center and attended either adult literacy or basic education classes taught by an Even Start instructor. The parents later rejoined their children to participate in joint activities, such as reading, painting, or playing, often sharing lunch. In this way, the Even Start program integrated early childhood education, adult literacy or adult basic education, and parenting education into a unified family literacy program. Not all Even Start programs we visited locate children and their parents in a single building; however, they all provided space at some location for joint child and parent activities and required the joint participation of parents and children in the program. In contrast, 73 percent of the parents of children enrolled in Head Start had a high school diploma and thus may not have needed adult education and literacy services. Head Start programs did not require the joint participation of parents and children in the program. At the sites we visited, parents typically left the Head Start center after dropping off their children. For example, one Head Start parent told us that she thought of Head Start as an early learning program for children and had enrolled her child in Head Start to obtain early childhood education. This parent said she had completed high school and did not need adult education or literacy services. However, for those parents in need of adult education and literacy services, Head Start programs often referred them to the local public school district, local community college, or Even Start for help. For example, Head Start officials in Niceville, Florida told us that they refer adults in need of such services to Even Start. The Albany Park Community Center Head Start in Chicago offered an array of adult learning opportunities. However, unlike other sites we visited that received either a Head Start or an Even Start grant, Albany Park received both Head Start and Even Start grants, using funding from both to provide a unified family literacy program. Because Head Start does not currently collect data on the types of adult education or literacy services it provides, however, we could not determine the specific types of education and literacy services these parents received. No recent, definitive, national-level research exists about the effectiveness of Head Start and Even Start for the families and children they serve. However, both programs have effectiveness studies underway using a methodology that many researchers consider to be the most definitive method of determining a program's effect on its participants. These studies reflect each program's primary focus and population of interest. For instance, consistent with Head Start's school readiness goal, its study focuses on children. Consistent with Even Start's family literacy goal, its study is focusing on children and adults. Although final results of these studies are not yet available, HHS and Education have conducted a number of other studies that provide useful information about the Head Start and Even Start programs. These studies have prompted both legislative and programmatic changes intended to improve program operations. Although there is little definitive information about the effectiveness or relative effectiveness of Head Start and Even Start, both programs are undergoing rigorous evaluations that will provide more definitive information about their effectiveness. Both programs are currently being evaluated using an "experimental design" in which groups of children are randomly assigned either to a group that will receive program services or to a group that will not receive program services. This is an approach many researchers consider the best for assessing program effectiveness when factors other than the program are known to affect outcomes. To illustrate, in the case of a child, many influences affect his or her development. Nutrition, health, family and community, in conjunction with education and care, play a role in his or her learning. In light of all these influences, it becomes difficult to distinguish between the effects of the program and the other factors that influence a child's learning. Figure 5 shows how this approach produces information that shows the effect of the program being studied, rather than the effects of other developmental influences on young children. In First Grade Both HHS and Education are using experimental design impact studies performed by independent research firms to measure the effect of Head Start and Even Start on the populations they serve. The Head Start study focuses on children, while the Even Start study focuses on both children and their parents. Head Start has two studies underway: one for the Head Start program and a separate effort to evaluate Early Head Start. See table 5 for a summary of the objectives for these studies. The Head Start study is a $28.3 million, national impact evaluation that follows participants over time. The study has been divided into two phases. The first phase, a pilot study designed to test various procedures and methods, was conducted last year. The second phase is scheduled to begin in the fall of 2002 and will entail data collection on 5,000 to 6,000 3 and 4 year-olds from 75 programs and communities across the country. The study will track subjects through the spring of their first grade year, and results are expected in December 2006. Although Head Start is scheduled to be reauthorized in 2003, an HHS official told us that the interim report scheduled for 2003 will likely not contain findings. The Early Head Start evaluation is a 6-year, $21 million study enlisting 3,000 families and their children, a sample drawn from 17 different Early Head Start programs. Under the Early Head Start evaluation, study participants are assessed at 14, 24 and 36 months after birth. The final report is scheduled for completion in June 2002. The preliminary findings were released at the beginning of 2001. According to HHS officials, these early results suggest that participation in Early Head Start has positive effects on both children and their parents. The Even Start study is expected to be a 6-year, $3.6 million study tracking 400 Even Start families from 18 program locations and focuses on measuring children's readiness for school and adult literacy. The final report is scheduled for completion in 2003. The current study is actually the second Even Start impact study conducted using an experimental design. The first evaluation examined Even Start programs operated by five grantees. As we observed in our earlier study, the small number of sites examined by the study and the lack of information on control group experiences did not permit conclusions about program effectiveness. Although experimental-design impact evaluations are considered by many researchers to be the most definitive method of determining the effect of the program on participants, other types of studies have been conducted by HHS and Education that provide a wide variety of data valuable to program managers and policymakers. Often, to answer varied, complex, and interrelated questions, policymakers may need to use several different designs to assess a single program. Different study designs are used depending on the questions to be answered, the nature of the program being studied and the type of information needed. For instance, Head Start is collecting outcome data on a nationally representative sample of Head Start children and families as part of its Family and Child Experiences Survey (FACES). FACES collects a range of data that includes cognitive, social, emotional and physical development of Head Start children; the well-being and accomplishments of Head Start families, and the quality of Head Start classrooms. Since this study does not employ an experimental design, researchers cannot attribute changes in children's performance to the Head Start program. A study of Early Head Start, which assessed the degree to which the program is being administered as the Congress intended, has been completed. This study gathered information on the characteristics of participants and the services they received. Information from this study will be integrated with the results of the experimental design study. Since Even Start's first national evaluation, Education has also made an effort to monitor Even Start's evolution in relation to its legislative mandate. For example, Even Start's first study was broad in scope and designed to examine the characteristics of Even Start participants and projects, and services provided to assess how closely they resembled what had been envisioned for the program. The study served as a catalyst for changes in the program's legislation, including a shift in focus on those most in need. As a result of the study, teen parents and previously ineligible family members can now participate. The Head Start and Even Start programs have similar goals and grantees in both programs provided similar services to children. However, the programs differ in the extent to which they served adults. Nevertheless, their common focus on improved educational outcomes for poor children and their families calls for coordination between the two programs. Indeed, federal law requires such coordination. Head Start and Even Start activities are coordinated with each other on many levels, with federal coordinating efforts more often focusing on the early childhood development aspects of the two programs, rather than on broader family literacy activities. While most Head Start and Even Start grantees have reported they collaborate with one another in some way, at the program sites we visited, we found that differences in participants and service areas may mean that collaboration involves only limited opportunities for program staff to work together. Both Head Start and Even Start programs are required to coordinate with one another and with other organizations to provide child and family support services. As a result, the programs are involved in several efforts to coordinate their activities with one another at the federal, state and local levels. Even Start's primary effort to coordinate directly with Head Start at the federal level focused on creating complementary systems for measuring developmental and educational outcomes for young children. Both programs have defined program goals and performance indicators for young children in consultation with each other and Even Start is also developing a new tool for collecting program data that will allow it to obtain information on early childhood and family outcomes similar to that collected by Head Start through a separate data collection effort.Coordinated data collection is intended to help the HHS and Education compare programs and determine their combined contribution to children's school readiness. However, officials from both departments said that cooperation in developing outcome measures for other components of family literacy, such as parenting and adult education, has not occurred because Head Start has made only a limited effort to measure its performance in this area. In another federal collaborative effort, Even Start has provided about $250,000 in funding to support Head Start's family literacy initiative. The funding helps to support an evolving "promising practices" national network of Head Start family literacy programs as well as training on how to build a family literacy program. Lessons learned from model family literacy initiatives and technical assistance are to be shared with Even Start grantees. Other initiatives by Education and HHS support state and local coordination efforts. For example, HHS and Education have both awarded grants to states to create coordinating councils that include state-level administrators of federal and state-funded early childhood and human services agencies. Head Start has funded Head Start Collaboration Offices in each state, while Even Start has funded an Even Start Consortium in 36 states. Membership in each Even Start consortium must include a representative from Head Start. Head Start Collaboration Offices are encouraged to forge links with organizations promoting family literacy, such as Even Start. In addition, Even Start and Head Start have jointly sponsored training for state and regional administrators on topics such as family literacy and interagency coordination. According to an Education contractor that provides the Even Start consortia with technical assistance, some state Even Start administrators have also collaborated with local Head Start officials to identify appropriate state-level performance indicators for children. At the local level, about 74 percent of Even Start grantees reported in program year 1999-2000 that they collaborated with Head Start in some way, including receiving cash funding, instructional or administrative support, technical assistance, and space or job training support from Head Start grantees. However, the type of support most often reported by Even Start grantees was technical assistance, especially public relations support in which Head Start helped to disseminate information about the program through the community. About one-third of Even Start grantees reported receiving direct instructional, administrative support or space from Head Start grantees. Instead, Even Start grantees more often received such support from the public schools. About one-fourth of Even Start programs had formal partnerships with Head Start. At program sites we visited, we observed that local coordination activities between Head Start and Even Start grantees seemed to be greater where grantees were trying to serve the same group of families living in the same geographic area. Grantees described less interaction between the programs where the families served were different and service areas did not overlap. For example, in the state of Washington, where a Head Start and Even Start program are formal partners and are both administered by the Renton Public Schools, only a few families are enrolled in both programs. Local officials said this is partly due to the location of the two sites in different neighborhoods several miles apart, differences in the ages of the children served by each program, and differences in the adult education needs of the families. Renton Head Start does not serve infants and toddlers, whereas Even Start does. Working Head Start parents can participate in adult education classes primarily in the evenings, whereas Even Start offers adult education classes during the day only. Cooperation between the programs has primarily focused on joint participation in training events and sharing information on the few families that are enrolled in both programs. In contrast, in the Albany Park neighborhood of Chicago, the Even Start and Head Start programs are not only administered by the same grantee, but they also are located in the same community center building. Administrators told us that cooperation and collaboration is extensive, with a large proportion of families enrolled in both Head Start and Even Start programs. Albany Park staff said that Even Start and Head Start administrators work together extensively to coordinate the curriculum between the programs and to accommodate the work schedules and learning needs of the many families they serve together. Although Head Start and Even Start both serve poor children, they differ because these children's parents differ substantially in their educational attainment and literacy. To meet the needs of parents who do not have high school diplomas or who have literacy needs, Even Start, from the beginning, designed its program to include adult education and literacy as core services. It also established a system for measuring the progress of adults in attaining adult education and literacy skills. Although a much larger percentage of parents with children enrolled in Head Start have high school diplomas, Head Start is a much larger program. Thus, there are still thousands of Head Start parents who might need and benefit from education and literacy services. Recognizing that these programs serve a similar population of children, Head Start and Even Start have jointly developed similar outcome measures for children. This common framework allows policymakers and program administrators to assess how well each program contributes to children's development. Joint development of indicators for adults' progress has not occurred. Head Start's current measure of adult literacy is not a direct measure of adult literacy skills and is not comparable with indicators used by Even Start. Lacking similar measures for assessing the educational and literacy level of parents, policymakers lack information on the relative contribution each program is making toward improving the education and literacy of the parents it serves. We recommend that the secretaries of HHS and of Education direct the administrators of Head Start and Even Start to coordinate the development of similar performance goals and indicators for adult education and literacy outcomes and that the effort include the identification of indicators that specifically measure adult education and literacy. In commenting our report, Education observed that the report presents a comprehensive discussion of the similarities and differences between the Even Start Family Literacy program and the Head Start program. Education generally agreed with our presentation. However, since our recommendation focused on adult literacy indicators, Education thought it would be helpful if we included a discussion of adult education programs and the purpose of the Adult Education and Family Literacy Act . Moreover, Education suggested that we recommend that the Head Start Bureau should coordinate with the department's Division of Adult Education and Literacy, not just Even Start, in its development of adult education-related performance indicators. Education also pointed out that Even Start's family literacy goal encompasses school readiness for participating children. (See app. I.) Education also gave us technical comments that were incorporated as appropriate. We agree that some additional information on the Adult Education and Family Literacy Act would provide related contextual information and included a limited discussion of the act in the report. However, because the Adult Education and Family Literacy Act programs were not part of this review, we have kept our recommendation limited to the Head Start and Even Start programs. This should not be interpreted as precluding the Secretary of Education facilitating discussions between Head Start and any other office in Education that could be helpful in developing comparable indicators. Finally, although one could broadly interpret Even Start's family literacy goal as encompassing school readiness, this is not the stated goal of the program. Therefore we have not added anything to our discussion of the Even Start goal. The Head Start Bureau, Administration of Children and Families, said HHS had no comments on the report. We are sending copies of this report to the secretaries of Health and Human Services and the Department of Education and appropriate congressional committees. Copies will also be made available to other interested parties upon request. If you have questions regarding this report, please call me at (202) 512-7215 or Eleanor Johnson, assistant director, at (202) 512-7209. Other contributors can be found in appendix II. In addition to those named above, Tiffany Boiman, James Rebbe, Stan Stenersen, and Jill Peterson made key contributions to this report. Bilingual Education: Four Overlapping Programs Could Be Consolidated GAO-01-657. Washington, D.C.: May 14, 2001. Early Childhood Programs: Characteristics Affect the Availability of School Readiness Information. GAO/HEHS-00-38. Washington, D.C.: February 28, 2000. Early Childhood Programs: The Use of Impact Evaluations to Assess Program Effects. GAO-01-542. Washington, D.C.: April 16, 2001. Early Education and Care: Overlap Indicates Need to Assess Crosscutting Programs. GAO/HEHS-00-78. Washington, D.C.: April 28, 2000. Evaluations of Even Start Family Literacy Program Effectiveness. GAO/HEHS-00-58R. Washington, D.C.: March 8, 2000. Head Start: Challenges in Monitoring Program Quality and Demonstrating Results. GAO/HEHS-98-186. Washington, D.C.: June 30, 1998. Head Start Programs: Participant Characteristics, Services, and Funding. GAO/HEHS-98-65. Washington, D.C.: March 31,1998. Head Start: Research Provides Little Information on Impact of Current Program. GAO/HEHS-97-59. Washington, D.C.: April 15, 1997. Title I Preschool Education: More Children Served but Gauging Effect on School Readiness Difficult. GAO/HEHS-00-171. Washington, D.C.: September 20, 2000.

The Head Start and Even Start Family Literacy programs have sought to improve the educational and economic outcomes for millions of disadvantaged children and their families. Because the two programs seek similar outcomes for similar populations, GAO has pointed out that they need to work together to avoid inefficiencies in program administrative and service delivery. Questions have also arisen about the wisdom of having similar early childhood programs administered by different departments. Head Start's goal is to ensure that young children are ready for school, and program eligibility is tied to specific income guidelines. In contrast, Even Start's goal is to improve family literacy and the educational opportunities of both the parents and their young children. Even Start eligibility is tied to parents' educational attainment. Despite these differences, both programs are required to provide similar services. Both programs have some similar and some identical performance measures and outcome expectations for children, but not for parents. Head Start and Even Start grantees provided some similar services to young children and families, but how these programs served adults reflect the variations in the need of the parents. No recent, definitive information exists on the effectiveness of either program so it is difficult to determine which program uses the more effective model to improve educational outcomes for disadvantaged children and their parents. At the local level, differences in the needs of participants and the location of neighborhoods served by the two programs may mean some Head Start and Even Start grantees find only limited opportunities to work together. At the national level, the Departments of Health and Human Services and of Education have begun to coordinate their efforts, including the funding of state-level organizations to improve collaboration among groups serving poor children and their families.

Ground ambulance services are provided by a wide range of organizations that differ in organizational structure, staffing types, types of transports offered, and revenue sources. Medicare payments for ambulance services are made up of two components: a service-level payment for the type of transport provided and a mileage payment. Providers may be affiliated with an institution (such as a hospital or a fire department) and share resources and operational costs, or they may be independent and freestanding. In addition, providers may be for-profit, nonprofit, or government-based. Providers may rely heavily on volunteers, use both volunteers and paid staff, or use only paid staff. Providers may specialize in nonemergency transports, or offer both nonemergency and emergency (those responding to a 911 call) transports. Also, some providers offer only basic life support (BLS) services, while others offer advanced life support (ALS) services. ALS services require the skills of a medical technician who is more specialized and trained, such as a paramedic, than the technician who can provide BLS services. Revenue sources depend on the resources available in communities and communities' choices about funding ambulance services. They may include community tax support, charitable donations, in-kind contributions, state and federal grants, subscription programs,payments from Medicare or Medicaid and private health insurance companies (including patient copayments or coinsurance). The mix and amount of revenues available may vary. Communities differ by the level of tax support for specific services, such as ensuring a minimum level of service in remote areas, sophistication of transport vehicles, and the training level of the staff. Medicare pays ambulance providers through a national fee schedule. (See fig. 5 in app. I for an overview of the Medicare ambulance payment formula.) Payments have two components: 1. service-level payment: for the type of transport provided, such as an ALS Level 1 transport;2. mileage payment. The mileage payment is determined by the number of miles traveled with a patient during an ambulance transport and the mileage base rate. Since 2002, CMS has increased the rural mileage rate (which also applies to super-rural transports) by 50 percent for miles 1 through 17. See 67 Fed. Reg. 9100 (Feb. 27, 2002) (adding subpart H to 42 C.F.R. part 414); 42 C.F.R. SS 414.610(c)(5)(i)(2011) (this mileage rate increase is not set to expire). Also see fig. 5 in app. I for an overview of the Medicare ambulance payment formula. Improvement, and Modernization Act of 2003, temporarily extended by subsequent acts, and most recently extended through the end of 2012 by the Middle Class Tax Relief and Job Creation Act of 2012. Providers paid under a fee schedule generally have an incentive to keep their costs to deliver services at or below the fee schedule rate. Some providers rely heavily on Medicare revenues, and adequate Medicare margins for these providers may help ensure that beneficiaries have access to ambulance services. In our 2007 report, we found that providers with lower transport volumes generally had higher costs per Because of transport than providers with greater transport volumes.high fixed costs for maintaining readiness--the availability of an ambulance and crew for immediate emergency responses--providers with low volumes, which still need to maintain readiness, tended to have higher costs per transport. Other significant factors that affected cost per transport included level of volunteer staff hours, percentage of Medicare transports that are BLS, percentage of Medicare transports that are super-rural, and level of community tax support. Providers' costs for providing ground ambulance transports were highly variable in 2010, ranging from a low of $224 per transport to a high of $2,204, with a median cost per transport of $429. The variability of costs per transport reflected differences in certain provider characteristics, such as volume of transports, intensity of Medicare transports, and level of government subsidies received. Providers reported that personnel costs accounted for the largest percentage of their total costs in 2010 and contributed the most to increases in total costs between 2009 and 2010. The median cost per ground ambulance transport for providers in our sample was $429 in 2010, but providers' costs per transport ranged from a low of $224 to a high of $2,204. Five percent of providers had costs per transport that were less than $253, and 5 percent had costs per transport that were more than $924. Figure 1 shows the distribution of 2010 costs per transport for providers in our sample. Among the population of providers from which our sample was drawn, the estimated median cost per transport ranged from $401 to $475, which represents the 95 percent statistical confidence interval around the median and is the range within which we expect the population median cost per transport to fall in 95 percent of the samples we could have drawn. Super-rural providers had estimated median costs per transport that were significantly higher than urban providers (see table 1). The variability associated with our survey data did not allow us to conclude that rural providers' estimated median costs per transport were significantly different from super-rural or urban providers. As will be discussed later, when we controlled for other provider characteristics that affected cost per transport using regression analysis, differences in cost per transport by service area were not significant.characteristics other than service area were more important in explaining the variation in cost per transport. The median Medicare margin, including add-on payments, was about positive 2 percent in 2010 for the 153 providers in our sample.removed the add-on payments, we found that payments decreased for the providers in our sample, resulting in a lower median Medicare margin of negative 1 percent for those providers. See table 2. Ambulance transports for all Medicare fee-for-service beneficiaries in the nation increased by 33 percent from 2004 to 2010. All three service areas--urban, rural, and super-rural--experienced growth. Transports per 1,000 beneficiaries in super-rural areas grew the most, by 41 percent, and transports per 1,000 beneficiaries in rural and urban areas increased by 35 percent and 32 percent, respectively. (See table 4.) The increase in ambulance transports from 2004 to 2010 is attributable primarily to an increase in BLS nonemergency transports, which rose by 59 percent from 2004 to 2010. Super-rural areas experienced the largest increase in BLS nonemergency transports (82 percent). The increase in Medicare beneficiaries' use of ambulance services did not appear to be caused by changes in the demographic characteristics of beneficiaries. For example, factors such as age, race, and sex remained stable from 2004 to 2010 in urban, rural, and super-rural areas. Representatives we spoke with from one ambulance provider organization suggested that some of the increase in ambulance transports was attributable to increased billing for Medicare ambulance services at the local-government level. Some local governments that provided ambulance transports free of charge had been reluctant in the past to bill insurers such as Medicare because patients would then be financially responsible for out-of-pocket insurance costs, such as deductibles and copayments. The increased out-of-pocket costs for patients had the potential to result in less community support of ambulance providers through fewer charitable contributions and fewer volunteers. However, these local governments have begun to bill Medicare as well as other insurers because of increased budgetary pressures. Representatives we spoke with also added that the introduction of the national fee schedule in 2002 may have contributed to increased billing because it allowed providers to better anticipate the amount of revenue they could receive from Medicare. The Department of Health and Human Services (HHS) Office of Inspector General (OIG) has explored increases in ambulance utilization and has cited improper payments as one potential cause. For example, HHS OIG found that nonemergency transports, including BLS nonemergency transports, made up the majority of improper payments for ambulance services, and particularly transports for dialysis services. HHS OIG also found that Medicare's ambulance transport benefit is highly vulnerable to abuse and found that many ambulance transports paid for by Medicare did not meet Medicare program requirements, including transports that were not medically necessary. We provided a draft of this report to HHS and invited representatives of AAA to review the draft. HHS had no general or technical comments on behalf of CMS. The AAA representatives provided oral comments and generally agreed with our findings; however, AAA had some questions regarding our methodology and conclusions, which we clarified in the report where appropriate and discuss below. In addition, AAA provided technical comments, which we incorporated as appropriate. AAA representatives questioned whether the Medicare margin results were comparable to those of the 2007 report and were concerned that readers would conclude that providers' Medicare margins have increased over time. We clarified in the report that we do not consider the results reported in 2007 and in the current report to be directly comparable because the samples examined in each report were different and we reported median Medicare margins in the current report whereas in 2007 we reported average Medicare margins. AAA representatives noted that our sample contains providers that have been in business since at least 2003 and that the cost data from this sample may not be representative of all ambulance providers. We agree that the providers in our sample represent mature and well-established organizations--an advantage because this approach avoids start-up organizations with potentially high start-up costs, as described in our scope and methodology. Despite the differences in the samples and the type of measure used for reporting Medicare margins, both of these studies showed wide variation in costs per transport and Medicare margins. AAA representatives had some questions about the results of our regression analysis. For example, the regression results suggest that ambulance providers that receive a greater proportion of government subsidies tend to have higher costs. The representatives theorized that providers with higher costs seek additional government support and did not think this finding was consistent with how their industry operates. As described in the report, the Medicare Payment Advisory Commission found an association between increased resources and increased costs in the hospital industry and theorizes that such hospitals face less pressure to control costs. We found an association in the ambulance industry but determining causality was beyond the scope of our work. AAA representatives also questioned the regression analysis results that indicated that providers' use of volunteer staff did not significantly contribute to differences in providers' total costs, because our survey data indicated that personnel costs were, on average, 61 percent of providers' total costs. The results may be a consequence of the relatively small sample size and, in addition, a small proportion of providers in our sample using volunteer staff (21 percent). Finally, the AAA representatives commented that ground ambulance providers' current Medicare payments are lower than those we calculated for 2010 because of the expiration of a required temporary increase in Medicare payments for certain geographic areas, the implementation of a policy for reporting fractional mileage, and the introduction of a productivity adjustment relative to the annual inflation adjustment of the fee schedule. In addition, AAA noted that the cost of fuel has increased since 2010. We acknowledge that these factors likely lowered Medicare payments and increased costs for some providers after 2010, the most recent year for which data were available when we began our study. We are sending copies of this report to other congressional committees and the Administrator of CMS. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions 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 the report. GAO staff who made major contributions to this report are listed in appendix II. This appendix describes the data and methods we used to respond to our research objectives. We conducted a survey of ambulance providers to collect data on their costs and other characteristics. We relied on these survey data for much of our analyses and supplemented our survey results with information from other sources, including Medicare claims data, as appropriate. We also analyzed Medicare claims data to determine payments to ambulance providers as well as to determine the number of Medicare ambulance transports. We tested the internal consistency and reliability of the data from our survey and the Medicare claims data and determined that all data sources were adequate for our purposes. We conducted our work from April 2012 through September 2012 in accordance with generally accepted government auditing standards. To collect data on ground ambulance providers' costs, revenues, transports, and organizational characteristics for calendar year 2010, or for the fiscal year that corresponded to all or the majority of a provider's calendar year 2010 data, we sent a web-based survey to a random, nationally representative sample of 294 eligible ambulance providers. We obtained data from 154 providers for a response rate of 52 percent, after excluding cost outliers and surveys with unreliable data. We determined that our sample was nationally representative of the approximately 2,900 ambulance providers that billed Medicare in 2003 and 2010, were still operational in 2012, and did not share costs with nonambulance services or air ambulance services. However, the small sample size and the variability of reported costs reduced the precision of our estimates. We drew potentially eligible providers for our survey from an existing sample, originally developed for our 2007 report, of 900 non-hospital- based ground ambulance providers that billed Medicare in 2003. Through Internet searches and phone contacts to ambulance providers, we excluded any providers that (1) were no longer in business; (2) shared costs with nonambulance services, such as those providers affiliated with a fire department; or (3) we were otherwise not able to contact.did for the 2007 report, we excluded ground ambulance providers that also provided air ambulance services. After all exclusions, we had 294 eligible providers for potential survey participation. On the basis of the number of providers that were eligible for our sample and the number of providers that responded to our survey, we calculated sample weights to estimate how many Medicare ambulance providers our sample represented. To develop our survey instrument, we modified the survey instrument used for our 2007 report, which was mailed to ambulance providers, to tailor it to our current objectives and format it for use as a web-based survey. We retained questions about ambulance providers' costs, revenues, and transports, as well as questions to identify organizational characteristics that might affect ambulance providers' costs, such as the use of volunteer staff. We added questions related to changes in total cost (increases or decreases) from 2009 to 2010 and the cost components that most contributed to the changes. We also asked providers for their National Provider Identifier (NPI), which providers use to bill Medicare, and their Provider Transaction Access Number (PTAN). These numbers enabled us to identify and analyze Medicare claims for We needed these current identifiers to link the providers we surveyed.the providers in our sample to Medicare claims data because our sample was based on the sampling frame of our 2007 report, and Medicare has implemented a new identification system since then. We sought feedback on our survey instrument from both internal and external sources. It was reviewed by internal survey experts and pretested on seven ambulance providers. We also consulted with the American Ambulance Association (AAA), an industry group that represents ambulance providers. On the basis of the feedback we received, we modified the survey instrument as appropriate. We sent our survey by e-mail to 294 eligible ambulance providers on April 12, 2012. We asked providers to complete the survey within 2 weeks of receipt. We later extended this deadline 2 weeks to give providers more time to complete the survey. Providers were encouraged to contact us by e-mail or a toll-free number so that we could resolve any questions or problems. We sent three reminder e-mails to providers that had not yet completed the survey (6, 14, and 21 days after sending the survey to providers) and made two rounds of reminder telephone calls to encourage participation. AAA and the National Association of Emergency Medical Technicians encouraged providers to participate in the survey. When providers returned surveys that were incomplete, invalid, or resulted in conflicting responses to key items, we conducted follow-up by phone and e-mail. We took steps to ensure that the data reported in the survey were valid and reliable. First, we included in the survey instrument questions intended to validate the reported cost data. For example, we asked providers whether certain cost components (such as personnel costs) were included in the total cost amount submitted, and we asked how confident providers were about the total cost amount submitted. As a result, we excluded from our analyses one provider that was not confident in the total cost amount. Second, we conducted analyses to identify any incomplete data or inconsistencies in responses. If we found such data, we contacted the provider to try to obtain complete or corrected data. We excluded three providers that were not able to provide complete data on total cost or total transports. Third, we used a lognormal distribution to exclude outliers with a cost per transport more than three standard deviations from the mean. We excluded three providers with costs per transport that were outliers. All computer programs we used for our analyses were peer reviewed to verify that they were written correctly and executed properly. On the basis of our efforts to validate the data, including computer testing and corrections, we concluded that the data were sufficiently valid and reliable for our purposes. All sample surveys are subject to sampling error--that is, the extent to which the survey results differ from what would have been obtained from the population instead of the sample. The sample is only one of a number of samples that we might have drawn. As a result, we reported the results of our analyses with their 95 percent confidence intervals. The 95 percent confidence interval refers to the range of values within which we would expect the true population value to fall in 95 percent of the samples we could have drawn. We analyzed 2010 Medicare claims data for the survey nonrespondents and compared this information with similar claims data for providers in our sample. Using Medicare claims data for all survey recipients, we were able to test for potential nonresponse bias for the characteristics contained in the claims data. The nonresponse analysis did not find any statistically measurable bias that would affect our analyses of providers' costs. We used regression analysis to investigate the relationship between providers' total cost and provider characteristics that may have affected their costs. We opted for a total cost model using a logarithmic functional form because it is well grounded in microeconomic theory. Although we considered using a similar model of the same functional form with cost per transport as the dependent variable, we determined that the parameter estimates of such a model would be similar to the total cost model. Provider characteristics included in our model were: (1) volume of transports, (2) cost of doing business, (3) mix of Medicare transports, (4) intensity of Medicare transports, (5) service area, (6) use of volunteer staff, (7) receipt of government subsidies, and (8) ownership type. We used those results to produce a graph illustrating the relationship between cost per transport and volume of transports. We also used the results of the regression analysis to estimate the effect on providers' cost per transport of reducing the value of each of two variables that were significant in the regression. See table 5 for the characteristics included in the model, how each characteristic was measured, and the data source for each characteristic. Our regression analysis modeled total cost at the provider level as a function of the provider characteristics described above. We used ordinary least squares to model the log of total costs for a provider.model was specified in log-log form to conform to standard microeconomic theory regarding cost functions. The two continuous independent variables--transport volume and geographic practice cost index (GPCI)--were entered in log form. The remaining variables were not entered in log form because they were either indicator variables (value of 0 or 1) or percentage variables (values ranging from 0 to 1.00). Three of the explanatory variables in the regression were statistically significant at the 1 percent or better level in explaining the variation in providers' total costs: total transports, percentage of revenues from The government subsidies, and percentage of Medicare transports that were nonemergency. Table 6 shows the regression results. We used the regression results to predict the log of total cost and then converted it to total cost by taking the antilog. We applied an adjustment to the resulting prediction of total cost to account for the fact that our regression was for log total cost rather than total cost. We then divided total cost by total transports to derive cost per transport. We used this method to produce predictions of cost per transport for the range of 1 to 20,000 transports shown in figure 2 of the report. We also used the regression results to estimate the effect on cost per transport of a reduced percentage of revenues from government subsidies and a reduced percentage of nonemergency transports. In each case, we held the other variables in the regression model at their regression sample mean and calculated cost per transport for the sample two ways: one with the value of the variable of interest set at its sample average and another with it set at a value 25 percent less. We reported the difference between these two values for each variable. To examine the relationship between Medicare payments and providers' costs, we used Medicare claims data to calculate Medicare payments in 2010 for the providers in our sample, and we calculated Medicare margins--the percentage difference between providers' Medicare payments per transport and their costs per transport. To examine ambulance transports per 1,000 Medicare beneficiaries, we used Medicare claims data and Centers for Medicare & Medicaid Services (CMS) 2010 Medicare enrollment data. We found CMS's claims and enrollment data to be sufficiently reliable for the purposes of this report. We calculated 2010 Medicare payments for the providers in our sample using Medicare carrier claims data. We identified relevant ambulance claims for 153 providers by using the NPIs (which providers use to bill Medicare) and PTANs reported by providers on the survey. We excluded any Medicare claims without either service-level or mileage payments and any claims with service-level payments that were more than three standard deviations from the mean of the log distribution for all such claims. We also excluded any claims for transports with multiple patients because the calculations for these payments require additional information not available on Medicare claims. See figure 5 for the payment formulas specified in the Medicare ambulance fee schedule. To calculate service-level payments, we used the type of transport identified on the claim to determine the associated relative value unit, which is a constant multiplier that adjusts the service-level base rate to account for the mix and intensity of the service, and we used the 2010 service-level base rate of $209.65. We used the zip code where the transport originated to determine the adjustment from the geographic practice cost index (GPCI), which is used to account for the different costs of operating ambulance services in different regions of the country. In accordance with CMS's payment methodology, we adjusted 70 percent of the service-level payment by the GPCI, and we did not adjust the other 30 percent by the GPCI. We also used the zip code where the transport originated to determine the applicable urban, rural, or super-rural add-on payment rate. To calculate mileage payments, we used the number of miles reported on the claim and the 2010 mileage base rate of $6.74. We used the zip code where the transport originated to determine the applicability of the permanent mileage increase for miles 1 through 17 for rural and super-rural transports and to determine the applicable urban, rural, or super-rural add-on payment rate. The total fee schedule payment for each transport is the sum of the service-level and mileage payments. We calculated payments with and without the applicable add-on payment rates, and we assumed that providers charged the maximum allowed amount under the ambulance fee schedule.that our payment calculations were comparable to actual payments made based on the claims, we compared the payments we calculated with add- ons to the payment amounts on the claims for a random sample of 6,000 urban, rural, and super-rural claims, and we found the difference in the amounts to be less than 1 percent. All payments are expressed in 2010 dollars. To ensure For the providers in our sample, we reported the median of providers' Medicare payment per transport by predominant service area (urban, rural, or super-rural) and for all providers. Medicare payment per transport, we divided the sum of the provider's Medicare payments by the sum of its Medicare transports. To calculate each provider's Medicare margin, we used the provider's cost per transport, as calculated from the survey responses, and its Medicare payment per transport, described in the previous section. We subtracted the provider's cost per transport from its Medicare payment per transport, and we divided this amount by the provider's Medicare payment per transport. For the providers in our sample, we reported the median Medicare margin and the distribution of providers' Medicare margins by predominant service area (urban, rural, or super-rural) and for all providers. As we did in the 2007 report, we classified providers as super-rural if 60 percent or more of their Medicare transports in 2010 originated in a super-rural zip code. We classified providers as rural if they did not meet the super-rural definition and 60 percent or more of their Medicare transports in 2010 originated in rural or super-rural zip codes. We classified providers as urban if they did not meet the rural or super-rural classifications. Since some providers furnish transports in more than one area, there is likely to be some measurement error in identifying the full effect of service area on costs. excluded claims with service-level payments outside of three standard deviations from the mean of the log distribution for all such claims for each of these years. We counted Medicare beneficiaries as the number of months beneficiaries were enrolled in Medicare Part A or B in 2010 divided by 12. We then divided the number of transports by the number of enrolled Medicare beneficiaries and multiplied the quotient by 1,000. We also examined the change in transports per 1,000 Medicare beneficiaries from 2004 to 2010. Medicare claims data, which are used by the Medicare program as a record of payments made to health care providers, are closely monitored by both CMS and Medicare Administrative Contractors--contractors that process, review, and pay claims for Medicare Part B-covered services, including ambulance services. The data are subject to various internal controls, including checks and edits performed by the contractors before claims are submitted to CMS for payment approval. Although we did not review these internal controls, we assessed the reliability of Medicare claims data by reviewing related CMS documentation, interviewing agency officials about the data, and comparing payments in a sample of claims to expected payments based on Medicare's published ambulance fee schedule. We determined that the Medicare claims data were sufficiently reliable for the purposes of this report. In addition, we assessed the reliability of CMS's enrollment data by reviewing related CMS documentation and comparing the enrollment data to published sources. We determined that Medicare enrollment data were sufficiently reliable for the purposes of this report. In addition to the contact named above, Christine Brudevold, Assistant Director; Ramsey Asaly; Carl S. Barden; Stella Chiang; Carolyn Fitzgerald; Leslie V. Gordon; Corissa Kiyan; Rich Lipinski; Elizabeth T. Morrison; Aubrey Naffis; and Eric Wedum made key contributions to this report. Ambulance Providers: Costs and Expected Medicare Margins Vary Greatly. GAO-07-383. Washington, D.C.: May 23, 2007. Ambulance Services: Medicare Payments Can Be Better Targeted to Trips in Less Densely Populated Areas. GAO-03-986. Washington, D.C.: September 19, 2003.

Since 2004, Congress has authorized supplemental temporary payments, called "add-on" payments, to augment Medicare fee schedule payments to ambulance providers. The add-on payments increased payments for transports in urban, rural, and super-rural (the least densely populated) areas by $175 million in calendar year 2011, according to the Medicare Payment Advisory Commission. In 2007, GAO reported a decline in transports by beneficiaries in super-rural areas and recommended that the Centers for Medicare & Medicaid Services (CMS) monitor beneficiary use of ambulance transports to ensure access to services, particularly in super-rural areas. The Middle Class Tax Relief and Job Creation Act of 2012 required GAO to update the 2007 report. GAO examined, for 2010 (the most recent year complete data were available when GAO began the study), (1) ground ambulance provider costs for transports, (2) the relationship between Medicare payments and provider costs, and (3) beneficiary use of ground ambulance transports. To do this work, GAO sent a survey to a sample of eligible providers based on the 2007 report sample asking for provider costs and characteristics. The sample is representative of all ground ambulance providers that billed Medicare in 2003 and 2010, were operational in 2012, and did not share costs with nonambulance services or air ambulance services. GAO also performed a regression analysis to examine factors that affect costs, analyzed Medicare claims and enrollment data, and interviewed representatives of ambulance provider organizations. CMS reviewed a draft of this report and had no comments. Ground ambulance providers' costs per transport for 2010 varied widely. The median cost per transport for the providers in GAO's sample was $429, ranging from $224 to $2,204 per transport. Provider characteristics that affected cost per transport were volume of transports (including both Medicare and non-Medicare transports), intensity of transports (the proportion of Medicare transports that were nonemergency), and the extent to which providers received government subsidies. Higher volume of transports, higher proportions of nonemergency transports, and lower government subsidies were associated with lower costs per transport. Providers reported that personnel cost was the largest cost component in their 2010 total costs and the biggest contributor to increases in their total costs from 2009 to 2010. The median Medicare margin, including add-on payments, was about +2 percent in 2010 (meaning that providers' Medicare payments per transport exceeded their overall costs per transport) for the providers in GAO's sample, but Medicare margins varied widely for those providers. When GAO removed the add-on payments, payments decreased for the providers in the sample, resulting in a lower median Medicare margin of -1 percent. Due to the wide variability of Medicare margins for providers in the sample, GAO cannot determine whether the median provider among the providers in the population that the sample represents had a negative or positive margin. The median Medicare margin with add-on payments ranged from about -2 percent to +9 percent, while the median Medicare margin without add-on payments ranged from about -8 percent to +5 percent. Ground ambulance transports for all Medicare fee-for-service beneficiaries grew 33 percent from 2004 to 2010. Transports by beneficiaries nationwide grew the most in super-rural areas (41 percent) relative to urban and rural areas. The increase overall is attributable primarily to an increase of 59 percent over this period in basic life support (BLS) nonemergency transports, which include noninvasive interventions, such as administering oxygen. In comparing this growth by service area, BLS nonemergency transports in super-rural areas grew the most--by 82 percent. Representatives from an ambulance provider organization suggested the increase in transports may be from increased billing by local governments. Some local governments that used to provide Medicare transports free of charge may bill Medicare now because of increased budgetary pressures. The Department of Health and Human Services Office of Inspector General has cited improper payments--which can be the result of billing mistakes--as one potential cause for increases in Medicare ambulance utilization and has stated that the Medicare ambulance transport benefit is highly vulnerable to abuse, with some payments for transports not meeting program requirements.

Using CDBG funds to respond to disasters is not unprecedented; however, the dollar amounts allocated for such purposes in the wake of the terrorist attacks on New York City are the largest ever made through the program. In the months following September 11, 2001, $3.5 billion in emergency supplemental CDBG funding was made available for New York City--more than the total CDBG funds provided nationwide for all major disasters in the last 10 years. Congress appropriated $40 billion to the President for emergency expenses (Emergency Response Fund) to respond to the terrorist attacks of September 11. Emergency response funds available for transfer to the Department of Housing and Urban Development (HUD) could be used for CDBG programs, as authorized by title I of the Housing and Community Development Act of 1974, as amended. Specifically, on November 1, 2001, the Office of Management and Budget designated $700 million for CDBG funding for New York City out of the Emergency Response Fund that Congress had appropriated. On January 10, 2002, Congress appropriated an additional $2 billion for CDBG funding, earmarking at least $500 million to compensate small businesses, nonprofit organizations, and individuals for their economic losses. Finally, on August 2, 2002, Congress appropriated an additional $783 million for CDBG funding. Although the CDBG program's primary purpose is community development, not disaster assistance, supplemental CDBG appropriations have been made to provide recovery assistance from past natural disasters, usually severe hurricanes, earthquakes, or floods. As in the aftermath of natural disasters, HUD waived many requirements--such as assisting persons of low and moderate income--of the general CDBG program. HUD is one of many federal agencies that offer disaster assistance, and HUD requires that its funds not be used to duplicate benefits provided by other federal agencies, such as SBA. Empire State is the New York State entity designated by the Governor to administer the first CDBG appropriation of $700 million. Created in 1968, Empire State is a corporate governmental agency of the state of New York and is currently engaged in housing and economic development and special projects throughout the state. To carry out large-scale economic development activities, Empire State has created various consolidated subsidiaries. In November 2001, the Empire State board of directors authorized the creation of the Lower Manhattan Development Corporation (LMDC) to assist in the economic recovery and revitalization of lower Manhattan, with special emphasis on the redevelopment of the areas damaged by the terrorist attacks. LMDC functions as a joint city-state development corporation with a 16-member board of directors that is appointed by the Governor and the Mayor. For the amounts appropriated by Congress in the 2002 Emergency Supplemental and the 2002 Supplemental previously noted, which totaled $2.8 billion, LMDC was designated in the legislation as the entity to develop programs and distribute assistance. In its January 30, 2002, action plan, Empire State estimated that almost 18,000 businesses in New York City, representing approximately 563,000 employees, were disrupted or forced to relocate as a result of the terrorist attacks. Empire State estimated that businesses with 200 employees or fewer accounted for 99 percent of all affected businesses and about 50 percent of all affected employees. As lead agency in administering federal assistance to New York City businesses, Empire State is carrying out the action plan, which HUD approved, for providing $700 million in business assistance, with $506 million allocated for small business programs. Additionally, LMDC has a HUD-approved action plan for spending $306 million, primarily to provide residential retention and attraction grants to individuals. LMDC also has made a proposed action plan available for public comment that it will submit to HUD, which would provide $350 million to Empire State for use in its business assistance programs--$200 million of which would be used for its small business programs. LMDC currently has issued no formal plans for spending the remaining, approximately $2 billion in CDBG funding. In addition to the assistance provided by government and private organizations, qualifying small businesses can receive federal tax benefits that have been made available for those affected by the terrorist attacks. The tax benefits include expanded work opportunity tax credits and special allowances for certain business property. Businesses also may benefit from real estate tax abatement, commercial rent tax exemptions or reductions, and energy discounts. These types of assistance are not discussed in this report. From an allocation of $506 million, Empire State developed various programs to assist small businesses. Empire State's Business Recovery Grant (BRG) Program provides grants to businesses to compensate them for economic loss, and its Small Firm Attraction and Retention Grant (SFARG) Program provides incentives to remain in or relocate to lower Manhattan. Empire State is implementing additional programs to provide technical assistance and loans and also expects to reimburse other city and state programs for their expenditures. Additionally, Empire State has made and continues to make many efforts to reach out to affected businesses. Table 1 contains information on the funding provided and disbursed as of September 11, 2002, for each of the Empire State small business assistance programs. In addition to the small business programs, Empire State officials said that retention assistance for larger businesses is particularly important to the future of the lower Manhattan economy. To a great extent, larger businesses and their employees provide small businesses in lower Manhattan with a client base. Small businesses in turn provide larger businesses and their employees with services ranging from business consulting, accounting, and office supplies to personal services, such as dry cleaning, dining establishments, and newsstands. Empire State has allocated $5 million for a recovery grant program for larger businesses with more than 500 employees nationwide, but with fewer than 200 employees in lower Manhattan, from which it has disbursed $3.1 million to assist 18 businesses. Empire State also has allocated $170 million for a larger firm business attraction and retention program, and LMDC is seeking approval to provide Empire State with additional funds, of which $150 million would go toward this program, bringing the total program allocation to $320 million. As of September 11, 2002, no disbursement of funds had been made from this program. According to Empire State, it had made offers to 102 businesses of which 50 had accepted offers totaling $140 million--a process that requires a much longer time frame than does the SFARG Program. The BRG Program for small businesses offers grants to compensate for economic losses. The BRG Program is Empire State's most far-reaching business assistance program. The first BRGs were provided in mid- February 2002. As of September 11, 2002, 8,783 businesses had received BRG grants totaling $254 million. The median grant amount was $9,261. Businesses with fewer than 50 employees accounted for 95 percent of the businesses receiving BRGs and received $200 million, or 79 percent of the total amount of BRGs disbursed. All types of businesses are eligible for BRGs, and assisted businesses can be categorized into various sectors, as shown in figure 1. The largest number of businesses assisted falls into three sectors: professional and technical services; finance, which also includes insurance; and retail trade. To be eligible for a BRG, businesses must have had fewer than 500 employees worldwide; have been located on or south of 14th Street in Manhattan on September 11, 2001; and have suffered uncompensated economic losses related to the attacks. The program identifies four geographic areas, or zones, upon which it then bases the number of days of revenue for which it will compensate. In the BRG computation, the number of days of revenue increases the closer the zone is to the World Trade Center site. See appendix II for a map that identifies these geographic areas. Revenue periods range from 3 to 25 days, and maximum grant amounts range from $50,000 to $300,000, not to exceed a business' economic loss after adjusting for insurance and other compensation. In addition to other eligibility requirements, businesses must still be operating in the city or agree to resume operations in the city within 1 year of the receipt of grant funds as well as agree to retain a substantial portion of their business operations in the city for at least 3 years. The program will accept applications through December 31, 2002. The size of businesses assisted varies as measured by the number of employees and annual revenues. Businesses with fewer than 10 employees accounted for about 75 percent of the businesses assisted (see fig. 2). Recipients of BRG assistance who had revenues of less than $1 million accounted for 5,785 businesses, or about 67 percent of the businesses assisted (see fig. 3). The BRG Program has provided assistance to thousands of businesses; however, it has awarded only about one-half of the number of grants it originally estimated and has not covered a substantial portion of the uncompensated economic losses reported by businesses. Although Empire State estimated that it would make 19,600 grant awards, on the basis of the number of small businesses believed to be located in the eligible area, as of September 11, 2002, it had provided 9,373 grants. Empire State is making additional outreach efforts and hopes to increase the number of businesses assisted. Analysis of the economic losses reported by businesses shows that at the median of businesses receiving a BRG, the BRG covered about 17 percent of a business' losses that were not covered by insurance and other city and state grants. Empire State recently changed the BRG computation, both retroactively and prospectively, to increase the number of business day revenues considered in determining the grant amount, particularly for those businesses that were in or near the World Trade Center. This change will result in increased payments to some businesses and thereby reduce the amount of their uncompensated economic losses. With new criteria for increased payments and additional applications expected, Empire State is estimating that the total allocation for the BRG Program will be $481 million. Empire State also is expected to use CDBG funds to reimburse city and state programs that provided grants to small businesses soon after the September 11 attacks. The city and state programs have disbursed $24 million in assistance; however, as of September 11, 2002, neither had filed for reimbursement. As previously noted, LMDC is currently seeking approval to provide Empire State with additional CDBG funds, of which $150 million would go toward the BRG Program, bringing the total program allocation from $331 million to $481 million. Empire State and LMDC plan to meet the federal legislative requirement that $500 million in CDBG assistance be used to compensate small businesses, nonprofits, and individuals located in lower Manhattan almost exclusively through the BRG Program. The remaining expenditures will come from part of LMDC assistance to individuals through its housing assistance program. The SFARG Program offers grants to qualifying businesses (i.e., businesses with no more than 200 employees that are located or planning to locate in the general area south of Canal Street) that sign a new lease or renew an existing lease for a minimum of 5 years. For existing businesses to be eligible, their current lease must expire no later than December 31, 2004, except for businesses located in an area designated as the "October 23rd Zone." The program offers grants on the basis of the number of employees in the business. Grant payments are made in two installments, the first at the time of application approval and the second 18 months after the application date. Total payments are $3,500 per employee, except for businesses that were in the "Restricted Zone" and remained downtown, for whom total payments are $5,000 per employee. The program will accept applications through December 31, 2004. The first SFARG assistance was provided on June 13, 2002. As of September 11, 2002, Empire State disbursed $12 million to 246 businesses in initial installment payments. The median grant amount was $27,500. The SFARG Program initially was limited to businesses with a minimum of 10 and no more than 200 employees. In response to public reaction, the program was amended to expand eligibility to all businesses with no more than 200 employees, with no lower limit. The program also has been criticized for excluding businesses that were located in the eligible area as of September 11, 2001, but that had long-term leases that did not expire by December 31, 2004. Business advocates argue that those businesses also had a demonstrated commitment to the area, which should make them eligible and not place them at a disadvantage relative to new businesses coming to the area. Empire State officials told us that SFARG was designed to provide incentives to businesses at risk of leaving, not for those that already had long-term commitments in the area. Additional criticism has been made that SFARG took too long to put the program in place and that relatively few businesses have received any benefits. LMDC is currently seeking approval to provide Empire State with additional CDBG funds, of which $50 million would go toward the SFARG Program, bringing the total program allocation from $105 million to $155 million. The Business Recovery Loan Program will provide funding to community- based lending organizations, which in turn will provide low-cost working capital loans to businesses that were adversely affected by the terrorist attacks and to businesses that have subsequently located or will locate new operations in lower Manhattan. The program is intended to enhance access to capital to businesses, particularly to those that do not meet SBA credit or eligibility criteria for disaster loans. Loans are available to businesses (1) located on or south of 14th Street in Manhattan as of September 11, 2001; (2) located in the five boroughs of New York City, but outside of lower Manhattan, that were adversely affected because at least 10 percent of their revenues were derived from sales or services to other businesses located on or south of 14th Street in Manhattan; or (3) newly located on or south of 14th Street in Manhattan since September 11, 2001. As of September 11, 2002, Empire State had selected 10 organizations to participate in the Business Recovery Loan Program. State officials had not disbursed any funds from the program and were in the process of contracting with the lending organizations. Under the program, lending organizations can make loans up to $250,000 per business. Repayments of principal by the borrowers of eligible loans may be retained by the lending organization as capital for making additional small business loans in the lender's target area. A business advocacy group has criticized Empire State for taking too long to put the program in place. The Technical Assistance Program provides grants to community-based organizations and other service providers to allow them to provide additional assistance to businesses affected by the World Trade Center disaster. The program allocation is $5 million, with a maximum grant of $250,000 per organization. Technical service providers are to assist small businesses with strategic planning; finance, insurance, and legal issues; and basic business management and to help businesses identify and access disaster funds available from CDBG-funded state programs and other city, state, and federal government agencies. The service providers may also assist with marketing, member development, and attraction efforts. To qualify for technical assistance, businesses must have fewer than 200 employees, have been affected by the disaster, and currently be located south of 14th Street in lower Manhattan. As of September 11, 2002, Empire State had selected 23 community-based and other service providers for the program and had provided a total of $224,000 to 4 of the organizations--some of which already offered technical assistance as part of their ongoing assistance programs. Although such organizations already have offered services to some businesses and over a year has elapsed since the attacks, a state official said that there is still a need for additional services and that more and better information currently exists to help make business decisions than in the period immediately after September 11, 2001. Empire State officials also hope that businesses that obtain technical assistance will apply for financial assistance, if they have not done so already. The Empire State action plan allocates $15 million to provide loan loss reserve subsidies to lenders making bridge loans to affected businesses. Empire State is a partner in the World Trade Center Disaster Recovery Bridge Loan Program, a joint city-state program that began in October 2001. Through this program, the city and state provide loan loss reserve subsidies to participating lenders, which make bridge loans to businesses awaiting SBA loan approvals. Eligible businesses are New York City-based, commercial, industrial, and retail enterprises and not-for-profits that were affected by September 11 and that are applying for SBA disaster loans. Participating banks and community-based lenders make the bridge loans to provide interim capital to businesses. If the SBA loan is approved, the business pays off the bridge loan with the SBA loan proceeds. If the borrower does not qualify for an SBA loan, the lender may restructure the bridge loans as term loans. In the original Bridge Loan Program, New York City and State shared equally in providing participating lenders with a 20 percent loan loss reserve subsidy for approved bridge loans. Empire State will use CDBG funds to reimburse the city and state for their loss reserve expenditures at a later date. Participating lenders have disbursed $31.5 million in bridge loans to 950 businesses as of September 11, 2002. The total city-state loan loss reserve payments total $6.3 million. The Bridge Loan Program is open until January 31, 2003, corresponding to the SBA Disaster Loan Program's ending date. Empire State and LMDC are not alone in their efforts to provide assistance to small businesses in lower Manhattan. There are many other organizations from all levels of government and the private and nonprofit sectors that have come forward to offer loans, grants, and technical assistance to small businesses affected by the disaster. Often these organizations were providing assistance within weeks or months of September 11, well before the Empire State programs became available. SBA disaster assistance is the other major source of federal assistance to businesses in New York. SBA began making loans within days after the terrorist attacks and has since made thousands of loans to businesses throughout the region. New York City and State offered cash grants to businesses within the first few months after the terrorist attacks as well as bridge loans to businesses through participating lenders. Some banks have also provided additional assistance and short-term loans to affected businesses. Finally, many nonprofit organizations, often funded by donations and charitable groups, have made loans and grants and offered other aid to hundreds of small businesses. Although these programs have not reached as many businesses or provided as much funding as the Empire State programs, they have filled a need by providing early assistance and targeting hard-to-reach groups and businesses. Some of these organizations, as well as business advocacy groups, also have played an important role in facilitating the flow of information among businesses and representing the interests of small businesses recovering from the disaster. In the aftermath of September 11, SBA declaration number 3364, "New York City Explosions and Fires," entitled business owners, nonprofit organizations, homeowners, and renters in New York City and the surrounding region to apply for SBA physical disaster loans and economic injury disaster loans (EIDL). Congress made special appropriations of $175 million to SBA for disaster assistance to respond to the terrorist attacks. SBA can use the appropriations to provide approximately $651 million in loans, while allowing $40 million for program administration. The appropriations are being used to cover the "subsidy rate" of the loans, which represent the costs to the government for the loans. From its first loan on September 15, 2001, through September 11, 2002, SBA provided 4,381 loans totaling $346 million within the broadly defined disaster area; of this $346 million, businesses in lower Manhattan received $154 million.SBA's deadline for filing applications has been extended several times and is now January 31, 2003. Physical disaster loans go to eligible business owners (for any size business), nonprofit organizations, homeowners, and renters. Business loan terms are for a maximum of 30 years at a 4 percent interest rate when no credit is available elsewhere. The loans can be used to repair or replace disaster-damaged property, including real estate, machinery and equipment, inventory, and supplies. SBA also gives EIDLs to eligible small businesses and nonprofits. SBA determines what constitutes a "small" business on the basis of the type of business and its revenue or number of employees. EIDL loans can be used for working capital, including making payments on short- or long-term notes or accounts payable. The loans carry a 4 percent interest rate but are only available to applicants with no credit available elsewhere. Loan amounts for both physical disaster and EIDL loans have been raised to $10 million and nonprofits have been made eligible for this disaster only. Collateral is required for physical loans over $10,000 and for EIDL loans over $5,000. SBA also requires that applicants have a reasonable ability to repay the loan and any other obligations from expected earnings. Table 2 shows SBA assistance to businesses in lower Manhattan, as of September 11, 2002. Business advocacy groups have criticized SBA for requiring collateral, particularly personal residences, for business loans and for denying too many loans. According to SBA data, denials and withdrawals have accounted for 54 percent of all business application dispositions. The primary reasons for denial were "no repayment ability" and "unsatisfactory credit." The primary reasons identified for withdrawals were "no IRS record found" and "failure to furnish additional information." SBA has also received criticism for not providing loans in a timely manner. According to SBA data, the average elapsed time from the receipt of a completed business loan application to disbursement issued is 38 days. Although additional funding remains available for disaster loans, the number of applications has dwindled in recent months. SBA officials said that some recent applications are for businesses that already have received loans but are seeking additional loans. SBA's outreach efforts have included opening multiple locations to distribute and explain applications and door-to-door outreach to affected businesses. At one time, SBA worked from 20 different locations throughout Manhattan at which business owners could get SBA disaster applications and information, including 1 location in Chinatown with multilingual personnel. SBA currently makes loan applications and information available at 2 locations and over the telephone and Internet. SBA's Service Corps of Retired Executives Program also has provided business counseling to affected owners. Funded in part by SBA and the state of New York, the New York Small Business Development Centers (SBDC) have seen increased demand at regional locations in their roles of providing business counseling and management assistance to small businesses since September 11, 2001.SBA has trained SBDC personnel to help business owners complete disaster loan applications; in turn, SBDC personnel have helped more than 500 business owners apply for SBA disaster loans. The SBDC program has also established its own loan fund through private donations and provided $5,000, 3-year loans at a 3 percent interest rate to 170 businesses, for a total disbursement of $850,000. Although the loan program is now closed, having expended all of its funds, SBDC officials are looking to obtain additional funding to reopen the program in the near future. SBDC officials also anticipate obtaining state funding to establish another loan program to provide additional assistance to affected small businesses. Both the city and state of New York established assistance programs within months of the World Trade Center attacks. Specifically, the city established the New York City Lower Manhattan Business Retention Grant Program to provide cash grants to nonretail businesses. This program began on November 14, 2001, and provided cash grants totaling $10 million to 1,674 nonretail businesses, including manufacturers and professional service firms. The program stopped accepting applications on March 31, 2002. To qualify, businesses had to be located south of Houston Street and employ 50 or fewer workers; they also had to apply for a loan from SBA or an approved lender. A business could receive up to $2,500 upon completing a loan application and up to a $7,500 cash grant (for a maximum of $10,000) upon approval of the loan, depending on the size of the requested loan. Moreover, businesses that were located in the World Trade Center were eligible for the full $10,000 without having to apply to SBA. The state established the World Trade Center Retail Recovery Grant Program to provide cash grants to retail businesses. This program began on November 5, 2001, and provided 3,048 retail businesses in lower Manhattan with cash grants totaling $13.7 million. Eligible businesses included retail and personal service firms, with fewer than 500 employees, located south of Houston Street. The program offered businesses compensation equal to 3 days of lost revenue, capped at $10,000, and required that businesses continue to operate in New York City. The state closed the program to new applications on December 31, 2001, after which Empire State began offering grants through the CDBG-funded Business Recovery Grant Program. Under the Empire State BRG Program, if a business had previously received a Retail Recovery Grant, the BRG grant amount was reduced by that amount. While the city and state grant programs are now closed to new applications, a joint city-state bridge loan program--the World Trade Center Disaster Recovery Bridge Loan Program--that works in cooperation with banks is still available, as previously described in this report. This program has participating banks and community-based lenders provide low-cost bridge loans to small businesses and nonprofits. The city and state each provided banks with 10 percent of the approved loan amount as a loan loss reserve. The first program loans were made on October 5, 2001. Subsequently, Empire State allocated $15 million from its CDBG funds to provide loan loss reserve subsidies and expects to reimburse the city and state for their prior and continuing expenditures. In addition to the grant programs, within days of the September 11 attacks, both the city and state established emergency walk-in centers that assisted small businesses. A toll-free hotline also was established to direct callers to emergency services. Business location services were provided as well as comprehensive on-line and hard-copy directories of emergency and business services available from governmental and nongovernmental sources. Outreach has included radio and print advertisements, direct mail, direct telephone calls, informational workshops, and an "Adopt a Company" Program. In addition to their participation in the Bridge Loan Program, some banks in New York offered additional assistance to small businesses, although there are no comprehensive data on the amount of total assistance they provided. Some banks offered short-term loan programs for businesses affected by the disaster. Loan terms were usually short, extending up to 5 years, with an interest rate at or below prime. However, banks did maintain existing credit standards; consequently, some banks had a high denial rate. For example, one bank denied over 80 percent of the applications that it received. After the September 11 terrorist attacks, several nonprofit organizations that traditionally assisted small businesses and had an interest in the business environment of lower Manhattan saw an immediate need that they could fill. Many nonprofits created programs for affected small businesses within weeks of the disaster and raised funds from banks, foundations, and other private contributors. As more disaster-related funding has become available, the nonprofits have been able or are seeking to supplement their original funds to expand or continue programs. The September 11th Fund, an organization dedicated to providing emergency and long-term assistance to the victims of September 11, became a major funding source for the nonprofits. The fund set aside $50 million to help small businesses and provided significant funding to many of the organizations mentioned below. Additionally, some of the nonprofits discussed below and others have participated in the city and state's Bridge Loan Program, have been selected to receive funding from Empire State to provide technical assistance, and/or have been selected to receive some of the $50 million of loan capital that Empire State will be awarding. Nonprofits have been able to offer different and sometimes more personal services than those provided through the larger federal programs. For instance, Accion New York (Accion), a small business mircrolender, offers a package of loans, small grants, and personal technical assistance through its newly created "American Dream Fund." These services include help in completing forms and creating needed financial documents. The New York City Partnership provides businesses with recoverable grants and intensive technical assistance, such as a mentor to help with future business planning. The partnership also created a goods and services clearinghouse for businesses affected by the disaster. Another nonprofit, Seedco, offers not only loans and grants, but also wage subsidies to enable small businesses to meet payroll and retain workers who might otherwise be laid off. For each business, Seedco will subsidize 50 percent of the salary of up to 10 employees who make $12 an hour or less. Often, nonprofit programs will specifically target types of businesses that are either overlooked or ineligible for federal programs or other nonprofit assistance. Renaissance Development Corporation (Renaissance), which has been working in Chinatown since 1973, markets its programs to affected businesses, such as the garment industry and limousine drivers. Accion targets businesses that have been turned down for SBA loans; specifically, Accion established a working relationship with SBA in which SBA refers these businesses to Accion. Accion also was located at a business recovery center, where clients had access not only to Accion but also to Empire State and SBA programs. The partnership's program specifically chose to target retail businesses with 50 or more employees, in part, because Seedco's program covers those with fewer than 50 employees. Many of the nonprofits have far more flexible lending criteria than either SBA or the banks, thereby allowing them to make loans the others have eschewed. Unlike SBA, Renaissance does not require collateral or tax receipts, instead it relies on store receipts, site visits, lottery sales, and personal knowledge of a business to determine business viability. Table 3 shows major nongovernmental assistance as of September 11, 2002. The nonprofits noted above and other groups also have played an important role in advocating for the interests of small businesses. For example, newly founded business advocacy groups, such as From the Ground Up and the World Trade Center Tenants Association, have lobbied Empire State, city and federal officials, and others to change programs to benefit small businesses. Some of these groups also have helped facilitate the flow of information among businesses and organizations, either formally or informally. The Manhattan Chamber of Commerce, for instance, has held networking events in lower Manhattan to bring various resources to one place. Seedco has published a widely used directory of resources available to help small businesses. We provided HUD, SBA, and Empire State with an opportunity to review this report. They provided comments that were technical in nature, which we have addressed in this report where appropriate. We are sending copies of this report to the Ranking Minority Member of the House Committee on Small Business, the Chairman and Ranking Minority Member of the Senate Committee on Small Business, other appropriate congressional committees, the Secretary of Housing and Urban Development, and the Administrator of the Small Business Administration. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact Nancy Simmons or me at (202) 512-8678. Key contributors to this report were Catherine Hurley, Mark McArdle, Dan Meyer, and Barbara Roesmann. To obtain information on the assistance provided to small businesses from Community Development Block Grant (CDBG) supplemental funding, we interviewed officials from the Department of Housing and Urban Development (HUD), New York State's Empire State Development Corporation (Empire State), and the Lower Manhattan Development Corporation (LMDC). For our analysis, we obtained detailed program information and data on the various programs that HUD, Empire State, and LMDC have created to assist businesses after September 11, including an Empire State database of grant recipients. This database is the same one used by the HUD Office of Inspector General to monitor expenditures in New York. We ascertained how information for this database was collected and maintained to determine its reliability, and we found the information to be reliable for our purposes. To obtain information on other sources of funds available to rebuild and sustain business in lower Manhattan, we interviewed officials from the following: the Small Business Administration (SBA), the New York City Economic Development Corporation, the New York Small Business Development Center (SBDC), FleetBoston and the Bank of New York, and nonprofit organizations that provided financial assistance. We selected the nonprofit organizations by reviewing various media and Internet sources on the rebuilding effort in New York as well as through referrals from other organizations concerned with economic renewal in lower Manhattan. We met with officials from the following nonprofit and other organizations that offer financial assistance toward the rebuilding and economic renewal efforts: Accion New York, Downtown Alliance, New York City Partnership, Renaissance Development Corporation, SeedCo, and the September 11th Fund. We also met with business advocacy groups, whose directors are often small business owners, to obtain their views on the assistance that Empire State, SBA, and others provided. These groups included the following: From the Ground Up, Manhattan Chamber of Commerce, Tribeca Organization, Wall Street Rising, and the World Trade Center Tenants Association. We obtained the Empire State disaster recovery database, which captured data on program activity through September 11, 2002. We used these data to calculate descriptive statistics on the numbers of businesses, dollar amounts, and other characteristics of the Business Recovery Grant (BRG) Program, the Small Firm Attraction and Retention Grant (SFARG) Program, and the large business recovery grant program. We used median instead of mean values because the median values were more representative of the "typical" grant. In addition, we analyzed the database to determine other characteristics of BRG recipients, including annual gross revenues, number of employees, type of business on the basis of the North American Industry Classification System code given, and the extent to which BRGs covered businesses' reported losses. We limited our analysis to disbursed grants. When multiple grants went to the same business as the result of an appeal or from an award for a supplemental grant, we summarized the data by business, not by grant. Since the BRG Program includes nonprofits in addition to small businesses, we included nonprofits in our analysis, although entities that identify themselves as nonprofits accounted for less than 3 percent of the total receiving grants. Other conditions or limitations are described in the explanations of specific analyses that follow. For our analysis of business employee size, we used the total number of employees of the business; when the business had other business affiliations, we used the total number of employees worldwide. The BRG Program uses the total number of employees worldwide to determine if a business qualifies as a small business. In our analysis of revenues of BRG recipients, we used the gross revenue amount reported at the business location. This gross revenue amount is the figure used in computing the grant amount. The database did not have total business gross revenues that included affiliated businesses. We included both businesses that received one grant and businesses that received multiple grants, when the database included the same gross revenue figure for each of the multiple grants. Also, Empire State informed us that the gross revenue entries include projected annual revenues for some new businesses that did not have a year of revenue data, as well as annual expenses, in lieu of revenue, for some businesses that do not generate revenues and for nonprofits. For our analysis of type of business, we used the business classification code from the database and grouped the results by the first two letters of the code, which designate the general industry type. Where the groups represented less than 3 percent of all businesses, we grouped them in the "other" category. We made two calculations of the extent to which BRGs compensated for business losses. The business loss data are self-reported and unaudited by Empire State. In the first calculation, we determined to what extent BRGs covered the uncompensated loss incurred by each business. The uncompensated loss was determined by using the business "net loss" database entry, which reflected remaining losses after adjusting for insurance proceeds and the city's Lower Manhattan Business Retention Grants; we further reduced this amount by the amount of the state Retail Recovery Grant. The BRG amount was then divided by the uncompensated loss figure to obtain the percentage of uncompensated loss covered by BRGs for each business. Where businesses had received multiple grants and the net loss figures were the same for each grant, we totaled the disbursed grant amounts and divided the total by the uncompensated loss amount. In the second calculation, we determined to what extent BRGs covered the total loss incurred by each business. We divided the BRG amount by the total business loss to obtain the percentage of the total loss covered by BRGs for each business. Where businesses had received multiple grants and the total loss figures were the same for each grant, we totaled the disbursed grant amounts and divided it by the total loss amount. To more accurately characterize the loss and compensation experience of small businesses in lower Manhattan for this report, we considered the entire distribution of the above statistics over all businesses to identify any uneven distribution around the median, or 50 percentile, which was the most common single summary measure we chose to report. We conducted our review between April and September, 2002 in Washington, D.C., and New York, New York, in accordance with generally accepted government auditing standards. South of Canal St. Houston St. - Canal St. 14th St. - Houston St.

The attacks on the World Trade Center had a substantially negative impact on the New York City economy, severely affecting businesses. In the aftermath of the attacks, Congress, among other things, appropriated emergency supplemental funds to several federal agencies to aid and rebuild the affected areas. The Chairman of the House Committee on Small Business asked GAO to describe the assistance provided to small businesses that is funded from emergency supplemental appropriations of federal Community Development Block Grant funds and other sources. To assist in New York City's recovery from the September 11, 2001, terrorist attacks, Congress appropriated $3.5 billion in Community Development Block Grant funding of which Congress earmarked at least $500 million to be used to compensate small businesses, nonprofit organizations, and individuals for their economic losses. One year after the attacks, these funds, administered in part by New York State's Empire State Development Corporation (Empire State), have provided $266 million to about 9,000 small businesses, many with fewer than 10 employees. Such assistance has included grants to compensate businesses for part of their economic losses--for both physical and economic injuries--and payments to attract and retain small businesses in efforts to revitalize the affected areas. Hundreds of millions of dollars remain available through these and other programs to assist an estimated 18,000 affected businesses. Empire State has employed mailings, visits, walk-in centers, and mass media to inform businesses of assistance programs. Other efforts by the Small Business Administration, New York City and State, banks, and nonprofit organizations have provided critical assistance to address the immediate and additional unmet needs of small businesses.

Within USDA, FNS has overall responsibility for overseeing the school- meals programs, which includes promulgating regulations to implement authorizing legislation, setting nationwide eligibility criteria, and issuing guidance. School-meals programs are administered at the state level by a designated state agency that issues policy guidance and other instructions to school districts providing the meals to ensure awareness of federal and state requirements. School districts are responsible for completing application, certification, and verification activities for the school-meals programs, and for providing children with nutritionally balanced meals each school day. The designated state agency conducts periodic reviews of the school districts to determine whether the program requirements are being met. Schools and households that participate in free or reduced-price meal programs may be eligible for additional federal and state benefits. Depending on household income, children may be eligible for free or reduced-price meals. Children from families with incomes at or below 130 percent of the federal poverty level are eligible for free meals; the income threshold for a family of four was $28,665 in the 2010-2011 school year. Those with incomes between 130 percent and 185 percent of the federal poverty level are eligible for reduced-price meals. Income is any money received on a recurring basis--including, but not limited to, gross earnings from work, welfare, child support, alimony, retirement, and disability benefits--unless specifically excluded by statute. In addition, students who are in households receiving benefits under certain public-assistance programs--specifically, SNAP, Temporary Assistance for Needy Families (TANF), or Food Distribution Program on Indian Reservations (FDPIR)--or meet certain approved designations (such as students who are designated as homeless, runaway, or migrant; or who are foster children) are eligible for free school meals regardless of income. In May 2014, we reported that USDA had taken several steps to implement or enhance controls to identify and prevent ineligible beneficiaries from receiving school-meals benefits. For example: USDA worked with Congress to develop legislation to automatically enroll students who receive SNAP benefits for free school meals; SNAP has a more-detailed certification process than the school-meals program. For our May 2014 report, USDA officials told us that they were emphasizing the use of direct certification, because, in their opinion, it helps prevent certification errors without compromising access. Direct certification reduces the administrative burden on SNAP households, as they do not need to submit a separate school- meals application. It also reduces the number of applications school districts must review. The number of school districts directly certifying SNAP-participant children increased from the 2008 through 2013 school years. For example, during the 2008-2009 school year, 78 percent of school districts directly certified students, and by the 2012- 2013 school year, this percentage had grown to 91 percent of school districts, bringing the estimated percentage of SNAP-participant children directly certified for free school meals to 89 percent. USDA was also conducting demonstration projects in selected states and school districts to explore the feasibility of directly certifying children that participate in the Medicaid program. USDA requires state agencies that administer school-meals programs to conduct regular, on-site reviews--referred to as "administrative reviews"--to evaluate school districts that participate in the school- meals programs. Starting in the 2013-2014 school year, USDA increased the frequency with which state agencies complete administrative reviews from every 5 years to every 3 years. As part of this process, state agencies are to conduct on-site reviews of school districts to help ensure that applications are complete and that the correct eligibility determinations were made based on applicant information. School districts that have adverse findings in their administrative reviews are to submit a corrective-action plan to the state agency, and the state agency is to follow up to determine whether the issue has been resolved. In February 2012, USDA distributed guidance to state administrators to clarify that school districts have the authority to review approved applications for free or reduced-price meals for school-district employees when known or available information indicates school- district employees may have misrepresented their incomes on their applications. In our May 2014 report, we identified opportunities to strengthen oversight of the school-meals programs while ensuring legitimate access, including clarifying use of for-cause verification, studying the feasibility of electronic data matching to verify income, and verifying a sample of households that are categorically eligible for assistance. As described in USDA's eligibility manual for school meals, school districts are obligated to verify applications if they deem them to be questionable, which is referred to as for-cause verification. We reported in May 2014 that officials from 11 of the 25 school districts we examined told us that they conduct for-cause verification. These officials provided examples of how they would identify suspicious applications, such as when a household submits a modified application-- changing income or household members--after being denied, or when different households include identical public-assistance benefit numbers (e.g., if different households provide identical SNAP numbers). However, officials from 9 of the 25 school districts we examined told us that they did not conduct any for-cause verification. For example, one school-district official explained that the school district accepts applications at face value. Additionally, officials from 5 of the 25 school districts told us they only conduct for-cause verification if someone (such as a member of the public or a state agency) informs them of the need to do so on a household. Although not generalizable, responses from these school districts provide insights about whether and under what conditions school districts conduct for-cause verifications. In April 2013, USDA issued a memorandum stating that, effective for the 2013-2014 school year, all school districts must specifically report the total number of applications that were verified for cause. However, the outcomes of those verifications would be grouped with the outcomes of applications that have undergone standard verification. As a result, we reported in May 2014 that USDA would not have information on specific outcomes, which it may need to assess the effectiveness of for-cause verifications and to determine what actions, if any, are needed to improve program integrity. While USDA had issued guidance specific to school- district employees and instructs school districts to verify questionable applications in its school-meals eligibility manual, we found that the guidance did not provide possible indicators or describe scenarios that could assist school districts in identifying questionable applications. Hence, in May 2014, we recommended that USDA evaluate the data collected on for-cause verifications for the 2013-2014 school year to determine whether for-cause verification outcomes should be reported separately and, if appropriate, develop and disseminate additional guidance for conducting for-cause verification that includes criteria for identifying possible indicators of questionable or ineligible applications. USDA concurred with this recommendation and in January 2015 told us that FNS would analyze the 2013-2014 school year data to determine whether capturing the results of for-cause verification separately from the results of standard verification would assist the agency's efforts to improve integrity and oversight. USDA also said that FNS would consider developing and disseminating additional guidance, as we recommended. In addition to for-cause verification, school districts are required to annually verify a sample of household applications approved for free or reduced-price school-meals benefits to determine whether the household has been certified to receive the correct level of benefits--we refer to this process as "standard verification." Standard verification is generally limited to approved applications considered "error-prone." Error-prone is statutorily defined as approved applications in which stated income is within $100 of the monthly or $1,200 of the annual applicable income- eligibility guideline. Households with reported incomes that are more than $1,200 above or below the free-meals eligibility threshold and more than $1,200 below the reduced-price threshold would generally not be subject to this verification process. In a nongeneralizable review of 25 approved civilian federal-employee household applications for our May 2014 report, we found that 9 of 19 households that self-reported household income and size information were not eligible for free or reduced-price-meal benefits they were receiving because their income exceeded eligibility guidelines. Two of these 9 households stated in their applications annualized incomes that were within $1,200 of the eligibility guidelines and, therefore, could have been selected for standard verification as part of the sample by the district; however, we determined that they were not selected or verified. The remaining 7 of 9 households stated annualized incomes that fell below $1,200 of the eligibility guidelines and thus would not have been subject to standard verification. For example, one household we reviewed submitted a school-meals application for the 2010-2011 school year seeking school-meals benefits for two children. The household stated an annual income of approximately $26,000 per year, and the school district appropriately certified the household to receive reduced-price-meal benefits based on the information on the application. However, we reviewed payroll records and determined that the adult applicant's income at the time of the application was approximately $52,000--making the household ineligible for benefits. This household also applied for and received reduced-meal benefits for the 2011-2012 and 2012-2013 school years by understating its income. Its 2012-2013 annualized income was understated by about $45,000. Because the income stated on the application during these school years was not within $1,200 per year of the income-eligibility requirements, the application was not deemed error-prone and was not subject to standard verification. Had this application been subjected to verification, a valid pay stub would have indicated the household was ineligible. One method to identify potentially ineligible applicants and effectively enforce program-eligibility requirements is by independently verifying income information with an external source, such as state payroll data. States or school districts, through data matching, could identify households that have income greater than the eligibility limits and follow up further. Such a risk-based approach would allow school districts to focus on potentially ineligible families while not interrupting program access to other participants. Electronic verification of a sample of applicants (beyond those that are statutorily defined as error-prone) through computer matching by school districts or state agencies with other sources of information--such as state income databases or public- assistance databases--could help effectively identify potentially ineligible applicants. In May 2014, we recommended that USDA develop and assess a pilot program to explore the feasibility of computer matching school-meal participants with other sources of household income, such as state income databases, to identify potentially ineligible households--those with income exceeding program-eligibility thresholds--for verification. We also recommended that, if the pilot program shows promise in identifying ineligible households, the agency should develop a legislative proposal to expand the statutorily defined verification process to include this independent electronic verification for a sample of all school-meals applications. USDA concurred with our recommendations and told us in January 2015 that direct-verification computer matching is technologically feasible with data from means-tested programs, and that data from SNAP and other programs are suitable for school-meals program verification in many states. USDA said that FNS would explore the feasibility of using other income-reporting systems for program verification without negatively affecting program access for eligible students or violating statutory requirements. Depending on the results of the pilot program, USDA said that FNS would consider submitting a legislative proposal to expand the statutorily defined verification process, as we recommended. In May 2014, we found that ineligible households may be receiving free school-meals benefits by submitting applications that falsely state that a household member is categorically eligible for the program due to participating in certain public-assistance programs--such as SNAP--or meeting an approved designation--such as foster child or homeless. Of the 25 civilian federal-employee household applications we reviewed, 6 were approved for free school-meals benefits based on categorical eligibility. We found that 2 of the 6 were not eligible for free or reduced- price meals and 1 was not eligible for free meals, although that household may have been eligible for reduced-price meals. For example, one household applied for benefits during the 2010-2011 school year--providing a public-assistance benefit number--and was approved for free-meal benefits. However, when we verified the information with the state, we learned that the number was for medical- assistance benefits--a program that is not included in categorical eligibility for the school-meals programs. On the basis of our review of payroll records, this household's annualized income of at least $59,000 during 2010 would not have qualified the household for free or reduced- price-meal benefits. This household applied for school-meals benefits during the 2011-2012 and 2012-2013 school years, again indicating the same public-assistance benefit number--and was approved for free-meal benefits. Figure 1 shows the results of our review. Because applications that indicate categorical eligibility are generally not subject to standard verification, these ineligible households would likely not be identified unless they were selected for for-cause verification or as part of the administrative review process, even though they contained inaccurate information. These cases underscore the potential benefits that could be realized by verifying beneficiaries with categorical eligibility. In May 2014, we recommended that USDA explore the feasibility of verifying the eligibility of a sample of applications that indicate categorical eligibility for program benefits and are therefore not subject to standard verification. USDA concurred with this recommendation and told us in January 2015 that FNS would explore technological solutions to assess state and local agency capacity to verify eligibility of a sample of applications that indicate categorical eligibility for school-meals-program benefits. In addition, USDA said that FNS would clarify to states and local agencies the procedures for confirming and verifying the application's status as categorically eligible, including for those who reapply after being denied program benefits as a result of verification. Chairman Rokita, Ranking Member Fudge, and Members of the Subcommittee, this concludes my prepared remarks. I look forward to answering any questions that you may have at this time. For further information on this testimony, please contact Jessica Lucas- Judy at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Gabrielle Fagan, Assistant Director; Marcus Corbin; Ranya Elias; Colin Fallon; Kathryn Larin; Olivia Lopez; Maria McMullen; and Daniel Silva. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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In fiscal year 2014, 30.4 million children participated in the National School Lunch Program and 13.6 million children participated in the School Breakfast Program, partly funded by $15.1 billion from USDA. In May 2014, GAO issued a report on (1) steps taken to help identify and prevent ineligible beneficiaries from receiving benefits in school-meal programs and (2) opportunities to strengthen USDA's oversight of the programs. This testimony summarizes GAO's May 2014 report ( GAO-14-262 ) and January 2015 updates from USDA. For the May 2014 report, GAO reviewed federal school-meals program policies, interviewed program officials, and randomly selected a nongeneralizable sample that included 25 approved applications from civilian federal-employee households out of 7.7 million total approved applications in 25 of 1,520 school districts in the Dallas, Texas, and Washington, D.C., regions. GAO performed limited eligibility testing using civilian federal-employee payroll data from 2010 through 2013 due to the unavailability of other data sources containing nonfederal-employee income. GAO also conducted interviews with households. GAO referred potentially ineligible households to the USDA Inspector General. In its 2014 report, GAO recommended that USDA explore (1) using computer matching to identify households with income that exceeds program-eligibility thresholds for verification, and (2) verifying a sample of categorically eligible households. USDA generally agreed with the recommendations and is taking actions to address them. In May 2014, GAO reported that the U.S. Department of Agriculture (USDA) had taken several steps to implement or enhance controls to identify and prevent ineligible beneficiaries from receiving school-meals benefits. For example: USDA worked with Congress to develop legislation to automatically enroll students who receive Supplemental Nutritional Assistance Program benefits for free school meals; this program has a more-detailed certification process than the school-meals program. Starting in the 2013-2014 school year, USDA increased the frequency with which state agencies complete administrative reviews of school districts from every 5 years to every 3 years. As part of this process, state agencies review applications to determine whether eligibility determinations were correctly made. In its May 2014 report, GAO identified opportunities to strengthen oversight of the school-meals programs while ensuring legitimate access, such as the following: If feasible, computer matching income data from external sources with participant information could help identify households whose income exceeds eligibility thresholds. As of May 2014, school districts verified a sample of approved applications deemed "error-prone"--statutorily defined as those with reported income within $1,200 of the annual eligibility guidelines--to determine whether the household is receiving the correct level of benefits (referred to as standard verification in this testimony). In a nongeneralizable review of 25 approved applications from civilian federal households, GAO found that 9 of 19 households that self-reported household income and size information were ineligible and only 2 could have been subject to standard verification. Verifying a sample of categorically eligible applications could help identify ineligible households. GAO reported that school-meal applicants who indicate categorical eligibility (that is, participating in certain public-assistance programs or meeting an approved designation, such as foster children) were eligible for free meals and were generally not subject to standard verification. In a nongeneralizable review of 25 approved applications, 6 households indicated categorical eligibility, but GAO found 2 were ineligible.

ACIP, commonly referred to as flight pay, is intended as additional pay to attract and retain officers in a military aviation career. The amount of ACIP varies from $125 a month for an aviator with 2 years or less of aviation service to $650 a month for 6 years to 18 years of service. After 18 years, the amount gradually decreases from $585 a month to $250 a month through year 25. After 25 years, aviators do not receive ACIP unless they are in operational flying positions. ACP, which has existed for all services since 1989, is considered a bonus and is intended to entice aviators to remain in the service during the prime of their flying career. An ACP bonus can be given to aviators below the grade 0-6 with at least 6 years of aviation service and who have completed any active duty service commitment incurred for undergraduate aviator training. However, it cannot be paid beyond 14 years of commissioned service. The services believe that it is during the 9-year to 14-year period of service that aviators are most sought after by the private sector airlines. Therefore, to protect their aviation training investment, all services, except the Army, which is currently not using the ACP program, offer ACP contracts to experienced aviators. In fiscal year 1996, the Army, the Navy, the Marine Corps, and the Air Force designated 11,336 positions as nonflying positions to be filled by aviators. These nonflying positions represent about 25 percent of all authorized aviator positions. As shown in table 1, the total number of nonflying positions has decreased since fiscal year 1994 and is expected to continue to decrease slightly up through fiscal year 2001. Service officials told us that they have been able to reduce the number of nonflying positions primarily through force structure reductions and reorganization of major commands. The services, however, have not developed criteria for determining whether there are nonflying positions that could be filled by nonaviators. The officials said that a justification is prepared for each nonflying position explaining why an aviator is needed for the position. These justifications are then approved by higher supervisory levels. The officials believe that this process demonstrates that the position must be filled by an aviator. In our view, the preparation of a written justification for filling a particular position with an aviator does not, in and by itself, demonstrate that the duties of a position could not be performed by a nonaviator. Because the services' position descriptions for nonflying positions do not show the specific duties of the positions, we could not determine whether all or some part of the duties of the nonflying positions can only be performed by aviators. Consequently, we could not determine whether the number of nonflying positions could be further reduced. In commenting on a draft of this report, an Air Force official said that the Air Force Chief of Staff has directed that all nonflying positions be reviewed and a determination made by July 1997 as to which positions can be filled by nonaviators. All aviators receive ACIP, regardless of whether they are in flying or nonflying positions, if they meet the following criteria. Eight years of operational flying during the first 12 years of aviation service entitles the aviator to receive ACIP for 18 years. Ten years of operational flying during the first 18 years of aviation service entitles the aviator to receive ACIP for 22 years. Twelve years of operational flying during the first 18 years of aviation service entitles the aviator to receive ACIP for 25 years. ACP criteria are more flexible than ACIP in deciding who receives it, the amount paid, and the length of the contract period. According to service officials, ACP is an added form of compensation that is needed to retain aviators during the prime of their flying career when the aviators are most attractive to private sector airlines. To protect their training investment, all the services believe it is necessary to offer ACP contracts. The Army does not offer ACP contracts because, according to Army officials, it has not had a pilot retention problem. For fiscal years 1994 through April 30, 1996, the Army, the Navy, the Marine Corps, and the Air Force made ACIP and ACP payments to their aviators totaling $909.1 million. Of this total amount, $211 million, or about 23 percent, was paid to aviators in nonflying positions by the Air Force, the Navy, and the Marine Corps. The following table shows ACIP and ACP payments by each service for each of the fiscal years. The services view ACP as a retention incentive for their experienced aviators. However, the way the services implement this incentive varies widely in terms of who receives ACP, the length of time over which it is paid, and how much is paid. To illustrate, The Army does not offer ACP to its aviators because it has not had a pilot retention problem that warrants the use of the ACP program. The Navy offers long-term ACP contracts of up to 5 years and a maximum of $12,000 a year to eligible pilots in aircraft types with a critical pilot shortage. The Marine Corps offered short-term ACP contracts of 1 or 2 years at $6,000 a year through fiscal year 1996. Beginning in fiscal year 1997, the Marine Corps plans to offer long-term ACP contracts of up to 5 years at $12,000 a year to its eligible pilots and navigators in aircraft types that have critical personnel shortages. The Air Force offers long-term ACP contracts of up to 5 years at a maximum of $12,000 a year to all eligible pilots if there is a pilot shortage for any fixed- or rotary-wing aircraft. Table 3 shows the number and dollar amount of ACP contracts awarded by the services for fiscal years 1994 through 1996. As shown above, the Air Force greatly exceeds the other services in the number of ACP contracts awarded as well as the value of the contracts. This is because the Air Force does not restrict ACP contracts just to pilots of particular aircraft that are experiencing critical pilot shortages. Instead, if there is an overall shortage in fixed-wing or rotary-wing pilots, all eligible pilots in those respective aircraft are offered ACP. According to Air Force officials, the reason for offering ACP contracts to all fixed-wing and/or rotary-wing pilots rather than specific aircraft is because they want to treat all their pilots equally and not differentiate between pilots based on the type of aircraft they fly. In their opinion, if they were to only offer ACP to pilots of certain aircraft types, morale could be adversely affected. The point in an aviator's career at which ACP is offered generally coincides with completion of the aviator's initial service obligation--generally around 9 years. By this time, the aviator has completed pilot or navigator training and is considered to be an experienced aviator, and according to service officials, is most sought after by private sector airlines. For this reason, the services believe that awarding an ACP contract is necessary to protect their training investment and retain their qualified aviators. For example, the Air Force estimates that by paying ACP to its pilots, it could retain an additional 662 experienced pilots between fiscal years 1995 and 2001. The issue of whether ACP is an effective or necessary retention tool has been brought into question. For example, an April 1996 Aviation Week and Space Technology article pointed out that in the previous 7 months, 32 percent of the 6,000 new pilots hired by private sector airlines were military trained pilots. This is in contrast with historical airline hiring patterns where 75 percent of the airline pilots were military pilots. The concern about military pilots being hired away by the airlines was also downplayed in a June 1995 Congressional Budget Office (CBO) report. The report stated that employment in the civilian airlines sector is far from certain. Airline mergers, strikes, or failures have made the commercial environment less stable than the military. Consequently, military aviators may be reluctant to leave the military for the less stable employment conditions of the airline industry. CBO concluded that short-term civilian sector demands for military pilots may not seriously affect the services' ability to retain an adequate number of pilots. The services include nonflying positions in their aviator requirements for determining future aviator training needs. Therefore, aviator training requirements reflect the number of aviators needed to fill both flying and nonflying positions. As shown in table 4, of all the services, the Air Force plans the largest increase in the number of aviators it will train between fiscal years 1997 and 2001--a 60-percent increase. The reason for the large training increase in Air Force aviators is because it believes that the number of aviators trained in prior years was insufficient to meet future demands. Because nonflying positions are included in the total aviator requirements, the Navy and the Marine Corps project aviator shortages for fiscal years 1997-2001 and the Air Force projects aviator shortages for fiscal years 1998-2001. As shown in table 5, there are more than enough pilots and navigators available to meet all flying position requirements. Therefore, to the extent that the number of the nonflying positions filled by aviators could be reduced, the number of aviators that need to be trained, as shown in table 4, could also be reduced. This, in turn, would enable the Navy, the Marine Corps, and the Air Force to reduce their aviator training costs by as much as $5 million for each pilot and $2 million for each navigator that the services would not have to train. The savings to the Army would be less because its aviator training costs are about $366,000 for each pilot. We recommend that the Secretary of Defense direct the Secretaries of the Army, the Navy, and the Air Force to develop criteria and review the duties of each nonflying position to identify those that could be filled by nonaviators. This could allow the services to reduce total aviator training requirements. In view of the recent articles and studies that raise questions about the need to incentivize aviators to remain in the service, the abundance of aviators as compared to requirements for flying positions, and the value of ACP as a retention tool, we recommend that the Secretary of Defense direct the service secretaries to reevaluate the need for ACP. If, the reevaluation points out the need to continue ACP, we recommend that the Secretary of Defense determine whether the services should apply a consistent definition in deciding what groups of aviators can receive ACP. In commenting on a draft of this report, Department of Defense (DOD) officials said that it partially agreed with the report and the recommendations. However, DOD also said that the report raises a number of concerns. DOD said that it did not agree that only flying positions should be considered in determining total aviator requirements. In its opinion, operational readiness dictates the need for aviator expertise in nonflying positions, and nonflying positions do not appreciably increase aviator training requirements. The report does not say or imply that only flying positions should be considered in determining total aviator requirements. The purpose of comparing the inventory of aviators to flying positions was to illustrate that there are sufficient pilots and navigators to meet all current and projected flying requirements through fiscal year 2001. We agree with DOD that those nonflying positions that require aviator expertise should be filled with aviators. The point, however, is that the services have not determined that all the nonflying positions require aviator expertise. Furthermore, to the extent that nonflying positions could be filled by nonaviators, the aviator training requirements could be reduced accordingly. DOD also said that the report, in its opinion, does not acknowledge the effectiveness of the processes used for determining aviator training requirements or the use of ACP in improving pilot retention. The issue is not whether ACP has improved retention--obviously it has--but whether ACP is needed in view of the data showing that the civilian airline sector is becoming less dependent on the need for military trained pilots and that military pilots are becoming less likely to leave the service to join the civilian sector. DOD further commented that the articles cited in the report as pointing to a decrease in civilian sector demand for military trained pilots contain information that contradicts this conclusion. DOD believes that the fact that the airlines are currently hiring a smaller percentage of military trained pilots is an indication of a decrease in pilot inventory and the effectiveness of ACP as a retention incentive. The articles cited in our report--Aviation Weekly and Space Technology and the June 1995 CBO report--do not contain information that contradicts a decreasing dependence on military trained pilots. The Aviation Weekly and Space Technology article points out that about 70 percent of the recent pilot hires by the civilian airlines have been pilots with exclusively civilian flying backgrounds. This contrasts to previous hiring practices where about 75 percent were military trained pilots. The CBO report also discusses expected long-term hiring practices in the civilian airline sector. The report points out that while the number of new hires is expected to double (from 1,700 annually to 3,500 annually) between 1997 and 2000, the Air Force's efforts to retain its pilots may not be affected because the industry's new pilots could be drawn from an existing pool of Federal Aviation Agency qualified aviators. Furthermore, the issue is not whether the pilot inventory is decreasing and whether ACP is an effective retention tool. The point of the CBO report was that because of private sector airline mergers, strikes, or failures, the commercial environment is less stable than the military. As a result, there is a ready supply of pilots in the civilian sector and the short-term demands for military pilots may be such that the Air Force's quest to retain an adequate number of pilots is not seriously affected. In commenting on why the Air Force's method of offering ACP contracts differs from the Navy's and the Marine Corps' methods, DOD stated that while morale and equity are vital to any retention effort, it is not the primary determinant in developing ACP eligibility. We agree and the report is not meant to imply that morale and equity is the primary determinant for developing ACP eligibility. The report states that the reason cited by Air Force officials for not restricting ACP contracts to just those pilots in aircraft that have personnel shortages, as do the Navy and the Marine Corps, is because of the morale and equity issue. Another reason cited by Air Force officials was the interchangability of its pilots. However, the Navy and the Marine Corps also have pilot interchangability. Therefore, interchangability is not a unique feature of the Air Force. DOD agreed with the recommendation that the services review the criteria and duties of nonflying aviator positions. However, DOD did not agree that the nonflying positions should be filled with nonaviators or that doing so would appreciably reduce aviator training requirements. DOD also agreed with the recommendation that the services need to continually review and reevaluate the need for ACP, including whether there should be a consistent definition in deciding what groups of aviators can receive ACP. In DOD's opinion, however, this review and affirmation of the continued need for ACP is already being done as part of the services' response to a congressional legislative report requirement. We agree that the services report annually on why they believe ACP is an effective retention tool. However, the reports do not address the essence of our recommendation that the need for ACP--a protection against losing trained pilots to the private sector--should be reevaluated in view of recent studies and reports that show that private sector airlines are becoming less dependent on military trained pilots as a primary source of new hires. The annual reports to Congress also do not address the issue of why the Air Force, unlike the Navy and the Marine Corps, does not restrict ACP to those aviators in aircraft that have aviator personnel shortages. A complete text of DOD's comments is in appendix II. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director, Office of Management and Budget; and the Chairmen and the Ranking Minority Members, House Committee on Government Reform and Oversight, Senate Committee on Governmental Affairs, House and Senate Committees on Appropriations, House Committee on National Security, Senate Committee on Armed Services, and House and Senate Committees on the Budget. Please contact me on (202) 512-5140 if you have any questions concerning this report. Major contributors to this report are listed in appendix III. To accomplish our objectives, we reviewed legislation, studies, regulations, and held discussions with service officials responsible for managing aviator requirements. Additionally, we obtained data from each of the services' manpower databases to determine their flying and nonflying position requirements. Using this information, we developed trend analyses comparing the total number of aviator positions to the nonflying positions for fiscal years 1994-2001. The Army was not able to provide requirements data for fiscal years 1994 and 1995. To determine the benefits paid to aviators serving in nonflying positions, we obtained an automated listing of social security numbers for all aviators and, except for the Army, the services identified the aviators serving in nonflying positions. The data were submitted to the appropriate Defense Financial Accounting System offices for the Army, the Air Force, and the Marine Corps to identify the amounts of aviation career incentive pay (ACIP) and aviation continuation pay (ACP) paid to each aviator. The Navy's financial data was provided by Defense Manpower Data Center. To assess whether the services implement ACIP and ACP uniformly, we obtained copies of legislation addressing how ACIP and ACP should be implemented and held discussions with service officials to obtain and compare the methodology each service used to implement ACIP and ACP. To determine how the services compute aviator requirements and the impact their flying and nonflying requirements have on training requirements, we held discussions with service officials to identify the methodology used to compute their aviator and training requirements. We also obtained flying and nonflying position requirements, available inventory, and training requirements from the services' manpower databases. We then compared the flying and nonflying requirements to the respective services' available aviator inventory to identify the extent that the available inventory of aviators could satisfy aviator requirements. We performed our work at the following locations. Defense Personnel and Readiness Military Personnel Policy Office, Defense Financial Accounting System, Kansas City, Missouri; Denver, Colorado; and Indianapolis, Indiana; Defense Manpower Data Center, Seaside, California; Air Force Directorate of Operations Training Division, Washington, D.C.; Air Force Personnel Center, Randolph Air Force Base, Texas; Air Force Directorate of Personnel Military Compensation and Legislation Division and Rated Management Division, Washington, D.C.; Air Combat Command, Langley Air Force Base, Virginia; Bureau of Naval Personnel, Office of Aviation Community Management, Navy Total Force Programming, Manpower and Information Resource Management Division, Washington, D.C.; Navy Manpower Analysis Team, Commander in Chief U.S. Atlantic Fleet, Marine Corps Combat Development Command, Force Structure Division, Marine Corps Deputy Chief of Staff for Manpower and Reserve Affairs Department, Washington, D.C.; Army Office of the Deputy Chief of Staff for Plans Force Integration and Analysis, Alexandria, Virginia; Army Office of the Deputy Chief of Staff for Personnel, Washington, D.C.; Congressional Budget Office, Washington, D.C. 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GAO reviewed certain Department of Defense (DOD) nonflying positions, focusing on: (1) the number of aviators (pilots and navigators) that are assigned to nonflying positions in the Army, Navy, Marine Corps, and Air Force; (2) the amount of aviation career incentive pay (ACIP) and aviation continuation pay (ACP) paid to aviators in nonflying positions; (3) whether the services implement ACIP and ACP uniformly; and (4) whether the nonflying positions affect the number of aviators the services plan to train to meet future requirements. GAO found that: (1) for fiscal year (FY) 1996, the Army, Navy, Marine Corps, and Air Force designated 11,336 positions, or about 25 percent of all aviator positions, as nonflying positions to be filled by aviators; (2) since FY 1994, the number of nonflying positions has decreased and this decrease is expected to continue through 2001 when the number of such positions is estimated to be 10,553; (3) for fiscal years 1994 through April 30, 1996, the Army, Navy, Marine Corps, and Air Force paid $739.7 million in ACIP, of which $179.1 million was paid to aviators in nonflying positions; (4) additionally, the Navy, Marine Corps, and Air Force paid $169.4 million in ACP, of which $31.9 million was paid to aviators in nonflying positions; (5) the Army does not pay ACP; (6) ACIP is payable to all aviators who meet certain flying requirements and all the services implement it in a consistent fashion; (7) with ACP, however, the services have a great deal of latitude in deciding who receives it, the length of time it is paid and the amount that is paid; (8) in determining their aviator training requirements, the services consider both flying and nonflying positions; (9) including nonflying positions increases the total aviator requirements and results in the services projecting aviator shortages in the upcoming fiscal years; (10) however, GAO's analysis showed that there are more than enough aviators available to satisfy all flying position requirements; (11) to the extent that the number of nonflying positions filled by aviators can be reduced, the number of aviators that need to be trained also could be reduced, saving training costs of about $5 million for each Navy, Marine Corps, and Air Force pilot candidate and about $2 million for each navigator candidate; and (12) the savings to the Army would be about $366,000 for each pilot training requirement eliminated.

Although the exact number and timing of the controllers' departures are impossible to determine, scenarios we developed indicate that the total attrition of controllers from FAA will grow substantially in the short and long terms. As a result, FAA will likely need to hire thousands of air traffic controllers in the next decade. At the end of fiscal year 2003, FAA had 15,635 controllers, and according to its staffing standard, it is targeting a controller staffing level of 15,136 in fiscal year 2004, 15,300 in fiscal year 2005, and 16,109 in fiscal year 2009. However, so far this year, the agency has lost nearly 400 controllers due to retirements and as of May had hired only 1 controller. FAA has reported similar projections of a wave of air traffic controller retirements, and in a 2004 report, the Inspector General also reported on the coming wave, citing FAA's estimate that nearly 7,100 controllers could leave the agency by 2012. Our 2002 report found that FAA estimated it would experience retirements of controllers at a level three times higher than that experienced over the 5-year period from 1996- 2000. On top of the substantial number of retirements, at the time, FAA also projected that an additional 2,000 controllers would be needed by 2010 to address forecasted increases in demand for air travel. Our 2002 report analyzed, among other things, the retirement eligibility levels for various portions of the controller workforce and found that the annual number of controllers first becoming eligible for retirement would peak in fiscal year 2007, when about 10 percent of the air traffic controllers will become eligible to retire. (See fig. 1.) In addition, we found that by 2011, about 68 percent of the current controllers would be eligible to retire. We found a similar situation with the retirement eligibility of supervisors. Because supervisors are important to air traffic control operations and because they tend to be older than others controlling traffic, we examined retirement eligibility and survey results of supervisors at FAA as of June 2001. We found that supervisors will also become eligible to leave FAA in very high numbers over the next decade. Specifically, we found that 1,205, or 65 percent of current supervisors, would become eligible to retire between 2002 and 2011. (See fig. 2.) However, with 28 percent of current supervisors already eligible to retire and another 65 percent reaching eligibility by 2011, a total of about 93 percent of 1,862 current supervisors will be eligible to retire by the end of fiscal year 2011. As a result, FAA may face substantial turnover in its supervisory ranks over the next decade. This turnover could put a further strain on FAA's ability to maintain a sufficient certified controller workforce, as experienced controllers will be tapped to fill open supervisory positions, leaving fewer to control air traffic or provide training for new controllers. Because of the crucial role certain facilities play in the national air space system, we analyzed the impact of retirement eligibility on the 21 major "en route" centers (air route traffic control centers used to manage aircraft beyond a 50-nautical-mile radius from airports), the 10 busiest airport towers, and the 10 busiest TRACON facilities (terminal radar approach control facilities used to track airplanes and manage the arrival and departure of aircraft within a 5-to-50 nautical mile radius of airports). Based on our analysis of FAA's employee database, we found the en route centers and the busiest terminal facilities will experience a sizeable increase in the number of controllers reaching retirement eligibility. As figure 3 shows, retirement eligibility in these facilities grows over the next decade. Based on our analysis for the towers, we found that the Denver tower had the highest proportion of retirement-eligible controllers as of September 30, 2001, with 14 of its 51 controllers (27 percent) eligible to retire. We found that by the end of fiscal year 2006, 45 percent of Denver's current controllers would be eligible to retire, and by the end of fiscal year 2011, 46 of its 51 controllers (90 percent), will reach retirement eligibility. Our analysis of the 10 busiest TRACON facilities showed that the Dallas/Fort Worth TRACON had the highest level of current controllers eligible to retire at the end of fiscal year 2001, with 36 of its 147 controllers (24 percent) eligible. We found that by the end of fiscal year 2006, the cumulative percentage would grow to 46 percent, and by the end of fiscal year 2011 would reach 87 percent, as 128 of the 147 controllers currently at the facility would reach retirement eligibility. In examining the 21 major en route centers, we found that the Jacksonville center had the highest proportion of retirement-eligible controllers at the end of fiscal year 2001, with 79 of its 376 controllers (21 percent) eligible for retirement. According to our analysis, by the end of fiscal year 2006, at least 29 percent of current controllers would be eligible for retirement at 10 centers--Albuquerque, Atlanta, Boston, Fort Worth, Houston, Jacksonville, Los Angeles, Memphis, Seattle, and Washington, D.C. We are not alone in seeing a bow wave of controller retirements approaching over the next several years. This month, FAA provided us with projections that 329 controllers would retire in fiscal year 2004, and that this level would double by fiscal year 2007 to over 650 in that year, and double again to 1170 by fiscal year 2013. These levels are significantly higher than the average of less than 200 retirements per year over the past 5 years (1999-2003). Similarly, the Department of Transportation Inspector General reported this month that increasing numbers of controllers will become eligible to retire through 2012, with a peak of retirement eligibility around fiscal year 2007, and that FAA had estimated that nearly 7,100 controllers could leave FAA by fiscal year 2012. There are several challenges related to hiring and training large numbers of air traffic controllers in the short amount of time available. Although we identified these challenges in 2002 and recommended that FAA create a comprehensive workforce plan that addresses these challenges, FAA has not yet created a plan. Moreover, its recent actions suggest that it has not implemented strategies to meet these challenges and put into place a system that will bring on board air traffic controllers in time to deal with the projected retirements of many controllers. However, senior FAA officials told us that the agency's new Air Traffic Organization is currently preparing a comprehensive business plan, including a comprehensive controller workforce plan, which is due to the Congress in December 2004. A key component of workforce planning is ensuring that appropriately skilled employees are available when and where they are needed to meet an agency's mission. This means that an agency continually needs trained employees to become available in time to fill newly opened positions. We reported in 2002 that FAA's hiring practice was generally to hire new employees only when current employees leave, which does not adequately account for the time needed to train controllers to fully perform their functions. The amount of time it takes new controllers to gain certification depends on the facility at which they work, but generally, training takes from 2 to 4 years and can take up to 5 years at some of the busiest and most complex facilities. Moreover, during the training period, the current training process depends upon substantial one-on-one training, during which an experienced controller works directly with a controller in training, monitoring the trainee's actions, so there must be an overlap of experienced controllers and newly hired controllers. FAA regional officials, who are responsible for ensuring that FAA's air traffic facilities are adequately staffed, were particularly concerned about FAA's general hiring practice. Specifically, the officials were concerned that significant increases in retirements would leave facilities short of qualified controllers while new trainees were hired and trained. Our report also noted that the lack of experienced controllers could have many adverse consequences. For example, several FAA regional officials stated that if a facility becomes seriously short of experienced controllers, the remaining controllers might have to slow down the flow of air traffic though their airspace. If the situation became dire, FAA could require airlines to reduce their schedules, but this would be an unlikely, worst- case scenario, according to some FAA regional officials. Also, because there would be fewer experienced controllers available to work, some FAA facility officials stated that those controllers could see increased workloads and additional, potentially mandatory, overtime. In addition to potentially resulting in increased work-related stress and sick leave usage, it could also cause experienced controllers to retire sooner than they otherwise might. For example, based on our 2002 survey of controllers, we estimated that 33 percent of controllers would accelerate their decision to retire if forced to work additional mandatory overtime. Identifying sources of future potential employees with the requisite skills and aptitude is also important. Efficiency in hiring will become even more important as FAA faces the wave of controller retirements, for hiring people who do not make it through the training process wastes money and time--and may affect both the cost of the controller workforce and the ability of FAA to fill positions quickly enough to maintain a sufficient controller workforce to meet its mission. FAA has historically hired new controllers from a variety of sources, including graduates from institutions in FAA's collegiate training institute program, the Minneapolis Community and Technical College, former FAA controllers who were fired by President Reagan in 1981, and former Department of Defense controllers. FAA can also hire off-the-street candidates to become controllers. The success of hiring candidates who actually become controllers depends in large part on identifying potential candidates who have the appropriate aptitude for controllers' work. Historically, FAA used its initial entry-level training at its academy to screen out candidates who could not become successful controllers. According to FAA officials, as many as 50 percent of off-the-street applicants have dropped out before finishing the required training program, at a cost of $10 million per year, a rate that highlights the difficulty of successfully hiring candidates to replace the thousands of new controllers expected to retire. FAA has recently begun to test a new screening exam that it hopes will better ensure that potential new hires have the skills and abilities necessary to become successful controllers. It will take a number of years to determine if the new test has the desired results. Training challenges include the limited capacity at the training center in Oklahoma City and at the air traffic control facilities. In addition, because of the significant amount of on-the-job training that currently occurs through one-on-one training, to effectively handle a large number of new controllers, there needs to be an overlap period during which both experienced controllers likely to retire soon and newly hired controllers are both on board. While this will result in a temporary increase in the cost of the air traffic controller workforce, eventually more senior, high salary controllers will retire and be replaced by new controllers at lower salaries, possibly reducing expenses; and the need for overlap between these two groups can be reduced. Our 2002 report recommended that FAA develop a comprehensive workforce plan for controllers to deal with these challenges, but FAA has not finalized a plan and its recent actions call into question whether it will have adequate strategies to address these challenges. For example, last year, FAA hired 762 controllers, but according to a senior National Air Traffic Controllers Association official, many of these hires took place at the end of the year, and because of limited space in training facilities, many of those hired were unable to begin entry level training immediately. Moreover, since hiring those controllers at the end of the year to reach a level of 15,635, FAA has lost nearly 400 controllers and has hired only 1 new controller through May of this year. Its fiscal year 2005 budget proposal does not request any funding to hire additional controllers to address the wave of retirements. There are also challenges in the broader context of the air traffic control system that will affect the ability of the air traffic controller workforce to meet future changes in the airline industry and use of airspace. These challenges need to be considered as FAA develops and implements a comprehensive plan for its controller workforce. Challenges include the need for FAA to (1) overcome significant and longstanding management problems it has had with acquiring new systems to modernize the air traffic control system intended to facilitate the safe and efficient movement of air traffic by controllers and (2) adjust to shifts in the use of airspace, including increases in the use of smaller aircraft and changes in air traffic patterns around the country. Controller workforce planning needs to take place in the larger context of FAA's Air Traffic Control modernization efforts in order to make optimal use of the agency's investments. However, as our past work has shown, FAA needs to address longstanding problems it has had in deploying new air traffic control systems on schedule, within budget, and with promised capabilities to facilitate the safe and efficient flow of air traffic by controllers. These new systems are intended to improve the safety and efficiency of the nation's air traffic control system, with some offering the potential to improve the productivity of the controller workforce. To maximize the usefulness of new systems to controllers and to help ensure that safety is not eroded by the introduction of new capabilities, sustained controller involvement is needed as new systems are developed, deployed, and refined. When there is an ineffective link between technology and needs, money and time will be wasted, and the effectiveness of the air traffic controller workforce may be reduced. Moreover, these new systems may change the productivity of the controller workforce, an effect that will need to be taken into account as FAA refines its estimates of future controller workforce needs. For example, our past work on the Standard Terminal Automation Replacement System (STARS)--the workstations used by controllers near airports to sequence and control air traffic--highlights the importance of controller involvement in the development, deployment, and refinement of air traffic control systems. In 1997, when FAA controllers first tested an early version of this commercially available system, they raised some concerns about the way aircraft position and other data were displayed and updated on the controllers' radar screens. For example, the controllers said the system's lack of detail about an aircraft's position and movement could hamper their ability to monitor traffic movement. In addition, controllers noted that many features of the old equipment could be operated with knobs, allowing controllers to focus on the screen. By contrast, STARS was menu-driven and required the controllers to make several keystrokes and use a trackball, diverting their attention from the screen. To address these concerns, among others, FAA decided to develop a more customized system and to deploy an incremental approach, thereby enabling controllers to adjust to some changes before introducing others. This incremental approach costs more and is taking longer to implement than the original STARS project. Despite the importance of controller involvement in the development, deployment, and refinement of new air traffic control systems, such activities can be very time- consuming, often take controllers off-line, and place additional pressure on an already constrained workforce. FAA needs to take into account these demands on the controller workforce as part of its comprehensive workforce plan. Changes in patterns of aircraft usage are likely to affect the needs of the air traffic controller workforce. The increased use of regional jets, the possibly expanding use of air taxis, ongoing general aviation aircraft usage, and fractional ownership, where individuals or companies purchase a share in an aircraft for their occasional use, could all increase the number of smaller aircraft in the sky, placing increased demands on the air traffic controller workforce. In addition, possible changes in air traffic patterns around the country may also impact this workforce. In 2001, we reported that we had found consensus among the studies we reviewed and the industry experts we interviewed that the growing number of regional jets had contributed to congestion in our national airspace. The industry experts we spoke with repeatedly expressed concern about the impact of adding so many aircraft so quickly to airspace whose capacity is already constrained. Because hundreds of new aircraft had been added to already congested airspace while comparatively few turboprops had been taken out of service, many of the experts believed it was inevitable that congestion and delays would increase. They also noted that with many more regional jets on order, congestion and delays were not likely to diminish in the near future. Earlier this month, the Chairman and Chief Executive Officer of AirTran Airways noted that the air traffic control system may have difficulty absorbing the hundreds of regional jets now on order. In coming years, air taxis may also add to crowding in the skies. FAA officials told us that they have been briefed on proposals for using air taxis to carry about four passengers each in selected metropolitan areas where there is heavy surface traffic congestion. The use of such air taxis could increase the demand on controllers to provide air traffic services in these metropolitan areas, where it is likely that there is already heavy air traffic. Furthermore, it is possible that any increases in general aviation or fractional ownership could also increase the amount of traffic in the skies--traffic that must be effectively directed by air traffic controllers to ensure the safety of the airways. Moreover, because fees collected for the Aviation Trust Fund are based largely on ticket taxes assessed on paying airline passengers, the change in the mix of aircraft could have implications for the Aviation Trust Fund. Given the dynamic nature of the airline industry, in which major airlines and low cost airlines may change their flight patterns by adding or removing hubs, the number of flights in any one location may spike or drop abruptly. Recent examples include Independence Air's move to set up operations at Washington Dulles International Airport and reports by industry sources of a US Airways plan to reduce service to Pittsburgh. These types of potential shifts in the location of demand for air traffic services underscore the need for a nimble air traffic control system that can seamlessly continue to provide services as demand shifts. FAA faces a complex task in effectively addressing the bow wave of controller retirements that is heading its way. The number of factors involved, including the need to time hiring so as not to overload training capacities and the need to be responsive to the changing demands of a dynamic industry, highlight the importance of a carefully considered, comprehensive workforce plan. This plan needs to include strategies for addressing the full range of challenges in order to seamlessly transition from the current workforce to a future workforce that is well qualified, trained, and can accommodate changes in the use of our airspace. However, although we recommended to FAA 2 years ago that it develop a comprehensive plan for this purpose, it has not yet finalized a plan. Senior FAA officials told us that the Air Traffic Organization is currently preparing a comprehensive business plan, including a comprehensive controller workforce plan, which is due to the Congress in December 2004. This is an important opportunity to establish strategies to meet the challenges ahead. Today these challenges continue to underscore the need for action in developing strategies that take into account (1) the expected timing and location of anticipated retirements, (2) the length of the hiring and training processes, (3) limitations on training capacities, and (4) changes in the airline industry and use of airspace that may affect the air traffic controller workforce in coming years. Without focused and timely action on all of these fronts, the gap created by the expected bow wave of controller retirements could reduce the effectiveness of the air traffic control workforce to meet its mission just as increased activity in the skies makes its effectiveness more critical than ever to the safety of our airways. This concludes my statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact JayEtta Z. Hecker at (202) 512-2834 or by e-mail at [email protected]. Individuals making key contributions to this testimony include, David Lichtenfeld, Beverly Norwood, Raymond Sendejas, Glen Trochelman, and Alwynne Wilbur. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In the summer of 2000, the air traffic control system lacked the capacity to handle demand efficiently, and flight delays produced near-gridlock conditions at several U.S. airports. A combination of factors, including the crises instigated by the events of 9/11, temporarily reduced air traffic, but air traffic is now back to near pre-9/11 levels. The ability of the air traffic control system to handle expected traffic in coming years may depend in part on the Federal Aviation Administration's (FAA) effectiveness in planning for a long-expected wave of air traffic controller retirements. GAO's testimony focuses on (1) the magnitude and timing of the pending wave of air traffic controller retirements, (2) the challenges FAA faces in ensuring that well-qualified air traffic controllers are ready to step into the gap created by the expected large number of retirements, and (3) challenges that will affect the ability of the air traffic controller workforce to meet future changes in the airline industry and use of airspace. GAO's statement is based on past reports on the air traffic controller workforce, including GAO's 2002 report that surveyed controllers and analyzed controller workforce data. GAO has updated this work through interviews with and the collection of data from key stakeholders in the aviation community. This work was performed in accordance with generally accepted government auditing standards. FAA faces a bow wave of thousands of air traffic controller retirements over the coming decade. GAO's 2002 report warned that almost half of the controller workforce (about 7,000 controllers) would retire over the next 10 years and about 93 percent of controller supervisors would be eligible to retire by the end of 2011. In addition, GAO's analysis showed that retirements could increase dramatically at the busiest air traffic control facilities. FAA and the Department of Transportation's Inspector General have also reported that a surge in controller retirements is on the way. FAA faces numerous hiring and training challenges to ensuring that wellqualified controllers are ready to fill the gap created by the expected retirements. For example, it can take 2-4 years or more to certify new controllers, and FAA's training facility and air traffic control facilities, where years of on-the-job training occur, have limited capacity. While FAA must make hiring decisions from a long-term perspective, it has generally hired replacements only after a current controller leaves. In 2002, GAO recommended that FAA develop a comprehensive workforce plan to deal with these challenges. However, FAA has not finalized a plan, and its recent actions call into question whether it has adequate strategies to address these challenges. For example, since the beginning of this year, FAA lost nearly 400 controllers and has hired only 1 new controller. Its fiscal year 2005 budget proposal does not request any funding to hire additional controllers. Challenges will also affect the ability of the air traffic controller workforce to meet future changes in the airline industry and use of airspace. Challenges include the need for FAA to overcome management problems with acquiring systems to modernize the air traffic control system and to adjust to shifts in the use of airspace, including increases in the use of smaller aircraft and changes in air traffic patterns around the country.

The military services preposition stocks ashore and afloat to provide DOD the ability to respond to multiple scenarios by providing assets to support U.S. forces during the initial phases of an operation until the supply chain has been established (see figure). Each military service maintains its own configurations and types of equipment and stocks to support its own prepositioned stock program. The Army stores sets of combat brigade equipment, supporting supplies, and other stocks at land sites in several countries and aboard ships. The Marine Corps stores equipment and supplies for its forces aboard ships stationed around the world and at land sites in Norway. The Navy's prepositioned stock program provides construction support, equipment for off-loading and transferring cargo from ships to shore, and expeditionary medical facilities to support the Marine Corps. In the Air Force, the prepositioned stock program includes assets such as direct mission support equipment for fighter and strategic aircraft as well as base operating support equipment to provide force, infrastructure, and aircraft support during wartime and contingency operations. Figure: High Mobility Multipurpose Wheeled Vehicles in a Prepositioned Storage Facility (left) and Mine Resistant Ambush Protected Vehicles Being Loaded for Prepositioning (right) In June 2008, DOD issued an instruction directing the Under Secretary of Defense for Policy to develop and coordinate guidance that identifies an overall war reserve materiel strategy that includes starter stocks, which DOD defines as war reserve materiel that is prepositioned in or near a theater of operations and is designed to last until resupply at wartime rates is established. Also, the instruction states that the Under Secretary of Defense for Policy is responsible for establishing and coordinating force development guidance that identifies an overall strategy to achieve desired capabilities and responsiveness in support of the National Defense Strategy. Further, it states that the Global Prepositioned Materiel Capabilities Working Group, including representatives from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Joint Staff, has responsibility for, among other things, addressing joint issues concerning prepositioned stocks. On March 7, 2017, DOD issued its strategic policy for managing its prepositioned stocks in DOD Directive 3110.07, Pre-positioned War Reserve Materiel (PWRM) Strategic Policy, and included information that addresses one of the six reporting elements enumerated in section 321 of the NDAA for fiscal year 2014. The table below presents our assessment of DOD's strategic policy. Table: GAO's Assessment of DOD's Strategic Policy Compared to the Six Reporting Elements Required by the National Defense Authorization Act for Fiscal Year 2014 GAO Assessment of DOD's Strategic Policy Addressed (1) Overarching strategic guidance concerning planning and resource priorities that link the Department of Defense's current and future needs for prepositioning stocks, such as desired responsiveness, to evolving national defense objectives. DOD's strategic policy requires the Under Secretary of Defense for Policy to develop and coordinate planning and resource requirements - such as those found in the Guidance for Employment of the Force and the Defense Planning Guidance - so that war materiel and prepositioned war reserve materiel is appropriately linked to desired capabilities in support of the national defense strategy. In addition, the strategic policy requires the Under Secretary of Defense for Acquisition, Technology, and Logistics and the DOD Component heads to maintain guidance that includes component-specific requirements for planning and resourcing priorities to address current and future requirements for maintaining prepositioned stocks optimally. GAO Assessment of DOD's Strategic Policy Not Addressed (2) A description of the department's vision for prepositioning programs and the desired end state. DOD's strategic policy does not include information describing the department's vision for prepositioning programs and the desired end state. Rather, the strategic policy assigns the Under Secretary of Defense for Acquisition, Technology, and Logistics and the DOD Component heads with the responsibility of maintaining guidance that includes a description of the component's vision and desired end state. (3) Specific interim goals demonstrating how the vision and end state will be achieved. DOD's strategic policy does not include information on specific interim goals describing how the department's vision and end state will be achieved. Rather, the strategic policy assigns the Under Secretary of Defense for Acquisition, Technology, and Logistics and the DOD Component heads with the responsibility of maintaining guidance that includes specific interim goals demonstrating how the component's vision and end state will be achieved. (4) A description of the strategic environment, requirements for, and challenges associated with prepositioning. DOD's strategic policy does not include a description of the strategic environment, requirements for, and challenges associated with, prepositioning stocks. Rather, the strategic policy assigns the Under Secretary of Defense for Acquisition, Technology, and Logistics, the Under Secretary of Defense for Policy, and the DOD Component heads the responsibility for providing guidance on the strategic environment, requirements for, and challenges associated with prepositioning stocks. (5) Metrics for how the Department will evaluate the extent to which prepositioned assets are achieving defense objectives. The strategic policy does not include metrics to evaluate whether prepositioned assets are achieving defense objectives. Rather, the strategic policy assigns the Chairman of the Joint Chiefs of Staff with the responsibility for developing metrics regarding DOD's prepositioned stock programs. (6) A framework for joint departmental oversight that reviews and synchronizes the military services' prepositioned strategies to minimize potentially duplicative efforts and maximize efficiencies in prepositioned stocks across the Department of Defense. The strategic policy does not include a framework for joint departmental oversight. Rather, the strategic policy assigns the Chairman of the Joint Chiefs of Staff with the responsibility for developing such a framework for synchronizing the services' prepositioning stock programs. As the table shows, DOD addressed the first element in section 321 of the NDAA for fiscal year 2014 by describing strategic planning and resource guidance. However, we assessed the remaining elements as not addressed because DOD did not provide the required information in its strategic policy. Officials from the Office of the Under Secretary of Defense for Policy stated that the strategic policy does not include this information because it is intended to serve as a directive for developing policies and assigning key responsibilities, which can be used as a mechanism for addressing required elements at a later time. However, the NDAA for fiscal year 2014 required that these elements be included in the strategic policy. Specifically: Element 2 (Description of the Department's Vision and Desired End State) and Element 3 (Specific Interim Goals): DOD's strategic policy does not include a description of the department's vision and the desired end state for its prepositioning programs, as required by element 2, or specific interim goals for achieving the department's vision and desired end state, as required by element 3. Rather, the strategic policy assigns the Under Secretary of Defense for Acquisition, Technology, and Logistics and the DOD Component heads the responsibility for providing guidance that includes a description of the component's vision and desired end stats as well as specific interim goals for achieving the component's vision and desired end state. DOD officials from the offices of the Under Secretary of Defense for Policy and the Joint Staff acknowledged that the strategic policy does not include a department-wide vision, desired end state, and specific interim goals. However, the NDAA for fiscal year 2014 requires a department vision, not a component vision. Moreover, for the past 6 years in our annual reports on duplication, overlap, and fragmentation and in our related reports, we have identified the potential for duplication in the services' prepositioned stock programs due to the absence of a department-wide strategic policy and joint oversight. Such joint oversight is necessary to articulate a single, department-wide vision and interim goals. By not including the department's vision or interim goals in its strategic policy, and instead, directing the Under Secretary of Defense for Acquisition, Technology, and Logistics and the DOD Component heads to provide guidance on the component's vision, DOD is continuing its fragmented approach to managing its prepositioned stock programs by further emphasizing individual visions rather than a joint, department-wide view. Unless DOD revises its policy or includes in other guidance a department-wide vision, desired end state, and goals for its prepositioned stock programs, DOD risks being unable to recognize potential efficiencies that could be gained by synchronizing the services' prepositioning programs with each other. Element 4 (Description of the Strategic Environment and Challenges): DOD's strategic policy does not include a description of the strategic environment, or the requirements for and challenges associated with prepositioned stocks as required by element 4. Rather, it directs the Under Secretary of Defense for Acquisition, Technology, and Logistics, the Under Secretary of Defense for Policy, and the DOD Component heads to provide guidance on this element. We believe that if the Under Secretaries issue such guidance as directed, DOD and the services will be able to have a shared understanding of the strategic environment, requirements, and challenges of managing their prepositioned stocks, which could promote joint oversight and efficiencies across the department. Element 5 (Metrics): DOD's strategic policy does not include metrics for evaluating the extent to which DOD prepositioned stocks are achieving defense objectives as required by element 5. Rather, the policy assigns the Chairman of the Joint Chiefs of Staff with the responsibility for developing metrics. We believe that if the Chairman develops such metrics as directed, DOD and the services will have common criteria with which to measure their programs. However, DOD will not be able to create informed metrics before first addressing other elements such as developing a department vision, goals, and articulating the strategic environment. Element 6 (Framework for Joint Departmental Oversight): DOD's strategic policy does not include a framework for joint departmental oversight that reviews and synchronizes the military services' prepositioned strategies to minimize potentially duplicative efforts and maximize efficiencies in prepositioned stocks across DOD, as required by element 6. Rather, the policy assigns the Chairman of the Joint Chiefs of Staff with the responsibility for establishing the framework. We have reported for years that DOD lacks joint oversight of its prepositioned programs. We believe that if the Chairman of the Joint Chiefs of Staff develops such a framework, as directed by the policy, DOD and the services will be better able to integrate and align at a department-wide level its prepositioning programs in order to achieve efficiencies and avoid duplication. Further, DOD has not yet issued an implementation plan for managing its prepositioned stock programs, which was also required by Section 321 of the NDAA for fiscal year 2014. The NDAA required DOD to complete the plan by April 24, 2014. In May 2017, DOD officials stated that they were reviewing information on the military services' prepositioning strategies for consolidation into a department-wide implementation plan. They anticipated that a plan would be finalized by September 30, 2017. It will be important for DOD to address the elements that were omitted from its strategic policy as it creates the implementation plan to ensure that the plan is linked to a complete strategy on prepositioned stocks for the department. Prepositioned stocks play a pivotal role during the initial phases of an operation. We have reported for the past 6 years on the importance of DOD having a department-wide strategic policy and joint oversight of the services' prepositioned stock programs, and Congress has required DOD to take action in this area. While it is encouraging that DOD has recently issued a strategic policy, the policy does not address most of the required elements enumerated in section 321 of the NDAA for fiscal year 2014. In the cases of a description of the strategic environment and challenges, metrics, and a framework for joint departmental oversight, DOD's policy appropriately assigns responsibility for the development of such information, and therefore we are not making recommendations related to those elements because the department has already directed their implementation. However, for the description of the department's vision and desired end state and specific interim goals, DOD's strategic policy does not include the required information and instead directs the development of the component's vision, end state, and goals, which reinforces a fragmented and potentially duplicative approach to managing prepositioned stocks across the services. Without either revising its strategic policy or including in other guidance the department's vision, end state, and goals for its prepositioned stock programs, DOD will continue to be ill positioned to recognize potential duplication, achieve efficiencies, and fully synchronize the services' prepositioned stock programs across the department. To improve DOD's management of its prepositioned stocks and reduce potential duplication among the services' programs, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics, in coordination with the Chairman of the Joint Chiefs of Staff, to revise DOD's strategic policy or include in other department-wide guidance: a description of the department's vision and the desired end state for its prepositioned stock programs, and specific interim goals for achieving that vision and desired end state. We provided a draft of this report to DOD for review and comment. DOD provided written comments on the draft, which are reprinted in appendix II. DOD concurred with our recommendations and noted it is taking steps to implement them. We also received technical comments from DOD, which we incorporated throughout our report as appropriate. We are providing copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense for Acquisition, Technology, and Logistics, and the Chairman of the Joint Chiefs of Staff. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 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. Section 321 of the National Defense Authorization Act (NDAA) for fiscal year 2014 required that the Department of Defense (DOD) establish an implementation plan for its programs of prepositioned stocks. The implementation plan for the prepositioning strategic policy shall include the following elements: A. Detailed guidance for how the Department of Defense will achieve the vision, end state, and goals outlined in the strategic policy. B. A comprehensive list of the Department's prepositioned stock programs. C. A detailed description of how the plan will be implemented. D. A schedule with milestones for the implementation of the plan. E. An assignment of roles and responsibilities for the implementation of the plan. F. A description of the resources required to implement the plan. G. A description of how the plan will be reviewed and assessed to monitor progress. In addition to the contact named above, individuals who made key contributions to this report include Alissa H. Czyz, Assistant Director; Vincent M. Buquicchio, Tracy W. Burney, Lionel C. Cooper, Richard Powelson, Courtney R. Bond, and Michael D. Silver.

DOD positions billions of dollars worth of assets-including combat vehicles, rations, medical supplies, and repair parts--at strategic locations around the world to use during early phases of operations. Each of the military services maintains its own prepositioned stock program. For the past 6 years, GAO has reported on the risk of duplication and inefficiencies in the services' programs due to the absence of a department-wide strategic policy and joint oversight. Section 321 of the NDAA for fiscal year 2014 required DOD to maintain a strategic policy and develop an implementation plan to manage its prepositioned stocks. The NDAA for fiscal year 2014 also included a provision for GAO to review DOD's strategic policy and implementation plan. This report assessed the extent to which DOD's strategic policy addresses mandated reporting elements and describes the status of DOD's implementation plan. To conduct this work, GAO analyzed DOD's strategic policy against the elements required in the NDAA and discussed the status of the implementation plan with DOD officials. The Department of Defense's (DOD) strategic policy on its prepositioned stock programs, issued in March 2017, addressed one of the six mandated reporting elements (see table). Specifically, DOD's policy describes strategic planning and resource guidance (element 1), as required. GAO assessed the remaining five reporting elements as not addressed because DOD did not provide the required information in its policy. For three of the five elements that were not addressed--a description of the strategic environment and challenges (element 4), metrics (element 5), and a framework for joint oversight (element 6)--DOD's policy assigns responsibility for the development of such information, and therefore GAO is not making recommendations related to those elements because DOD has already directed their implementation. However, for two of the five elements that were not addressed--a description of the department's vision and desired end state (element 2) and specific interim goals (element 3)--DOD's strategic policy does not include the required information and instead directs the development of component's (rather than the department's) vision, end state, and goals. DOD officials stated that the strategic policy does not include required information such as a department-wide vision, end state, and interim goals because it is intended to serve as a directive for assigning responsibilities. Without revising its strategic policy or including required information in other department-wide guidance, DOD will not be positioned to fully synchronize the services' prepositioned stock programs to avoid unnecessary duplication and achieve efficiencies. DOD has not yet issued an implementation plan for managing its prepositioned stock programs, which the National Defense Authorization Act (NDAA) required by April 24, 2014. DOD officials anticipated that a plan would be finalized by September 30, 2017. It will be important for DOD to address the elements that were omitted from its strategic policy as it creates the implementation plan to ensure that the plan is linked to a complete strategy on prepositioned stock programs for the department. GAO recommends that DOD revise its prepositioned stocks strategic policy or include in other department-wide guidance (1) a description of the department's vision and the desired end state, and (2) specific interim goals for achieving this vision and end state. DOD concurred with the recommendations, noting that it is taking steps to implement them.

The five major Army inventory control points manage secondary items and repair parts valued at $17 billion. These items are used to support Army track and wheeled vehicles, aircraft, missiles, and communication and electronic systems. The process for identifying the items and the quantity to stock begins with developing the budget request--the key to effective inventory management. If too few or the wrong items are available to support the forces, then readiness suffers and the forces may not be able to perform their assigned military missions. On the other hand, if too many items are acquired, then limited resources are wasted and unnecessary costs are incurred to manage and maintain the items. The Army uses different processes for determining its spare and repair parts budget requests and for determining which parts to buy or repair. The process for determining spare and repair parts budget requests is based on data from the budget stratification reports, which show the dollar value of requirements and inventory available to meet the requirements. When an item's available inventory is not sufficient to meet the requirements, it is considered to be in a deficit position. The aggregate value of items in a deficit position then becomes the Army's basis for determining its spare and repair parts needs. As these needs are formulated into a budget request, the end result (budget request) is normally less than the aggregate value of items in a deficit position. This makes it even more important that the true needs be based on accurate data. Otherwise, funds may be allocated to procuring spare and repair parts that should be spent on other priority needs. Using accurate data in the requirements determination process avoids such misallocation of funds. We have previously issued reports pointing out data inaccuracy problems in the Army's requirements determination process and the effect of these inaccuracies on inventory decisions. See appendix IV. The process for determining which items to buy or repair is based on information in the item's supply control study, which is automatically prepared when an item reaches a point when insufficient assets are available or due in to meet requirements. When a study is prepared, the item manager validates the requirements and asset information in the study. Based on the results of the validated data, the item manager will decide whether to buy, repair, or not buy the quantity recommended by the study. As of September 30, 1994, we reviewed 258 items from a universe of 8,526 items with a deficit inventory position. The selected items represented 3 percent of the items in a deficit position but accounted for $519 million, or 69 percent, of the $750 million deficit inventory value. We found that 94 of the 258 items, with a reported deficit inventory value of $211 million, had data errors that affected the items' requirements or inventory available to satisfy the requirements. Table 1 shows the results of our review for the Army's inventory control points. Overstated requirements and understated inventory levels were the major reasons items were erroneously reported in a deficit position. In addition, some items were incorrectly included in the process for determining funding requirements. If the items' inventory position had been correctly reported, the true deficit value for the 94 items would have been about $23 million rather than $211 million. Table 2 shows the major reasons why items were incorrectly classified as deficit. When insufficient inventory is on hand and due in to meet an item's requirements, the budget stratification process will report the item as being deficit. If the item's deficit position is caused by overstated requirements, this means that resources could be wasted buying unneeded items. As shown in table 2, overstated requirements caused 53 items to be erroneously reported as being in a deficit position. The overstated requirements resulted from inaccurate demand data, inaccurate leadtime data, and lower-than-expected requirements. Table 3 shows the number of instances where these reasons caused the items' requirements to be overstated. The following examples illustrate the types of inaccurate data that caused overstated requirements: The item manager for an aircraft floor item used on the CH-47 Chinook helicopter said that the database still included demands from Operations Desert Shield and Desert Storm. Including these demands in the requirements determination caused the budget stratification process to erroneously classify the item as having a deficit inventory position of about $500,000. If the outdated demands had been purged from the system, the item would not have been in a deficit position. According to the item manager for the front lens assembly item used on the AN/PVS-7B Night Vision Goggles, the item requirements shown in the budget stratification report did not materialize. She said that the report showed the item as having a deficit inventory position of $2.4 million. However, when it came time to procure the item, the project leader reduced the planned procurement quantity because the field units indicated they did not like the item. The item's actual deficit position should have been only $18,000. According to the item manager, an angle drive unit used on the M2/M3, M2A1/M3A1 Bradley Fighting Vehicle system had an inflated safety level requirement in the budget stratification report. The report showed a safety level of 6,887 units instead of the correct safety level of 355. As a result, a deficit inventory position of $6.6 million was reported. When a prime stock number has authorized substitute items, the requirements and inventory for the prime and substitute items are supposed to be added and shown as one requirement and one inventory level under the prime number. This did not happen. The requirements for both types of items were shown as one requirement but the inventory was not. As a result, the inventory to meet the overall requirement was understated, and the item was placed in a deficit position. For example, according to the item manager for a night window assembly used on the TOW subsystem for the M2/M3 Bradley Fighting Vehicle, the budget stratification report showed a deficit supply position of $800,000 for the item. This occurred because inventory belonging to a substitute item was not counted toward the prime item's requirements. The item manager said the true deficit for the assembly was $65,000. There were also requirements problems for items being repaired at maintenance facilities. The requirements system did not accurately track stock in transit between overhaul facilities and the depots. According to item managers at several inventory control points, they had problems either tracking the physical movement of inventory between the depots and repair facilities, or ensuring that all records were processed so the database accurately accounted all applicable assets. These problems could cause items to be erroneously reported as being in a deficit position. Table 4 shows how often these reasons resulted in understated inventory levels. Our review of selected items identified nine items that should have been excluded from the budget stratification process. By including these items, the budget stratification process identified funding needs for the items when, in fact, the funds to procure the items were being provided by another service, a foreign country under a foreign military sales agreement, or another appropriation. Table 5 shows the number of items that were incorrectly included in the budget stratification process. The following examples illustrate the effect of including "excluded" items in the budget stratification process: According to the item manager for a fire control electronic unit used on the M1A2 main battle tank, the Army issued a contract in August 1993 to procure items to meet the Army's requirements as well as foreign military sales. Because the Army is reimbursed for foreign military sale items, these items should have been excluded from the budget stratification process. However, the items were included in the stratification process and were reported as having a deficit inventory position of $2.3 million. The inventory control point procured a gas-particulate filter unit used in producing modular collective protective equipment. According to the item manager, procurement appropriation funds, provided by the program manager's office, were used to buy the items. Because the stratification process is only supposed to deal with items procured by the Defense Business Operating Fund, the item should not have been included in the stratification process and a deficit inventory position of about $800,000 should not have been reported. According to the item manager, the Air Force manages and makes all procurements for a panel clock item. The Army's budget stratification report showed this item had a deficit inventory position of $700,000. However, because the Air Force managed this item, the panel clock should not have been coded as an Army secondary item for inclusion in the budget stratification report. The item manager for an electronic component item said that the item should have been coded as an inventory control point asset rather than a project manager's office asset. Because project manager items are not available for general issue, these items were not counted against the item's requirements in the budget stratification report. If these items had been properly coded, the item would not have been reported as having a $700,000-deficit inventory position. According to the item manager, an electronic component item should have been coded as a major end item rather than a secondary item and not included in the budget stratification process. The item was reported as having a deficit inventory position of $500,000. The Army is aware of many of the processing, policy, and data problems affecting the accuracy of the requirements data. Furthermore, the Army has identified 32 change requests to correct problems with the requirements determination and supply management system. According to Army officials, the cost to implement the 32 change requests would be about $660,000, and in their opinion, the benefits would greatly outweigh the added costs. The officials said these changes would correct many of the problems, including some of the ones we identified during our review. Nevertheless, not all of the requests have been approved for funding because the Department of Defense is developing a standard requirements system as part of its Corporate Information Management initiative and does not want to spend resources to upgrade existing systems. As a result, it has limited the changes that the services can make to their existing systems. Army officials said that the standard system is not expected to be implemented for at least 4 years. Furthermore, major parts of the existing system will probably be integrated into the standard system. Therefore, unless the data problems are corrected, they will be integrated into the standard system and the Army will still not have reliable data. Army officials also cited examples where processing change requests are needed to correct other data problems in the requirements determination system. For example, the depots do not always confirm material release orders/disposal release orders received from the inventory control points. As a result, the inventory control points do not know if the depots actually received the orders. They identified numerous instances where the depots put the release orders in suspense because of higher priority workloads. This resulted in the release orders not being processed in a timely manner, processed out of sequence, or lost and not processed at all. Because the inventory control points could not adequately track the release orders, they could have reissued the release orders. The reissuance could have caused duplicate issues or disposals, imbalances in the records between the inventory control points and the depots, and poor supply response to the requesting Army units. A system change request was initiated in November 1994 to address this problem, but the request has not yet received funding approval. Although Army officials could not provide a cost estimate to implement the change request, it could save about $1 million in reduced workload for the inventory control points and depots. According to Army officials, one programming application in the requirements determination system uses reverse logic to calculate the supply positions of serviceable and unserviceable assets. It compares the supply position of all serviceable assets to the funded approved acquisition objective (current operating and war reserve requirements). However, for the same item, the program compares the supply position of all unserviceable assets to the total of the current operating and war reserve requirements, the economic retention quantity, and contingency quantity. The effect of this is that serviceable inventory can be sent to disposal while unserviceable inventory is being returned to the depots. According to Aviation and Troop Command records, the Command disposed of $43.5 million of serviceable assets at the same time that $8.5 million of unserviceable assets, of the same kind, were returned to the depots between March and September 1994. By September 1995, the Command had disposed of $62 million of serviceable assets. Command officials said that a system change request was initiated in November 1994 to correct the programming logic problem. However, the request did not receive funding approval because it violated Department of Army policy, even though the estimated cost to implement the change request would be less than $20,000. Although this change will not reduce the reported deficit quantities, it will allow the commands to keep more serviceable items in lieu of unserviceables, and it will reduce overhaul costs. Furthermore, according to Command records, this policy is causing the disposal of high-dollar, force modernization items that could result in re-procurement and adversely affect stock availability to field units. We recommend that the Secretary of Defense direct the Secretary of the Army to proceed with the pending system change requests to correct the data problems. Doing so could correct many of the problems identified in our report. Furthermore, the corrective actions would improve the overall reliability and usability of information for determining spare and repair parts requirements. The Department of Defense agreed with the report findings and partially agreed with the recommendation. It said that instead of the Secretary of Defense directing the Army to proceed with the system change request, the Army will be requested to present a request for funding for the system changes to the Corporate Configuration Control Board at the Joint Logistics Systems Center. The Board, as part of the Corporate Information Management initiative, was established to consider and resolve funding matters related to changes to existing systems. In our opinion, the action proposed by the Department of Defense achieves the intent of our recommendation, which was for the Army to seek funds to correct the data problems in its requirements determination system. Defense's comments are presented in their entirety in appendix II. We are sending copies of this report to the Secretary of the Army; the Director, Office of Management and Budget; and the Chairmen, House Committee on Government Reform and Oversight, Senate Committee on Governmental Affairs, the House and Senate Committees on Appropriations, House Committee on National Security, and Senate Committee on Armed Services. Please contact me on (202) 512-5140 if you have any questions concerning this report. Major contributors to this report are listed in appendix III. We held discussions with responsible officials and reviewed Army regulations to determine the process used by the Army to identify its spare and repair parts needs for its budget development process. We focused on the process used to identify items in a deficit position. As part of these discussions, we also studied the budget stratification process, which is the major database input used in the budget development process. To identify the items in a deficit position, we obtained the September 30, 1994, budget stratification data tapes for the five Army inventory control points: Army Munitions and Chemical Command, Aviation and Troop Command, Communications-Electronics Command, Missile Command, and Tank-Automotive Command. From the total universe of 8,526 secondary items with a deficit inventory position valued at $750 million, we selected all items that had a deficit position of $500,000 or more. This resulted in a sample of 258 items with a total inventory deficit position of $519 million, or 69 percent of the total deficit. For each of the 258 selected items, we obtained information from the responsible item manager to determine whether the item was actually in a deficit position as of September 30, 1994. For those items that the budget stratification process had erroneously placed in a deficit position, we determined the reason for its misclassification. We obtained this information by reviewing item manager files and discussing the items with responsible item management personnel. We categorized the reasons for the erroneous classifications to determine frequency distribution for each type of reason. We then determined through discussions with item management officials and review of system change requests what actions were taken or planned to correct the identified problems. We performed our review from October 1994 to July 1995 in accordance with generally accepted government auditing standards. Army Inventory: Growth in Inventories That Exceed Requirements (GAO/NSIAD-90-68, Mar. 22, 1990). Defense Inventory: Shortcomings in Requirements Determination Processes (GAO/NSIAD-91-176, May 10, 1991). Army Inventory: Need to Improve Process for Establishing Economic Retention Requirements (GAO/NSIAD-92-84, Feb. 27, 1992). Army Inventory: More Effective Review of Proposed Inventory Buys Could Reduce Unneeded Procurement (GAO/NSIAD-94-130, June 2, 1994). Defense Inventory: Shortages Are Recurring, But Not a Problem (GAO/NSIAD-95-137, Aug. 7, 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. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed the: (1) accuracy of the databases used to determine Army spare and repair parts requirements and inventory levels for Defense Business Operations Fund budget requests; and (2) actions taken to correct data problems that could affect the reliability of these budget estimates. GAO found that: (1) the Army's 1994 budget report contained numerous inventory data inaccuracies which led to erroneous reports of deficit inventory positions for several items; (2) overstated requirements and understated inventory levels were the major cause of most of the false deficit position reports; (3) the actual deficit position value for 94 items was about ten-fold less than what was reported; (4) some items should have been excluded from the budget stratification process; (5) although the Army is aware of many requirements data problems and has identified several change requests to correct these problems, the Army has not been able to correct these problems because the Department of Defense (DOD) is developing a standard requirements determination system for all the services and has limited how much the services can spend to change their existing systems; (6) the new DOD standard system will not be implemented for 4 years and most of its existing data will be integrated into that system; and (7) the Army cannot ensure that its budget requests represent its actual funding needs for spare and repair parts, that the new system will receive accurate data when it is implemented, or that expensive usable items will not be discarded and reprocured.

As provided by the Panama Canal Treaty of 1977, the Panama Canal Commission will terminate on December 31, 1999, when the Republic of Panama will assume full responsibility for the management, operation, and maintenance of the Panama Canal. The Treaty provides that the Canal be turned over in operating condition and free of liens and debts, except as the two parties may otherwise agree. As discussed in note 9 to the financial statements, as of September 30, 1995, the Commission forecasts that the present $90.7 million in unfunded liabilities should be covered by tolls over the remaining life of the Treaty. We did not examine the Commission's forecast and express no opinion on it. The ability to cover these future costs, including administrative costs, is dependent upon (1) obtaining the budgeted levels of Canal operations and (2) future economic events. The Commission operates as a rate-regulated utility. In fiscal year 1995 approximately 74 percent of its operating revenues were obtained from tolls and the remaining 26 percent, from nontoll revenues, such as navigation services and electric power sales. Early retirement, compensation benefits for work injuries, and post-retirement medical care costs are being funded from Canal revenues on an accelerated basis in order to be fully funded by 1999. During the period of our audit, the President of the United States served as the rate regulator for tolls, which are established at a level to recover the costs of operating and maintaining the Canal. The following is taken from management's analysis of the Commission's financial statements. The analysis generally explains the changes in major financial statement line items from fiscal years 1994 to 1995. Our opinions on these financial statements do not extend to the analysis presented below, and, accordingly, we express no opinion on this analysis. While we do not express an opinion on the analysis, we found no material inconsistencies with the financial statements taken as a whole. The Commission's operations ended fiscal year 1995 at breakeven, compared to the net operating revenue of $1.7 million for fiscal year 1994. The net operating revenue for 1994 was applied to the $0.6 million outstanding balance of unrecovered costs from fiscal year 1992 operations and the $1.1 million balance left was paid to the Republic of Panama on March 9, 1995. From fiscal years 1991 through 1995, toll and nontoll revenues increased an average of approximately 3.8 percent annually. Fiscal year 1995 total operating revenues increased to $586 million, up 6.9 percent from fiscal year 1994 due mainly to an increase in Canal traffic, principally larger vessels. Nontoll revenues, which consist primarily of navigation services and electric power sales, increased to $164 million during fiscal year 1995, up 12.6 percent from fiscal year 1994. The deduction from tolls revenue for working capital was increased from $5 million in fiscal year 1994 to $10 million in fiscal year 1995 in order to substantially complete the financing of the Commission's storehouse and fuel inventories. The deduction from tolls revenue for contributions for capital expenditures increased from $11.5 million in fiscal year 1994 to $30.3 million in fiscal year 1995. The increase was attributable to the funding required for the increase in the Commission's capital program in 1995 for the acquisition of the crane TITAN and to provide funding for anticipated additional capital expenditures for replacements and additions to the tug fleet, acceleration of the Gaillard Cut widening project and the purchase of additional towing locomotives. From fiscal years 1991 through 1995, total operating expenses increased an average of approximately 4.0 percent annually. Fiscal year 1995 total operating expenses increased to $586 million, up 7.3 percent over fiscal year 1994. The following were some of the highlights: Tonnage payments to the Republic of Panama increased $9.8 million or 13.9 percent in fiscal year 1995. The additional net tonnage transiting the Canal produced $7.6 million of the increase and a rate change from 36 cents to 37 cents per ton accounted for $2.2 million of the change. Navigation service and control costs increased $13.6 million or 14.8 percent due mainly to the cost of additional resources required to service the record traffic levels experienced in fiscal year 1995. The increase in locks operation costs of $10.4 million or 18.2 percent reflected the cost of additional crews required for the increased level of traffic, additional locks maintenance and repair projects, and increased costs for locks overhaul projects. Depreciation expense increased $5.7 million or 22.1 percent in fiscal year 1995 principally as the result of (1) an adjustment to the service life for certain assets, (2) the change in the capitalization limit from $1,500 to $5,000 for minor items acquired in fiscal year 1995, and (3) the depreciation for new additions to plant during the fiscal year. Partially offsetting these increases was a credit adjustment resulting from the amortization of capital contributions of assets acquired prior to fiscal year 1992. Interest expense on the interest-bearing investment of the United States decreased $3.2 million or 42.2 percent in fiscal year 1995 because of the larger average cash balances maintained by the Commission in its U.S. Treasury revolving fund account and lower interest rates. Other operating expenses increased $5.8 million or 18.8 percent primarily because of an increase in the provision for marine accident claims during the year related to accidents that occurred during fiscal year 1995. By the end of fiscal year 1995, total assets of the Commission increased by 3.3 percent to $851 million, and total liabilities and reserves decreased by 1.6 percent to $263 million. Capital increased by 5.6 percent to $588 million. The most significant changes in individual account balances by the end of fiscal year 1995 were the following: Property, plant, and equipment (excluding depreciation and valuation allowances) increased by a net $38 million to $1,141 million. This increase was due primarily to net capital expenditures of $38.7 million and the acquisition of several plant items from other U.S. government agencies. Major capital additions to plant from capital expenditures included $9.4 million for the Canal widening/straightening program; $8.0 million for the replacement and improvement of facilities and buildings; $6.6 million for the replacement and addition of floating equipment; $5.2 million for the replacement and addition of miscellaneous equipment; $4.0 million for improvements to electric power, communication, and water systems; $2.6 million for the replacement of motor vehicles; and $1.6 million for the replacement of launches and launch engines. Current assets increased by a net $54 million to $262 million due principally to an increase in cash. Cash increased by $46.8 million as a result of the net cash provided by operating activities exceeding the net cash used in investing activities. Deferred charges decreased by a net $26 million to $87 million. This was due principally to the amortization of deferred charges for early retirement, compensation benefits for work injuries, and post-retirement medical care costs. Liabilities and reserves decreased by a net $4.2 million to $263 million. The major reason for the net decrease included a decrease of $26.9 million for certain employee benefits, offset in part by increases in the liabilities for severance pay, accounts payable, employees' leave, marine accident claims, and in the reserve for lock overhauls. Capital increased by a net $31 million to $588 million, principally because of a $21.4 million net increase in capital contributions for capital expenditures and a $10.0 million increase in contributions for working capital. The Panama Canal Act of 1979 requires us to include in our annual audit report to the Congress a statement listing (1) all direct and indirect costs incurred by the United States in implementing the 1977 Treaty, net of any savings, and (2) the cost of any property transferred to the Republic of Panama. The act also provides that direct appropriated costs of U.S. government agencies should not exceed $666 million, adjusted for inflation over the life of the Treaty. As of September 30, 1995, the inflation-adjusted target was $1,367 million. U.S. Government agencies that provided services to the former Panama Canal Company and Canal Zone Government provided the direct and indirect cost information including the cost of property transferred to the Republic of Panama as required under the 1977 Treaty. This information is presented in unaudited supplementary schedules to the Commission's financial statements, and, accordingly, we express no opinion on these schedules. From fiscal years 1980 to 1995, the net reported costs to the U.S. Government under the Treaty amounted to $791 million, which is less than the act's inflation-adjusted target. As required by the Panama Canal Act of 1979, we are sending copies of this report to the President of the United States and the Secretary of the Treasury. We are also sending copies to the Director of the Office of Management and Budget; the Secretaries of State, Defense, and the Army; the Chairman of the Board of Directors of the Panama Canal Commission; and the Administrator of the Panama Canal Commission. Comptroller General of the United States United States General Accounting Office Washington, D.C. 20548 Comptroller General of the United States To the Board of Directors Panama Canal Commission Our audits of the Panama Canal Commission found the fiscal years 1995 and 1994 financial statements to be reliable in all material respects; although certain internal controls to help assure compliance with a statutory spending limitation should be improved, management fairly stated that internal controls in place on September 30, 1995, were effective in safeguarding assets from material loss, assuring material compliance with laws governing the use of budget authority and with other relevant laws and regulations, and assuring that there were no material misstatements in the financial statements; and reportable noncompliance with laws and regulations we tested for the fiscal year ended September 30, 1995. We discussed a draft of this report with the Commission's Chief Financial Officer who agreed with our findings and conclusions. Described below are significant matters considered in performing our audit and forming our conclusions. The Commission's management identified and reported an instance of reportable noncompliance with laws and regulations and certain related controls. The amount of the violation was not material to the financial statements. In January 1996, the Commission reported to us a violation of the Antideficiency Act for the fiscal year 1995 Panama Canal Revolving Fund. The Commission exceeded its $50,030,000 congressional spending limitation for administrative expenses, as set forth in the fiscal year 1995 appropriation (Public Law 103-331) by $160,225. Management determined that the violation resulted from a weakness in the Commission's system of internal controls related to the review of the classification of obligations for consultant services. Management has taken steps to improve the specific control weaknesses related to this incident. As required in 31 U.S.C. Section 1351, the Commission has reported all relevant facts of this Antideficiency Act violation and a statement of actions taken to the President, the Office of Management and Budget (OMB), the Speaker of the House of Representatives, and the President of the Senate. As discussed in note 9 to the financial statements, the Panama Canal Treaty requires that the Commission transfer the Canal to the Republic of Panama on December 31, 1999, free of liens and debts, except as the two parties may otherwise agree. To comply with this provision, the Commission is required to identify and fully fund its liabilities by that date. Note 9 indicates that, as of September 30, 1995, the Commission had total liabilities and reserves of $262.7 million and total resources of $172.0 million. The Commission forecasted that the net unfunded $90.7 million in liabilities should be collected from future toll revenues over the remaining life of the Treaty. We did not examine the Commission's forecast and, accordingly, express no opinion on the forecast. The following sections provide our opinions on the Commission's financial statements and assertion on internal controls, and our report on the Commission's compliance with laws and regulations we tested. This section also discusses the information presented in the unaudited supplemental schedules and the scope of our audit. The financial statements including the accompanying notes present fairly, in all material respects, in conformity with generally accepted accounting principles, the Commission's assets, liabilities, and capital; operating revenue and expenses; changes in capital; and cash flows. We evaluated management's assertion about the effectiveness of its internal controls designed to safeguard assets against loss from unauthorized acquisition, use, or disposition; assure the execution of transactions in accordance with laws governing the use of budget authority and with other laws and regulations that have a direct and material effect on the financial statements or that are listed in OMB audit guidance and could have a material effect on the financial statements; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements and to maintain accountability for assets. Management of the Commission fairly stated that those controls in effect on September 30, 1995, provided reasonable assurance that losses, noncompliance, or misstatements material to the financial statements would be prevented or detected on a timely basis. Management of the Commission also fairly stated the need to improve certain internal controls for review of the classification of obligations for consultant services, as described above. These weaknesses in internal controls, although not considered to be material to the financial statements, represent deficiencies in the design or operations of internal controls which could adversely affect the entity's ability to meet the internal control objectives to assure the execution of transactions in accordance with laws and regulations or meet OMB criteria for reporting matters under the Federal Managers' Financial Integrity Act (FMFIA) of 1982. Management made this assertion based upon criteria established under FMFIA and OMB Circular A-123, Internal Control Systems. Except as noted above, our tests for compliance with selected provisions of certain laws and regulations disclosed no other instances of noncompliance that would be reportable under generally accepted government auditing standards. However, the objective of our audit was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. The Treaty related cost schedules are presented as required by the Panama Canal Act of 1979, and the schedule of property, plant, and equipment is presented for purposes of additional analysis. This information has not been subjected to the auditing procedures applied in the audit of the financial statements, and, accordingly, we express no opinion on these schedules. While we do not express an opinion on the detailed schedule of property, plant, and equipment, we found no material inconsistencies with the financial statements taken as a whole. preparing the annual financial statements in conformity with generally establishing, maintaining, and assessing the internal control structure to provide reasonable assurance that the broad control objectives of FMFIA are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are reliable (free of material misstatement and presented fairly, in all material respects, in conformity with generally accepted accounting principles) and (2) management's assertion about the effectiveness of internal controls is fairly stated, in all material respects, based upon criteria established under FMFIA and OMB Circular A-123, Internal Control Systems. We are also responsible for testing compliance with selected provisions of certain laws and regulations and for performing limited procedures with respect to unaudited supplementary information appearing in this report. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by evaluated the overall presentation of the financial statements; obtained an understanding of the internal control structure related to safeguarding of assets, compliance with laws and regulations, and financial reporting; tested relevant internal controls over safeguarding, compliance, and financial reporting and evaluated management's assertion about the effectiveness of internal controls; tested compliance with selected provisions of the following laws and regulations: Panama Canal Act of 1979, Antideficiency Act, Prompt Payment Act, Civil Service Reform Act of 1978, as amended, Fair Labor Standards Act, and Accounting and Auditing Act of 1950; considered compliance with the process required by FMFIA for evaluating and reporting on internal control and accounting systems; prepared Treaty related costs schedules using unaudited information obtained from other federal agencies; and compared the unaudited detailed schedule of property, plant, and equipment for consistency with the information presented in the financial statements. We did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to those controls necessary to achieve the objectives outlined in our opinion on management's assertion about the effectiveness of internal controls. Because of inherent limitations in any internal control structure, losses, noncompliance, or misstatements may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We did our work in accordance with generally accepted government auditing standards. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a legislative requirement, GAO audited the Panama Canal Commission's financial statements for the fiscal years ended September 30, 1995 and 1994, focusing on: (1) the statements' reliability; (2) internal controls; and (3) compliance with selected applicable laws and regulations. GAO found that: (1) the financial statements presented fairly, in all material respects, the Commission's financial position as of September 30, 1995 and 1994, and the results of its operations, changes in capital, and cash flows for the years then ended, in conformity with generally accepted accounting principles; (2) although improvements are needed, the Commission's internal controls in effect as of September 30, 1995, reasonably ensured that losses, noncompliance, or material misstatements would be prevented or detected; (3) the Commission disclosed a nonmaterial violation of the Antideficiency Act and has implemented internal controls that should prevent any future violations; (4) there were no other reportable instances of noncompliance with applicable laws and regulations; (5) the Commission has improved its general controls over its computerized information systems to correct previously identified weaknesses; and (6) the Commission expects to have its liabilities fully funded by the time the Canal is transferred to Panama.

Under DERP, DOD is required to conduct environmental restoration activities at sites located on former and active defense properties that were contaminated while under its jurisdiction. Program goals include the identification, investigation, research and development, and cleanup of contamination from hazardous substances, pollutants, and contaminants; the correction of other environmental damage (such as detection and disposal of unexploded ordnance) that creates an imminent and substantial endangerment to public health or welfare or the environment; and the demolition and removal of unsafe buildings and structures. Types of environmental contaminants found at military installations include solvents and corrosives; fuels; paint strippers and thinners; metals, such as lead, cadmium, and chromium; and unique military substances, such as nerve agents and unexploded ordnance. DOD has undergone five BRAC rounds, with the most recent occurring in 2005. Under the first four rounds, in 1988, 1991, 1993, and 1995, DOD closed 97 major bases, had 55 major base realignments, and addressed hundreds of minor closures and realignments. DOD reported that the first four BRAC rounds reduced the size of its domestic infrastructure by about 20 percent and generated about $6.6 billion in net annual recurring savings beginning in fiscal year 2001. As a result of the 2005 BRAC decisions, DOD was slated to close an additional 25 major bases, complete 32 major realignments, and complete 755 minor base closures and realignments. When the BRAC decisions were made final in November 2005, the BRAC Commission had projected that the implementation of these decisions would generate over $4 billion in annual recurring net savings beginning in 2011. In accordance with BRAC statutory authority, DOD must complete closure and realignment actions by September 15, 2011--6 years following the date the President transmitted his report on the BRAC recommendations to Congress. Environmental cleanup and property transfer actions associated with BRAC sites can exceed the 6-year time limit, having no deadline for completion. As we have reported in the past, addressing the cleanup of contaminated properties has been a key factor related to delays in transferring unneeded BRAC property to other parties for reuse. DOD officials have told us that they expect environmental cleanup to be less of an impediment for the 2005 BRAC sites since the department now has a more mature cleanup program in place to address environmental contamination on its bases. In assessing potential contamination and determining the degree of cleanup required (on both active and closed bases), DOD must comply with cleanup standards and processes under all applicable environmental laws, regulations, and executive orders. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) authorizes the President to conduct or cause to be conducted cleanup actions at sites where there is a release or threatened release of hazardous substances, pollutants or contaminants which may present a threat to public health and the environment. The Superfund Amendments and Reauthorization Act of 1986 (SARA) amending CERCLA clarified that federal agencies with such sites shall be subject to and comply with CERCLA in the same manner as a private party, and DOD was subsequently delegated response authority for its properties. To respond to potentially contaminated sites on both active and closed bases, DOD generally uses the CERCLA process, which includes the following phases and activities, among others: preliminary assessment, site investigation, remedial investigation and feasibility study, remedial design and remedial action, and long-term monitoring. SARA also required the Secretary of Defense to carry out the Defense Environmental Restoration Program (DERP). Following SARA's enactment, DOD established DERP, which consists of two key subprograms focused on environmental contamination: (1) the Installation Restoration Program (IRP), which addresses the cleanup of hazardous substances where they were released into the environment prior to October 17, 1986; and (2) the Military Munitions Response Program (MMRP), which addresses the cleanup of munitions, including unexploded ordnance and the contaminants and metals related to munitions, where they were released into the environment prior to September 30, 2002. While DOD is authorized to conduct cleanups of hazardous substances released after 1986 and munitions released after 2002, these activities are not eligible for DERP funds but are instead considered "compliance" cleanups and are typically funded by base operations and maintenance accounts. Once a property is identified for transfer by a BRAC round, DOD's cleanups are funded by the applicable BRAC account. While SARA had originally required the government to warrant that all necessary cleanup actions had been taken before transferring property to nonfederal ownership, the act was amended in 1996 to allow expedited transfers of contaminated property. Now such property, under some circumstances, can be transferred to nonfederal users before all remedial action has been taken. However, certain conditions must exist before DOD can exercise this early transfer authority; for example, the property must be suitable for the intended reuse and the governor of the state must concur with the transfer. Finally, DOD remains responsible for completing all necessary response action, after which it must warrant that such work has been completed. DOD uses the same method to propose funding for cleanup at active and BRAC sites and FUDS; and cleanup funding is based on DERP goals and is generally proportional to the number of sites in each of these categories. Specifically, officials in the Military Departments, Defense Agencies, and FUDS program who are responsible for environmental restoration at the sites under their jurisdiction formulate cleanup budget proposals based on instructions in DOD's financial management regulation and DERP environmental restoration performance goals. DOD's DERP goals include reducing risk to human health and the environment, preparing BRAC properties to be environmentally suitable for transfer, having final remedies in place and completing response actions, and fulfilling other established milestones to demonstrate progress toward meeting program performance goals. DERP goals included target dates representing when the current inventory of active and BRAC sites and FUDS are expected to complete the preliminary assessment and site inspection phases, or achieve the remedy in place or response complete (RIP/RC) milestone. In addition, Congress has required the Secretary of Defense to establish specific performance goals for MMRP sites. Table 1 provides a summary of these goals for the IRP and MMRP. As the table indicates, BRAC sites have no established goals for preliminary assessments or site inspections. For sites included under the first four BRAC rounds, the goal is to reach the RIP/RC milestone at IRP sites by 2015 and at MMRP sites by 2009. For sites included under the 2005 BRAC round, the goal is to reach the RIP/RC milestone at IRP sites by 2014 and at MMRP sites by 2017. DOD's military components plan cleanup actions that are required to meet these goals at the installation or site level. DOD requires the components to assess their inventory of BRAC and other sites by relative risk to help make informed decisions about which sites to clean up first. Using these relative risk categories, as well as other factors such as stakeholder interest and mission needs, the components set more specific cleanup targets each fiscal year to demonstrate progress and prepare a budget to achieve those goals and targets. The proposed budgets and obligations among site categories are also influenced by the need to fund long-term management activities. While DOD uses the number of sites achieving RIP/RC status as a primary performance metric, sites that have reached this goal may still require long-term management and, therefore, additional funding for a number of years. Table 2 shows the completion status for active and BRAC sites and FUDS, as of the end of fiscal year 2008. Table 3 shows the completion status of BRAC sites and those that require long term management under the IRP, MMRP, and the Building Demolition/Debris Removal Program by military component, for fiscal years 2004 through 2008. DOD data show that, in applying the broad restoration goals, performance goals, and targets, cleanup funding is generally proportional to the number of sites in the active, BRAC, and FUDS site categories. Table 4 shows the total DERP inventory of sites, obligations, and proportions at the end of fiscal year 2008. As the table indicates, the total number of BRAC sites requiring cleanup is about 17 percent of the total number of defense sites, while the $440.2 million obligated to address BRAC sites in fiscal year 2008 is equivalent to about 25 percent of the total funds obligated for cleaning up all defense waste sites. Since DERP was established, approximately $18.4 billion has been obligated for environmental cleanup at individual sites on active military bases, $7.7 billion for cleanup at sites located on installations designated for closure under BRAC, and about $3.7 billion to clean up FUDS sites. During fiscal years 2004 through 2008, about $4.8 billion was spent on cleaning up sites on active bases, $1.8 billion for BRAC sites, and $1.1 billion for FUDS sites. Table 5 provides DOD's funding obligations for cleanup at BRAC sites by military component and program category for fiscal years 2004 through 2008. Table 6 shows DOD's estimated cost to complete environmental cleanup for sites located at active installations, BRAC installations, and FUDS under the IRP, MMRP, and the Building Demolition and Debris Removal Program for fiscal years 2004 through 2008. Finally, table 7 shows the total inventory of BRAC sites and the number ranked as high risk in the IRP and MMRP, by military component, for fiscal years 2004 through 2008. Our past work has also identified a number of challenges to DOD's efforts in undertaking environmental cleanup activities at defense sites, including BRAC sites. For example, we have reported the following: DOD's preliminary cost estimates for environmental cleanup at specific sites may not reflect the full cost of cleanup. That is, costs are generally expected to increase as more information becomes known about the extent of the cleanup needed at a site to make it safe enough to be reused by others. We reported in 2007 that our experience with prior BRAC rounds had shown that cost estimates tend to increase significantly once more detailed studies and investigations are completed. Environmental cleanup issues are unique to each site. However, we have reported that three key factors can lead to delays in the cleanup and transfer of sites. These factors are (1) technological constraints that limit DOD's ability to accurately identify, detect, and clean up unexploded ordnance from a particular site, (2) prolonged negotiations between environmental regulators and DOD about the extent to which DOD's actions are in compliance with environmental regulations and laws, and (3) the discovery of previously undetected environmental contamination that can result in the need for further cleanup, cost increases, and delays in property transfer. In conclusion, Mr. Chairman, while the data indicate that DOD has made progress in cleaning up its contaminated sites, they also show that a significant amount of work remains to be done. Given the large number of sites that DOD must clean up, we recognize that it faces a significant challenge. Addressing this challenge, however, is critical because environmental cleanup has historically been a key impediment to the expeditious transfer of unneeded property to other federal and nonfederal parties who can put the property to new uses. 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. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Anu Mittal at (202) 512- 3841 or [email protected] or John B. Stephenson at (202) 512-3841 or [email protected]. Contributors to this testimony include Elizabeth Beardsley, Antoinette Capaccio, Vincent Price, and John Smith. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Under the Defense Environmental Restoration Program (DERP), the Department of Defense (DOD) is responsible for cleaning up about 5,400 sites on military bases that have been closed under the Base Realignment and Closure (BRAC) process, as well as 21,500 sites on active bases and over 4,700 formerly used defense sites (FUDS), properties that DOD owned or controlled and transferred to other parties prior to October 1986. The cleanup of contaminants, such as hazardous chemicals or unexploded ordnance, at BRAC bases has been an impediment to the timely transfer of these properties to parties who can put them to new uses. The goals of DERP include (1) reducing risk to human health and the environment (2) preparing BRAC properties to be environmentally suitable for transfer (3) having final remedies in place and completing response actions and (4) fulfilling other established milestones to demonstrate progress toward meeting program performance goals. This testimony is based on prior work and discusses information on (1) how DOD allocates cleanup funding at all sites with defense waste and (2) BRAC cleanup status. It also summarizes other key issues that GAO has identified in the past that can impact DOD's environmental cleanup efforts. DOD uses the same method to propose funding for cleanup at FUDS, active sites, and BRAC sites; cleanup funding is based on DERP goals and is generally proportional to the number of sites in each of these categories. Officials in the Military Departments, Defense Agencies, and FUDS program, who are responsible for executing the environmental restoration activities at their respective sites, formulate cleanup budget proposals using the instructions in DOD's financial management regulation and DERP environmental restoration performance goals. DERP's goals include target dates for reaching the remedy-in-place or response complete (RIP/RC) milestone. For example, for sites included under the first four BRAC rounds, the goal is to reach the RIP/RC milestone at sites with hazardous substances released before October 1986 by 2015 and for sites in the 2005 BRAC round by 2014. DOD's military components plan cleanup actions that are required to meet DERP goals at the installation or site level. DOD requires the components to assess their inventory of BRAC and other sites by relative risk to help make informed decisions about which sites to clean up first. Using these relative risk categories, as well as other factors, the components set more specific restoration targets each fiscal year to demonstrate progress and prepare a budget to achieve those goals and targets. DOD data show that, in applying the goals, and targets, cleanup funding has generally been proportional to the number of sites in the FUDS, active, and BRAC site categories. For example, the total number of BRAC sites requiring cleanup is about 17 percent of the total number of defense sites requiring cleanup, while the $440.2 million obligated to address BRAC sites in fiscal year 2008 is equivalent to about 25 percent of the total funds obligated for this purpose for all defense waste sites. GAO's past work has also shown that DOD's preliminary cost estimates for cleanup generally tend to rise significantly as more information becomes known about the level of contamination at a specific site. In addition, three factors can lead to delays in cleanup. They are (1) technological constraints that limit DOD's ability to detect and cleanup certain kinds of hazards, (2) prolonged negotiations with environmental regulators on the extent to which DOD's actions are in compliance with regulations and laws, and (3) the discovery of previously unknown hazards that can require additional cleanup, increase costs, and delay transfer of the property.

In 1944, President Franklin D. Roosevelt made a commitment that no servicemen blinded in combat in World War II would be returned to their homes without adequate training to meet the problems imposed by their blindness, according to VA. From 1944 to 1947, the Army and Navy provided this rehabilitation training. In 1947, responsibility for this training was transferred to VA, and in 1948, VA opened its first BRC to provide comprehensive inpatient care to legally blind veterans. In 1956, blind rehabilitation services were expanded to include veterans whose legal blindness was not service-connected. Because of this expansion, the demographics of VA's blind veteran population shifted toward predominately older veterans whose legal blindness was caused by age-related eye diseases. Expanded eligibility also caused an increase in demand for services. VA responded to this demand by opening 9 additional BRCs in the United States and Puerto Rico for a total of 10 facilities with 241 authorized beds. (See table 1.) As of May 5 2004, VA reported that there were 2,127 legally blind veterans waiting for admission to BRCs. In fiscal year 2003, VA estimated that about 157,000 veterans were legally blind, with more than 60 percent age 75 or older. About 44,000 legally blind veterans were enrolled in VA health care. VA estimated that through 2022, the number of legally blind veterans would remain stable. (See fig. 1.) The National Institutes of Health (NIH) considers the increase in age- related eye diseases to be an emerging major public health problem. According to NIH, the four leading diseases that cause age-related legal blindness are cataract, glaucoma, macular degeneration, and diabetic retinopathy, each affecting vision differently. (See fig. 2 for illustrations of how each disease affects vision.) Cataract is a clouding of the eye's normally clear lens. Most cataracts appear with advancing age, and by age 80, more than half of all Americans develop them. Glaucoma causes gradual damage to the optic nerve--the nerve to the eye--that results in decreasing peripheral vision. It is estimated that as many as 4 million Americans have glaucoma. Macular degeneration results in the loss of central visual clarity and contrast sensitivity. It is the most common cause of legal blindness in older Americans and rarely affects those under the age of 60. Diabetic retinopathy is a common complication of diabetes impairing vision over time. It results in the loss of visual clarity, peripheral vision, and color and contrast sensitivity. It also increases the eye's sensitivity to glare. Nearly half of all diabetics will develop some degree of diabetic retinopathy, and the risk increases with veterans' age and the length of time they have had diabetes. To assist legally blind veterans, VA established Visual Impairment Services Team (VIST) coordinators who act as case managers and are responsible for coordinating all medical services for these veterans, including obtaining medical examinations and arranging for blind rehabilitation services. There are about 170 VIST coordinators, who are located at VA medical centers that have at least 100 enrolled legally blind veterans. VIST coordinators are also responsible for certain administrative services such as reviewing the veteran's compensation and pension benefits. Almost all of VA's blind rehabilitation services for veterans are provided through comprehensive inpatient care at BRCs, where veterans are trained to use their remaining vision and other senses, as well as adaptive devices such as canes, to help compensate for impaired vision. VA offers both basic and computer training. (See table 2 for examples of the types of skills taught during basic and computer training.) In fiscal years 2002 and 2003, VA spent over $56 million each year for inpatient training at BRCs. During this same time period, VA spent less than $5 million each year to provide outpatient rehabilitation training for legally blind veterans. VA offers three types of blind rehabilitation outpatient services to legally blind veterans, but these services are available in few VA locations. The three types of services include Visual Impairment Services Outpatient Rehabilitation (VISOR), Visual Impairment Center to Optimize Remaining Sight (VICTORS), and Blind Rehabilitation Outpatient Specialists (BROS). The services range from short-term outpatient programs provided in VA facilities to home-based services. Figure 3 identifies the locations throughout the United States and Puerto Rico where these services are offered. VISOR is a 10-day outpatient program located at the VA medical center in Lebanon, Pennsylvania, that offers training in the use of low vision equipment, basic orientation and mobility, and living skills. Serving veterans in the surrounding 13-county area, it is primarily for veterans who can independently perform activities of daily living and who require only limited training in visual skills and orientation and mobility, such as traveling within and outside their homes. According to a VISOR official, the program is meant to provide training to veterans while they wait for admission to a BRC or to veterans who do not want to attend a BRC. Veterans who participate in this program are housed in hoptel beds within the medical facility. In fiscal year 2003, 54 veterans attended the VISOR program; about 20 to 30 percent of these veterans were legally blind. According to a VISOR official, there is no waiting list for this program and the local medical center provides the necessary funding for it. VICTORS is a 3- to 7-day outpatient program for veterans in good health whose vision loss affects their ability to perform activities of daily living, such as personal grooming and reading mail. The program provides the veterans with a specialized low vision eye examination, prescriptions for and training in the use of low vision equipment, and counseling. There are three VICTORS programs located in VA medical centers in Kansas City, Missouri; Chicago, Illinois; and Northport, New York. Veterans are housed in hoptel beds within the medical facility or in nearby hotels. In fiscal year 2003, VICTORS served over 900 veterans; about 25 to 30 percent of these veterans were legally blind. According to VICTORS officials, the wait time for admission to VICTORS varied from about 55 to about 170 days. The medical center where the program is located funds the services. BROS are blind rehabilitation outpatient instructors who provide a variety of short-term services to veterans in their homes and at VA facilities. BROS train veterans prior to and following their participation in BRC programs, as well as veterans who cannot or do not choose to attend a BRC. BROS training addresses veterans' immediate needs, especially those involving safety issues such as reading prescriptions or simple cooking. There are 23 BROS throughout VA's health care system, with 7 located in the VA network that covers Florida and Puerto Rico. In fiscal year 2003, BROS trained about 2,700 veterans, almost all of whom were legally blind. Wait time for BROS services varied from about 14 to 28 days according to the BROS we interviewed. BROS are funded by the medical centers where they are located. VA officials who provide services to legally blind veterans told us that some veterans could benefit from increased access to outpatient blind rehabilitation services. We obtained this information by asking VA to review all of the veterans who, as of March 31, 2004, were on the waiting lists for admission to the five BRCs we visited and to determine whether outpatient services could meet their needs. VA officials reported that 315 out of 1,501 of these veterans, or 21 percent, could potentially be better served through access to outpatient blind rehabilitation services, if such services were available. The types of veterans VA believes could potentially benefit from outpatient services include those who are very elderly or lack the physical stamina to participate in a comprehensive 28- to 42-day BRC program and those who have medical needs that cannot be provided by the BRC. For example, some BRCs are unable to accept patients requiring kidney dialysis. In addition, some veterans do not want to leave their families for long periods of time and some legally blind veterans are primary caretakers for their spouses and are unable to leave their homes. VA officials also told us that veterans in good health who can independently perform activities of daily living and require only limited or specialized training could also be served effectively on an outpatient basis. A VA study concluded that there is a need for increased outpatient services for legally blind veterans. In 1999, VA convened a Blind Rehabilitation Gold Ribbon Panel to study concerns about the growing number of legally blind veterans. The panel examined how VA historically provided blind rehabilitation services and recommended that VA transition from its primarily inpatient model of care to one that included both inpatient and outpatient services. In 2000, VA established the VIAB to implement the panel's recommendations. The VIAB drafted guidance for a uniform standard of care policy for visually impaired veterans throughout VA's health care system. This guidance outlined a continuum of care to provide a range of services from basic low vision to comprehensive inpatient rehabilitation training, including use of more outpatient services from both VA and non-VA sources. In January 2004, a final draft of the uniform standard of care policy was forwarded to VA's Health Systems Committee for approval. The committee believed additional information was needed for its approval and requested additional analysis that compared currently available blind rehabilitation services with anticipated needs. VA plans to complete this analysis in the first quarter of fiscal year 2005 and then resubmit the uniform standard of care policy and the additional analysis to the Health Systems Committee. VA officials were unable to provide a timeframe for the Health Systems Committee's approval. Some VIST coordinators have already provided outpatient services to legally blind veterans by referring them to state and private blind rehabilitation services. For example, in Florida a VIST coordinator referred veterans to the Lighthouse for the Blind for computer training at its outpatient facility if they did not live near and did not want to travel to the BRC. A VIST coordinator in Oklahoma arranged contractor-provided computer training in the veteran's home for veterans with a 20 percent or more service-connected disability. The coordinator issued the computer equipment to a local contractor; the contractor then set up the equipment in the veteran's home and provided the training. Another VIST coordinator in North Carolina referred all legally blind veterans to state service agencies, including veterans waiting for admission to a BRC. Each county in that state had a social worker for the blind that referred its citizens to independent living programs for in-home training in orientation and mobility and living skills. The state provided this training at no charge to the veteran and VA paid for the equipment. Recently, VA has begun to shift computer training from inpatient settings at BRCs to private sector outpatient settings. VA's goal was to remove from the BRC waiting list by July 30, 2004, those veterans seeking admission to a BRC only for computer training. In spring 2004, VA issued instructions stating that the prosthetic budget of each medical center, which already paid for computer equipment for legally blind veterans, would now pay for computer training. Additionally, the Blind Rehabilitation Service Program Office asked BRCs to identify all the veterans waiting for admission for computer training and refer them back to their VIST coordinator for local computer training. If BRC and VIST coordinator staff determined that local computer training was not available or appropriate for a veteran, they were to provide an explanation to the program office. On May 5, 2004, 674 veterans were waiting for admission to a BRC for computer training. As of July 1, 2004, 520 veterans were removed from the BRC waiting list because arrangements were made for them to receive computer training from non-VA sources or they no longer wanted the training. There are two factors that affect VA's expansion of outpatient services systemwide. One factor is the agency's long-standing belief that rehabilitation training for legally blind veterans can be best provided in a comprehensive inpatient setting. The second reported factor is VA's method of allocating funds for blind rehabilitation outpatient services, which provides local medical center management discretion to provide funds for them. Some VA officials told us that one factor affecting veterans' access to outpatient care has been the agency's traditional focus on providing comprehensive inpatient training at BRCs. VA has historically considered the BRCs to be an exemplary model of care, and since 1948 BRCs have been the primary source of care for legally blind veterans. However, this delivery model has not kept pace with VA's overall health care strategy that reduces reliance on inpatient care and emphasizes outpatient care. VA's continued reliance on inpatient blind rehabilitation care is evident in its recent decision to build two additional BRCs in Long Beach, California, and Biloxi, Mississippi. We have, however, observed some recent changes that may affect this reliance on inpatient services. For example, VA has new leadership in its blind rehabilitation program that has expressed an interest in providing a broad range of inpatient and outpatient services to meet the training needs of legally blind veterans. Further, as previously discussed, the VIAB's draft continuum of care policy recommends a full range of blind rehabilitation services, emphasizing more outpatient care, including VICTORS, VISOR, and BROS. VA blind rehabilitation officials also told us that they believe changes to VA's resource allocation method could provide an incentive to expand blind rehabilitation services on an outpatient basis. The VIAB believes that the funds allocated for basic outpatient care for legally blind veterans do not cover the cost of providing blind rehabilitation services. Veterans Integrated Service Networks (networks) are allocated funds to provide basic outpatient care for veterans, which they then allocate to the medical centers in their regions. Both the networks and the medical centers have the discretion to prioritize the use of these funds for blind rehabilitation services or any other medical care. Some networks and medical centers have made outpatient blind rehabilitation training a priority and use these funds to provide outpatient services. For example, the network that covers Florida and Puerto Rico has used its allocations to fund seven BROS that are located throughout the region to provide outpatient blind rehabilitation services to legally blind veterans in their own homes or at VA facilities. Currently, the VIAB is working with VA's Office of Finance and Allocation Resource Center to develop an allocation amount that would better reflect the cost of providing blind rehabilitation services on an outpatient basis, which could in turn, provide an incentive for networks and medical centers to expand outpatient rehabilitation services for legally blind veterans. Many legally blind veterans have some vision, which frequently can be enhanced with optical low vision devices and training that includes learning to perform everyday activities such as cooking, reading prescription bottles, doing laundry, and paying bills. Since the 1940s, VA's preferred method of providing training to these veterans has been through inpatient services offered by BRCs. Because of its predisposition toward inpatient care, VA has developed little capacity to provide this care on an outpatient basis uniformly throughout the country. For the last 10 years, VA has been transitioning its overall health care system from a delivery model based primarily on inpatient care to one incorporating more outpatient care. Outpatient services for legally blind veterans, however, have lagged behind this trend. Recently, VA drafted a uniform standard of care policy that recommends a full range of blind rehabilitation services, emphasizing more outpatient care, including more services provided by VISOR, VICTORS, and BROS type programs. Making inpatient and outpatient blind rehabilitation training services available to meet the needs of legally blind veterans will help ensure that these veterans are provided with options to receive the right type of care, at the right time, in the right place. We are recommending that the Secretary of Veterans Affairs direct the Under Secretary for Health to issue, as soon as possible in fiscal year 2005, a uniform standard of care policy that ensures that a broad range of inpatient and outpatient blind rehabilitation services are more widely available to legally blind veterans. We provided a draft of this testimony to VA for comment. In oral comments, an official in VA's Office of the Deputy Under Secretary for Health informed us that VA concurred with our recommendation. Mr. Chairman, this concludes my prepared remarks. I will be glad to answer any questions you or other Members of the Committee may have. For further information regarding this testimony, please contact Cynthia A. Bascetta at (202) 512-7101. Michael T. Blair, Jr., Cherie Starck, Cynthia Forbes, and Janet Overton also contributed to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In fiscal year 2003, the Department of Veterans Affairs (VA) estimated that about 157,000 veterans were legally blind, and about 44,000 of these veterans were enrolled in VA health care. The Chairman of the Subcommittee on Health, House Veterans' Affairs Committee, and the Ranking Minority Member, Senate Veterans' Affairs Committee expressed concerns about VA's rehabilitation services for blind veterans. GAO reviewed (1) the availability of VA outpatient blind rehabilitation services, (2) whether legally blind veterans benefit from VA and non-VA outpatient services, and (3) what factors affect VA's ability to increase veterans' access to blind rehabilitation outpatient services. GAO reviewed VA's blind rehabilitation policies; interviewed officials from VA, the Blinded Veterans Association, state and private nonprofit agencies, and visited five Blind Rehabilitation Centers (BRC). VA provides three types of blind rehabilitation outpatient training services. These services, which are available at a small number of VA locations, range from short-term programs provided in VA facilities to services provided in the veteran's own home. They are Visual Impairment Services Outpatient Rehabilitation, Visual Impairment Center to Optimize Remaining Sight, and Blind Rehabilitation Outpatient Specialists. VA reported to GAO that some legally blind veterans could benefit from increased access to outpatient blind rehabilitation services. When VA reviewed all of the veterans who, as of March 31, 2004, were on the waiting list for admission to the five BRCs GAO visited, VA officials reported that 315 out of 1,501 of them, or 21 percent, could potentially be better served through access to outpatient blind rehabilitation services, if such services were available. GAO also identified two factors that may affect the expansion of VA's outpatient blind rehabilitation services. The first involves VA's longstanding position that training for legally blind veterans is best provided in a comprehensive inpatient setting. The second reported factor is VA's method of allocating funds for medical care. VA is currently working to develop an allocation amount that would better reflect the cost of providing blind rehabilitation services on an outpatient basis.

Participation in adaptive sports--sports that have been specifically adapted or created for persons with disabilities--has been recognized by experts as an important means of rehabilitation for people with physical and other disabilities, including veterans and members of the armed services. In 2008, federal law authorized VA to establish a grant program to fund adaptive sports for veterans and members of the armed services with disabilities. First operated using fiscal year 2010 funds, the program is authorized to support activities that will facilitate, encourage, and sustain participation in adaptive sports activities. Under the program, grants are made to qualifying organizations, referred to in the law as eligible entities, that will plan, develop, manage and implement programs to provide adaptive sports opportunities. To be eligible for a grant, an organization must be a non-federal entity with significant experience in managing a large-scale adaptive sports program. Such experience must be with programs that are either (1) affiliated with a National Paralympic Committee or a National Governing Body authorized to provide Paralympic sports, (2) an adaptive sports program of a National Governing Body that meets certain other requirements, or (3) an adaptive sports program in which at least 50 persons with disabilities participate or in which the participants with disabilities reside in at least five different congressional districts. Since fiscal year 2010, VA has allocated $8 million per year for the program. During the program's first four fiscal years--2010 through 2013--the USOC served an intermediary role in program management, receiving grant funds from VA and sub-granting them to organizations that provided adaptive sports opportunities and events. In 2012, we reported on the program's actual or planned activities in fiscal years 2010 to 2012, when USOC was involved. At that time, we found several shortcomings in program reporting and oversight practices. For example, we found that expenditure reporting practices for grantees were not consistent with federal internal control standards, and that VA was not performing on-site or remote monitoring to verify how funds were being used. In addition, we reported that in fiscal year 2011 $3.1 million of the $7.5 million annually provided by VA--about 40 percent--was absorbed by USOC for its operations, personnel, and administrative costs. We made several recommendations aimed at improving grantee reporting and encouraged VA to review implementation of USOC's monitoring plan. VA's implementation of the program substantially addresses these recommendations. As appropriate, we refer to these recommendations and related VA actions to address them later in this report. In December 2013, the program was reauthorized with a number of changes. The reauthorization eliminated USOC's role and instead provides that VA can award grants to eligible entities. In addition, the law placed specific limits on grantees' use of grant funds for administrative and personnel costs. For grants supporting adaptive sports opportunities taking place during fiscal year 2015, grantees can allocate no more than 7.5 percent to such costs; in fiscal year 2016 and thereafter, grantees will be limited to 5 percent. Law and regulation include other requirements for VA and grantees. For example, the adaptive sports program's authorizing statute and regulations outline a number of criteria that guide grant application review and selection, including requirements that applicants clearly state the sports activities to be provided, clearly define program objectives, and describe the adequacy of their program management structure. In addition, applications must include detailed descriptions of any partnerships and the grant funds that will be provided to any partners; the anticipated personnel, travel, and administrative costs paid for with grant funding; and the performance metrics to be used to evaluate the effectiveness of the activities carried out with grant funds. VA grant programs are also subject to government-wide grants management requirements. In its first two years of awarding grants, VA has awarded grants near the end of the fiscal year for use by grantees to support activities to be carried out in the following fiscal year. For example, organizations that were awarded grants in fiscal year 2014 have used fiscal year 2014 funds to support adaptive sports activities during fiscal year 2015. Similarly, grantees will use grants awarded in fiscal year 2015 to support adaptive sports activities that will occur primarily during fiscal year 2016. Except where specifically noted, this report refers only to activities and events pertaining to grants awarded in fiscal year 2014. In fiscal year 2014, the first year VA was responsible for selecting eligible entities to receive grants under the adaptive sports grant program, VA officials reported challenges because of tight time frames to obtain and review grant applications and the lack of a standard application form tailored for the adaptive sports grant program. (See fig. 1 for a timeline of events.) Proposed program based in facts, good reasoning, sound judgment (20 points) Considerations: Likelihood of success in aiding rehabilitation; appropriateness of funding requested; measurability of objectives; benefits for disabled veterans. low risk and high potential return. For example, it sought to ensure that proposed activities were occurring in areas with a large population of veterans with disabilities. In some cases, some aspects of a proposal were accepted and others rejected to make the proposed grant amount smaller. At the end of this process, VA selected 69 applications to which the $8 million allocated for the program in fiscal year 2014 was awarded. Sufficiency of management structure (20 points) Considerations: Sufficient experience in providing activity; certification of key personnel; evidence of community outreach; clear description of infrastructure to support planned activities. Geographic coverage (15 points) Considerations: Cost-effective filling of adaptive sports needs in area; appropriate for region and potential participants. Conformance with VA program goals and objectives (15 points) Considerations: Proposed activities advance program goals, fall within spectrum of adaptive sports, and have positive impacts. Strength of program concept and objectives (10 points) Considerations: Concepts clearly linked to objectives; likely to benefit health of disabled veterans. VA officials told us that completing all tasks necessary to award the grants before the end of fiscal year 2014 was very challenging--in part because of the limited time frame and because managing the solicitation and selection of grant applicants was a new experience for the responsible VA unit. However, VA officials explained that the alternative would have been that no program activities would have been funded with fiscal year 2014 dollars. Officials told us that developing and publishing the interim final rule to govern the program within about 6 months required considerable effort. VA officials also told us that development and authorization of an application form tailored to the program was not possible within the deadlines they faced in fiscal year 2014. Instead they opted to use a standard federal grant applications form--SF-424-- developed by OMB. Because law and regulation required the program's grant applications to include information that the SF-424 forms are not designed to include--such as a description of the roles of any partner organization--VA required narrative attachments to this standard application form. These narratives varied greatly in length, detail, and format. According to one VA official, they ranged from about 7 pages to about 60 pages. Financial capability and value for funding (10 points) As a result, according to VA officials, the review and approval process for fiscal year 2014 was very labor-intensive, and VA officials said staff had to engage in extensive communications and negotiations with applicants. For example, VA officials told us they conducted extensive negotiations with some applicants regarding the cost and scope of their proposals, with the aim of controlling costs and maximizing the benefits that program funds would provide to participants. In addition, VA officials said that, despite repeated VA communication, some applicants did not understand the limitation on administrative expenses. Under this limitation, for activities taking place during fiscal year 2015, grantees could allocate no more than 7.5 percent of the grant amount to administrative expenses, including any costs associated with employees other than those who directly provided coaching and training for participants. This misunderstanding may have been unintentionally reinforced by the budget categories used in the standard federal application form, which do not distinguish between these two types of personnel costs. For example, the standard form includes a line for personnel expenses, but does not distinguish between costs attributable to coaching and instruction, and other types of personnel costs. Federal law, VA regulation, and grant management principles dictate that a number of requirements be followed during the application and selection process. For example, the program statute and VA regulations require that an applicant submit a detailed description of its financial controls, including methods to track expenditure of grant funds, that a grantee observe the applicable percent limit on administrative expenses, and that any partnerships be described, including the amount of funds that will be made available to each partner. Despite VA's efforts to ensure completeness of grant applications, our review of 16 fiscal year 2014 grant files and other VA documentation found that in some cases aspects of grant applications were not well documented. For example, VA developed a standard checklist--the VA Administrative and Financial Review Questionnaire for Grantees-- for applicants to attest to various aspects of their administrative and financial policies and procedures. While this checklist was not required, VA officials told us that they treated the satisfactory completion of this form as sufficient evidence that the grantee could adequately safeguard and account for grant funds. However, 3 of 16 grant files we reviewed contained neither this form nor any other documentation of the administrative and financial capabilities of the grantee. The forms of 3 others indicated that these grantees lacked certain administrative and financial policies and procedures. For example, one grantee indicated on its form that it did not have a written accounting manual or written policies and procedures for managing finances. Other aspects of some grantee applications were also limited. For example, 7 of the 16 grant applications we reviewed lacked clear documentation that the 7.5 percent limit on administrative expenses had been observed in proposed budgets. Similarly, we found that in 3 cases, full documentation of intended grantee partnerships was not clear. For example, one grantee's application narrative referred to partners but did not specify the role of the partner organizations. As discussed in the next subsection, VA subsequently took action to keep instances of such documentation issues from recurring in future grant application and award processes. The fiscal year 2015 application process differed in significant ways from the fiscal year 2014 process. Importantly, VA developed a new application form tailored to the adaptive sports grant program. As summarized in table 1, our review indicates that this new form addresses the review difficulties and documentation limitations the program experienced in fiscal year 2014. For example, whereas the fiscal year 2014 application form did not require applicants to distinguish between the two types of personnel costs so as to meet the limit on total administrative costs, the new form does. Similarly, the new form requires that applicants explicitly identify partner organizations, including their locations and roles. In addition to the new form, other aspects of the fiscal year 2015 application process increased the likelihood that VA would receive more complete application packages and conduct a more efficient review. While applicants had 5 weeks to prepare and submit grant applications after publication of the Notice of Funding Availability in fiscal year 2014, in fiscal year 2015 they had 9 weeks. In fiscal year 2015 VA also required applicants to submit the Administrative and Financial Review Questionnaire, which was optional in fiscal year 2014 and which inquires about an applicant's administrative and financial policies, procedures, accounting, and management of grants. Because VA was reviewing fiscal year 2015 grant applications at the time we were completing our audit work, we did not review the applications or accompanying documentation and cannot independently assess their quality compared to those submitted in fiscal year 2014. However, VA officials told us in July 2015 that the new application resulted in a much improved and more efficient application and review process. Specifically, the application form instructs applicants to provide required information or leave a visible blank, and so VA officials noted that the fiscal year 2015 applications have been more consistently complete and the rate of rejection of incomplete applications much lower. Also, they said VA's review has been much less laborious in fiscal year 2015. Finally, according to VA, the new form facilitated a more comprehensive approach to comparing proposed budgets among the grant applications. VA's approach to monitoring grantees, as outlined in VA grants management policy and an agency memorandum on monitoring techniques, includes regular grantee reporting, supplemented with monitoring through detailed site visits and desk audits of selected grantees. This approach is consistent with the Uniform Guidance, and is intended to help ensure that grantees are providing adaptive sports opportunities to veterans and service members, according to the terms of their grant agreements with VA. It is also intended to help ensure that VA grant funds are being managed according to federal requirements, as reflected in the grant agreements. In addition, grantee monitoring can provide VA with useful information to measure the grant program's performance and for reporting to the Congress and the public. VA requires that all grantees submit quarterly and annual reports. VA reviews these reports to ensure that grantees are operating according to the terms of their grant agreements. While only annual reports are required under the program's statute, VA requires grantees to report on performance quarterly because, according to VA officials, this helps to provide for more frequent monitoring of grantees. To ensure that grantees' quarterly reports include consistent information in accordance with statutory and regulatory requirements, VA created a standard quarterly report template, adapted from a USOC template. As summarized in table 2, VA's quarterly report template contains data required from grantees under VA's program regulations. For each grant, VA customized the template to show the activities the grantee agreed to provide; and a budget showing the amount awarded, broken out into several categories. According to VA officials, they identified the activities and budget amounts by reviewing each grantee's application. Grantees are expected to submit an updated report each quarter to VA. The quarterly report format is consistent with GAO's 2012 recommendations, in that it (1) requires reporting of the expenditure of VA grant program funds, excluding funds from other sources; and (2) is formatted to provide consistent and non-duplicative reporting of activities and numbers of participants. Table 2 summarizes how VA translated the information required of grantees into the quarterly report format. As indicated in table 2, VA's quarterly report template did not require grantees to provide all of the information required by program regulations. For example, VA program regulations require grantees to include in their reports detailed records of the time involved in providing adaptive sports activities through direct personal interaction with adaptive sports participants, such as coaching or instruction, versus time spent on other adaptive sports activities. However, during fiscal year 2015, VA did not require grantees to add this information to the quarterly reports. We pointed out this omission to VA staff, and in August 2015, they provided a draft revised quarterly report format, where grantees are to provide information on time spent providing direct instruction to participants. A VA official indicated that they intended to further revise the template so that it also required grantees to report staff time spent on matters other than direct personal interaction with participants, as required by regulations. They expected to complete the template revision before the start of fiscal year 2016. VA's program regulations also require grantees to identify the locations of their adaptive sports activities. However, VA did not provide a specific place for grantees to report the locations of their activities. VA has revised its quarterly report format to have grantees identify locations of their activities. Improved information from grantees could help VA assess the extent of geographic coverage of adaptive sports opportunities. In addition to quarterly reporting by all grantees, VA's grantee monitoring approach calls for monitoring of selected grantees through conducting site visits and desk audits, although the reporting format for the latter has not been established. A site visit involves a visit to a grantee's offices to review financial and other records, a visit to a grantee's adaptive sports event, or both. The reviewing official is to assess the extent to which the grantee is providing activities according to the grant agreement. Also, the reviewer is to assess the soundness of the grantee's financial management of VA grant funds, as well as the grantee's financial controls. To record the results of the assessments for use by VA program officials, the reviewer prepares a site visit report using a standard VA format. A desk audit (also known as a remote audit), according to VA officials, involves asking the grantee to provide documentation to support an assessment of grantee financial management issues that might be of concern. VA may, for example, ask to see receipts for equipment or transportation ticket purchases or ask for documentation of how the calculation of staff days spent on providing services is made. A VA official stated that desk audits will likely be tailored to the circumstances as appropriate. For both site visits and desk audits, VA employs a selective monitoring approach--based on risk--to help focus its limited resources on grantees at highest risk of failing to perform or mismanaging funds. Such an approach is consistent with our prior work, which found that risk-based monitoring can help agencies identify grantees that need additional attention; for example, using limited resources to visit higher-risk grantees. According to VA officials, one criterion for assessing risk is the awarded amount. Officials said that they tend to select grantees receiving less funding for desk audits, and grantees receiving more funding for site visits, because those receiving larger grants are at risk of losing more dollars in case of financial mismanagement. VA also said that they use information from application reviews, such as assessments of financial controls, and grantees' previous experience providing adaptive sports programs, in deciding whether a desk audit or site visit is warranted. Another consideration is the scope of a grantee's event. A VA official said that a site visit may be scheduled to a multi-sport event, such as one of the regional Valor Games, where a grantee may be collaborating with other adaptive sports providers, including other VA grantees. To economize on monitoring costs, VA uses geographic considerations as well. For example, VA officials said that a site visit may be planned if it would cover several grantees headquartered in the same area. Although VA officials provided us their policy on monitoring of grant funded activities, for most of fiscal year 2015 they did not have a written monitoring plan. Best practices in grants management suggest that risk- based monitoring helps agencies ensure adequate grantee financial management and performance. Also, planning is part of an agency's internal control system, which helps program managers achieve desired results through effective stewardship of public resources, such as grant funds. For example, by documenting and using written criteria for determining which grantees need closer monitoring, VA could be better positioned to help prevent mismanagement of funds and poor program performance. We discussed this issue with VA staff earlier in our review, and in August 2015, they provided us with their draft monitoring plan. According to a VA official, VA expects to complete this plan early in fiscal year 2016. VA's draft plan describes a monitoring approach consistent with VA grants management policy. However, the draft plan lacks certain elements, such as information on the number and frequency of site visits and desk audits. Promising practices in ensuring adequate grantee financial systems and proper use of grant funds include an agency reviewing a target number of grantees each year. For example, one agency requires reviews of 10 percent of all of its grantees each year as a mechanism to enhance grantee accountability. A grantee monitoring plan that addresses the number and frequency of reviews throughout the year can help VA ensure that it is monitoring grantees on an ongoing basis, to prevent, and promptly detect, misuse of grant funds. At the time of our review, VA was implementing two main methods of its monitoring approach--quarterly grantee reporting and VA site visits. Almost all of the grantees whose files we reviewed submitted their quarterly reports on time. For 13 of the 16 grants, the grantees submitted their first quarter fiscal year 2015 reports on time, and all submitted their second quarter reports on time. We found that, in general, the grantees provided the information VA requested. Also, in our review of the selected grantee files, we found evidence that VA reviewed the quarterly reports to ensure that grantees were operating according to the terms of their grant agreements with VA. For 6 of the first-quarter and 12 of the second-quarter reports we reviewed, we found that VA identified issues for follow up, and requested additional information from grantees. Table 3 describes examples of the types of issues VA identified in the quarterly reports we reviewed. We reviewed reports on the results of 8 VA site visits, covering 9 of its 69 grants, conducted from November 2014 through June 2015. Six of the 8 site visits occurred at grantees' adaptive sports events; the remaining 2 visits occurred at grantees' headquarters. As summarized in table 4, the reports identified several types of issues, although none of the issues reflected grantee noncompliance. In each of the 8 reports we reviewed, VA officials provided notes on how grantees operated their events and the financial management of VA grant funds. Several of the reports also made suggestions for improvements in these areas. Through July 2015, VA officials told us that the agency had not conducted any desk audits of fiscal year 2014 grantees. VA officials explained that at the start of fiscal year 2015, desk audits were intended to form a portion of the monitoring strategy, but they have been deferred due primarily to a large workload. In August 2015, a VA official stated that they had initiated a desk audit of one grantee. The 69 adaptive sports grants awarded by VA in fiscal year 2014 supported a wide range of activities, with cycling, boating, snow skiing, and archery among the most frequent (see fig. 2). Some grants were focused on activities in a single location and/or sport, while others planned to support a variety of sports events. For example, one grant targeted recreational rowing for veterans with disabilities in five locations across the country, while another grant aimed to provide a variety of physical fitness activities in one state. Another grantee committed to provide more than seven different sports for paralyzed veterans in more than 30 locations across the country. The activities supported by these 69 grants also targeted athletes with a range of disabilities (see table 5). A sport or an adaptation may be aimed at participants with a specific type of disability, or may be suitable for participants with a range of disabilities. To support these activities, grantees planned to spend grant funds in various budget categories. The largest categories for the 69 fiscal year 2014 grants were travel, including transportation, lodging, and subsistence for athletes, coaches, and other officials involved in meeting program objectives; operations, including such expenses as facility rentals and ski lift tickets; and supplies, including purchase of adaptive bicycles, watercraft, and bows and arrows (see fig. 3). Importantly, a total of about $459,000--about 5.7 percent of the total $8 million awarded-- was budgeted as administrative costs. This included both normal administrative costs as well as personnel costs associated with grant activities but not attributable to time spent coaching or training participants. The amount was below the 7.5 percent statutory limit for activities carried out in fiscal year 2015. Participants, grantee officials, and coaches we interviewed generally said that adaptive sports activities are beneficial to veterans and service members in multiple ways (see table 6.) These benefits include improved family and social relationships, emotional health, levels of independence and life skills, and physical well-being. Several interviewees--including participants and grantee officials--said adaptive sports can have a transformative effect on a veteran with disabilities. One official said he sees disabled veterans who have been inactive for many years participate in adaptive sports, resulting in a significant life change. Another official said some veterans with disabilities get accustomed to being taken care of, which can amplify their disabilities. He recalled that at one sports clinic funded by the grant program, a blind veteran asked to be guided to another part of the sports facility and, after some good- natured ribbing by his teammates, was convinced he could navigate on his own. Several experts we spoke with stressed the importance of sustained involvement in adaptive sports as the key to long-term benefits. According to one adaptive sports expert familiar with the grant program, the important thing is whether or not the event helps fuel a persistent participation in the sport and thereby contributes to a balanced and active life. One of the grantees we visited considered the opportunity that applicants would have to continue their participation in a sport when selecting participants. A grantee official said that in reviewing applications from veterans and service members wishing to join an event, they consider the proximity of the applicant to ongoing programs offering the same adaptive sport. The aim is to ensure that veterans participating in the grant-funded event also stay involved in the sport for their ongoing well-being and health. VA officials agreed with this aim and said in the future they may consider grant applications, for example, that propose purchasing adaptive sports supplies and equipment to help benefit veterans over a number of years. Some grantee officials who we interviewed spoke of a high incidence of veteran no-shows at adaptive sports activities and events as an impediment to program success. At one of our site visits--a sports clinic in which 7 of 10 registered participants attended--an official said some veterans may cancel on short notice, which deprives other interested veterans from participating. In addition, the official was concerned that excessive no-shows may mean there are not enough athletes to form teams or hold an effective practice session. Another official said considerable time and money has been lost when veterans register but do not participate. The official said some no-shows are understandable, such as when a veteran's plans are affected by a medical condition. Nonetheless, adaptive sports are about more than athletics and are aimed at strengthening "mind and heart" of participants as well, the official said. Some veterans can be victims of learned helplessness after they return from service, the official said, and goal-setting and an insistence on accountability can counter this. Another official said that while non- attendance of registered athletes at their high-profile summer sports camp is not a problem, it can be an issue at less prominent events, such as weeknight archery training sessions. Some grantees noted that asking participants to have a financial stake in an event could encourage attendance. For example, one official suggested that registrants pay a refundable deposit of perhaps $250 so that they have some "skin in the game" and event sponsors have greater assurance of their attendance. Another grantee official explained that in her organization's experience, requiring an up-front financial commitment is effective. At a 2013 multi-sport event, about 35 of the registered athletes did not attend, resulting in a huge waste of federal funds and missed opportunities for other veterans, she said. To combat this, the organization required a credit card number from registrants for the 2014 event, and informed them they would be charged the cost of one-night's lodging if they failed to attend without prior notice. Under this policy, she said, 82 of the 84 registrants--98 percent--took part. Another grantee official said that while requesting a deposit of some kind might have merit, it could also cause cash flow difficulties for some veterans. He said some participants in weeknight training sessions have a hard time paying public transit fare, so the additional cost of a refundable deposit might be a barrier to participation. VA officials confirmed that no-shows are a problem. They explained that while its regulations require that adaptive sports events supported by the grants be free of charge for eligible veterans, having strategies to incentivize attendance for those who register--such as charging for a first night's hotel expenses--are permissible. They also said that they have provided informal guidance to some fiscal year 2014 grant recipients on ways to reduce no-show rates--typically this information has been shared with grantees sponsoring large scale events that involve travel. However, VA has not systematically gathered and disseminated permissible techniques for reducing no-show rates to all of its grantees. According to federal internal control standards, program management is responsible for identifying, analyzing, and responding to risks it faces in achieving program objectives. A systematic effort to gather and disseminate techniques to address the no-show issue would be consistent with this requirement. In fiscal year 2014, VA assumed responsibility for selecting and overseeing grantees under the adaptive sports grant program and, despite challenges, awarded 69 grants supporting a wide variety of adaptive sports opportunities for veterans and members of the armed services with disabilities. Our review indicates that through the first half of fiscal year 2015, grantees were substantially complying with reporting requirements and that site visits to selected grantees have identified opportunities for improvement. Further, VA is amending its quarterly reporting template so that it will require a report of staff time spent on direct personal interaction with participants, and time spent on other matters, as required by program regulations. However, VA's draft monitoring plan does not include a regular schedule for site visits or desk audits, which risks the possibility that none will be performed in some years, or that they will be performed very late in the year. Promising practices in ensuring adequate grantee financial systems and proper use of grant funds include review of a certain number of grantees each year, and irregular scheduling risks the possibility that mismanagement or misuse of grant funds will not be promptly detected. Finally, a significant no-show factor means that program dollars may not be used to their fullest potential. VA officials are aware of this issue, and have taken some steps to address it. However, they have not systematically gathered or disseminated techniques to reduce the no- show rate. Further attention to this matter could better enable VA and grantees to serve as many eligible veterans as there are slots available in funded activities. To help ensure the best use of the VA Adaptive Sports Grant program funds, we recommend the Secretary of Veterans Affairs direct the Undersecretary for Public and Intergovernmental Affairs to take the following two actions: Revise the draft monitoring plan to include guidance on the number and frequency of annual site visits and desk audits. Systematically gather and disseminate, to all its grantees, techniques that can reduce the no-show rate at funded events. We provided a draft of this report to the Department of Veterans Affairs for review. We received formal written comments, which are reproduced in appendix II. VA concurred with our conclusions and both of our recommendations. With regard to the first recommendation, VA indicated that it had established a requirement that a minimum of 10 percent of grantees would be subject to site visits and/or desk audits each fiscal year. Regarding the second recommendation, VA stated that the agency plans to systematically gather and disseminate techniques from a variety of sources to reduce no-show rates. VA also provided several technical comments which we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees, the Secretary of Veterans Affairs, the Assistant Secretary for Public and Intergovernmental Affairs, and other interested parties. In addition, this 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) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are found in appendix III. The objectives of this engagement were to determine (1) how the VA adaptive sports grant program selected grantees to provide adaptive sports programs and activities for veterans and service members with disabilities; (2) how VA monitors grantees' use of funds; and (3) what programs and activities have been supported with fiscal year 2014 funds, and what is known about how veterans and service members with disabilities have benefited from these programs and activities. Our work was limited to program grants using fiscal year 2014 funds, which supported grantee activities that were to take place in fiscal year 2015. Because our audit work began and ended during VA's first year of monitoring grantees, our work on VA's grantee monitoring generally covered the first two quarters of fiscal year 2015--October 2014 through March 2015. We addressed the first objective in several steps. To determine how VA reviewed and selected fiscal year 2014 adaptive sports grant applications, we reviewed key VA documents--including relevant federal laws, program regulations, VA's fiscal year 2014 Notice of Funding Availability, and application instructions--and interviewed VA officials. We also reviewed relevant grants management criteria, including VA's agency- wide grants management policies, and best grants management practices that had been identified by members of the Domestic Working Group. Second, to determine how VA staff followed program policies and key criteria, we reviewed the files of 16 fiscal year 2014 grants and examined available documents such as the grant applications and proposals, proposed budgets, evidence of grantees' financial and administrative capability, VA's scoring of grantee proposals, and the grant agreement. We selected grants based on type of organization, amount of grant funding and geography. We selected grants to ensure that we obtained eight from national, four from regional and four from community- based organizations. We selected all grants valued at $250,000 or more--seven from national organizations, three from regional organizations. We then selected the remaining six sample grants randomly--one from a national organization, one from a regional organization, and all four from community-based organizations. Also, we ensured that selected grantees included representation of different geographic regions. Although this sample size does not allow us to project to the universe of the 69 fiscal year 2014 grants, it is nonetheless a substantial sample, representing $3.7 million, or 46 percent, of the $8 million granted in fiscal year 2014. In addition to our review of the 2014 application process, we reviewed relevant documents and interviewed VA officials regarding changes to the grant application and review process in fiscal year 2015. To address the second objective, we interviewed VA officials, reviewed relevant VA policy documents and relevant grant oversight criteria, and reviewed selected VA oversight documentation. Specifically, we reviewed VA's standard quarterly report template to ensure it conformed to the reporting requirements contained in program regulations. We also reviewed the quarterly reports for the 16 grants selected as described in the preceding paragraph for the first two quarters of fiscal year 2015--the 3-month periods ending December 31, 2014 and March 31, 2015. We also identified issues that VA had raised with the quarterly reports and, in selected instances, followed up with VA on how its review comments were addressed. We also obtained and reviewed reports of 8 VA site visits that had been conducted by the end of June 2015. To address the third objective, we obtained data from VA on the types of sports events to be provided by each fiscal year 2014 grantee and interviewed VA program officials; USOC officials who had been involved in administering sub-grants prior to December 2013; and representatives of three veterans service organizations--Disabled American Veterans, The American Legion, and Veterans of Foreign Wars. We also obtained VA data on grantee budgets and proposed activities. We interviewed VA officials about this data and determined that it was sufficiently reliable for our purposes. To obtain further perspectives on the value of adaptive sports for veterans and service members, we attended three adaptive sports events funded through VA grants. We selected them in consultation with VA program officials. Specifically, we selected events that were occurring during our review and also considered regional diversity and travel considerations. The events selected, listed below, did not provide a representative sample of all VA-funded adaptive sports activities. February 2015 goalball camp conducted by the U.S. Association of Blind Athletes in Fort Wayne, Indiana; March 2015 archery camp conducted by the Rehabilitation Institute of Chicago, in Chicago, Illinois; and May 2015 multi-sport event conducted by Bridge II Sports in Chapel Hill and Durham, North Carolina. At each event, we interviewed event organizers, coaches and trainers and event participants; and observed the events. We also interviewed event organizers prior to or during their events. In addition to the contact named above, Brett Fallavollita (Assistant Director), Michael Hartnett (Analyst-in-Charge), Greg Whitney, and Nyree Ryder Tee made key contributions to this report. In addition, key support was provided by Susan Aschoff, James Bennett, Sheila McCoy, Walter Vance, and Craig Winslow.

VA's adaptive sports grant program distributes $8 million annually to organizations that provide sports activities for veterans and service members with disabilities. The U.S. Olympic Committee (USOC) played an intermediary role from fiscal year 2010, when the program was implemented, through 2013. USOC received funds from VA and subgranted them to selected grantees. VA is now responsible for selecting grantees and program administration. Congress included a provision in statute for GAO to review VA's program management. GAO reviewed (1) how VA selected grantees to provide activities for veterans and service members with disabilities; (2) how VA monitors grantees' use of funds; and (3) what programs and activities were supported with fiscal year 2014 funds, and what is known about its benefits. GAO reviewed a nongeneralizable sample of 16 of the 69 grant files accounting for about $3.7 million of the $8 million awarded in fiscal year 2014; and interviewed VA officials, as well as grantee officials and adaptive sports participants during site visits to adaptive sports events in three states, selected in part to ensure regional diversity. From December 2013 through September 2014, VA developed implementing regulations, announced availability of funding, and selected grantees--ultimately awarding 69 grants from a pool of 161 applications to receive funding under its adaptive sports grant program. VA selected grantees in three steps, including (1) eliminating non-qualifying applications, (2) scoring and ranking qualifying applications using nine criteria, such as strength of the proposed program concept, and (3) a final step that included, among other things, eliminating unnecessary costs from proposed budgets. VA officials said limited available time necessitated the use of a standard federal grant application form rather than one tailored for the program. Because the form did not include some information needed to assess applications--such as the roles of partner organizations--VA asked for narrative attachments. These attachments varied greatly in length and detail which VA officials said made their review quite labor intensive. In addition, some applications did not contain needed information. For example, 3 of the 16 grant files reviewed by GAO did not contain documentation of the grantee's financial management capabilities. VA customized its application form for fiscal year 2015, and VA officials said this led to a substantial improvement in the application process. VA developed a grant monitoring approach for fiscal year 2014 grants that relied on quarterly and annual reports from grantees (containing information on financial and sports activities), site visits, and remote auditing of selected grantees. In the sample of 16 grant files reviewed, GAO found grantees generally complied with VA's quarterly reporting requirements. VA has improved the quarterly report template so that it requests information on time spent on direct personal interaction with participants. Through June 2015, VA provided GAO with reports of 8 visits covering 9 of its 69 grants. However, VA did not initiate a remote audit until August 2015. The agency developed a draft grant monitoring plan in the fourth quarter of fiscal year 2015, but the plan does not specify the number or frequency of site visits and remote audits. This omission risks the possibility that none will be performed in some years, or performed very late in the year, thus missing an opportunity for prompt detection of the misuse of funds. The grants supported a variety of sports activities and afforded participant benefits such as socialization and improved personal independence, according to the participants, coaches, and grantee officials GAO interviewed. The 69 grantees in fiscal year 2014 planned activities that encompassed many different adaptive sports, with cycling, boating, and snow skiing among the most common. Overall, the allotment for administrative costs in grantees' budgets was about 5.7 percent of the total $8 million awarded in fiscal year 2014--below the statutory maximum of 7.5 percent. However, some grantee officials expressed concern about a significant no-show rate. VA officials confirmed that no-shows are a problem, and stated that they had shared information with some grantees about ways to reduce no-shows. However, they have not systematically gathered and disseminated such techniques to all grantees, which could promote higher attendance rates and maximum benefit of federal dollars. GAO recommends that VA (1) specify the number and frequency of annual site visits and remote audits, and (2) systematically identify and disseminate techniques for reducing no-shows. VA concurred with both recommendations.

Oversight of contracts--which can refer to contract administration functions, quality assurance surveillance, corrective action, property administration, and past performance evaluation--ultimately rests with the contracting officer, who has the responsibility for ensuring that contractors meet the requirements as set forth in the contract. Frequently, however, contracting officers are not located in the contingency area or at the installations where the services are being provided. As a result, contracting officers appoint contract monitors who are responsible for monitoring contractor performance. For some contracts, such as LOGCAP or theaterwide service contracts like the Afghan trucking contract or some Afghan security guard contracts, contracting officers may delegate contract oversight to the Defense Contract Management Agency (DCMA) to monitor contractor performance. In Afghanistan, DCMA teams include administrative contracting officers, and quality assurance representatives, who ensure that the contractors perform work to the standards written in the contracts and oversee the CORs assigned to DCMA-administered contracts. The DCMA team also includes property administrators and subject matter experts who advise the agency on technical issues such as food service, electrical engineering, and fire safety. DCMA does not administer construction contracts because according to the head of DCMA in Afghanistan it lacks the technical expertise to manage these types of contracts. Generally, construction contracts in Afghanistan are administered by organizations like the Army Corps of Engineers, or they may be administered by the contracting officer assisted by a COR. If DCMA is not delegated responsibility for administrative oversight of a contract, the contracting officer who awarded the contract is responsible for the administration and oversight of the contract. These contracting officers, such as those from the CENTCOM Contracting Command, appoint CORs or contracting officer's technical representatives to monitor contractor performance. CORs appointed by the CENTCOM contracting command and others are typically drawn from units receiving contractor- provided services. These individuals are not normally contracting specialists and serve as contract monitors as an additional duty. They cannot direct the contractor by making commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contract. Instead, they act as the eyes and ears of the contracting officer and serve as the liaison between the contractor, the contracting officer, and the unit receiving support or services. In Afghanistan, CORs who have been appointed as contracting officer's representatives for contracts administered by DCMA report their oversight results to DCMA personnel. For contracts not administered by DCMA, CORs provide oversight information to the contracting officer, who may be located in Afghanistan or outside the theater of operations. In addition to their oversight responsibilities, CORs have been tasked with other duties such as developing statements of work, developing requirements approval paperwork and preparing funding documents. DOD has added new training for CORs serving in contingencies, but some gaps in training remain and not all of the required training is being conducted or completed. In Afghanistan, much of the day-to-day surveillance of contracted projects is done by CORs. The Federal Acquisition Regulation (FAR) requires that quality assurance, such as surveillance, be performed at such times and places as necessary to determine that the goods or services conform to contract requirements. DOD guidance requires CORs be trained and assigned prior to award of a contract. DOD training is intended to familiarize the COR with the duties and responsibilities of contract oversight and management. Contracting organizations such as CENTCOM Contracting Command require that personnel nominated to be CORs complete specific online training courses, as well as locally developed training and contract-specific training, before they can serve as CORs. DOD has taken some actions to improve the capability of CORs to provide management and oversight of contracts in contingency operations such as Afghanistan. These actions include developing a new COR training course, with a focus on contingency operations, and developing a COR certification program. Additionally, DOD has begun to emphasize the need for qualified CORs in military doctrine and other guidance with the publication of Joint Publication 4-10, Operational Contract Support and the Defense Contingency Contracting Representatives Officers Handbook and memoranda issued by the Deputy Secretary of Defense. However, our analysis of DOD's COR training and interviews with CORs and contracting personnel from organizations like the regional contracting centers and the Defense Contract Management Agency indicated that some gaps and limitations continue to exist. According to personnel in Afghanistan, none of the required COR training provides enough specifics about contract management and oversight in Afghanistan. For example, the required training does not provide CORs with information regarding important issue areas like the Afghan First Program, which encourages an increased use of local personnel and vendors for goods and services as part of the U.S. counterinsurgency strategy, and working with private security contractors. Some CORs told us that they were unfamiliar with the challenges of working with Afghan contractors, and had believed that contracting with Afghan vendors would be similar to contracting with U.S vendors. However, some of the CORs and other contracting officials we interviewed said they found that providing oversight to Afghan contractors is more challenging than working with other vendors because Afghan vendors often did not meet the time lines established by the contract, did not provide the quality products and the services the units had anticipated, and did not necessarily have a working knowledge of English. For example, one COR told us during our visit in February 2011, that the unit was still waiting for barriers that they had contracted for in May 2010. While some of the barriers had been delivered, the unit had not received all of the barriers they required even though the contract delivery date had passed. Other CORs and contracting officials and contract management officials described similar situations where services were not provided as anticipated or not provided at all. As a result, items such as portable toilets, barriers, gates, water, and other items or services were not available at some locations when needed, raising concerns about security, readiness, and morale. Officials we spoke with noted similar problems with construction contracts awarded to Afghan contractors. For example, according to another COR, an Afghan contractor was awarded a $70,000 contract to build a latrine, shower, and shave unit. However, when the contractor was unable to satisfactorily complete the project, another contract was awarded for approximately $130,000 to bring the unit to usable condition. Similarly contracting officials provided documentation of other construction problems including, a latrine or shower facility built without drains, and a facility constructed in the wrong location, and facilities that were poorly constructed. Because of the nature and sensitivity of security contracts, CORs for private security contractor contracts have unique responsibilities. For example, CORs are responsible for compiling a monthly weapon's discharge report and for ensuring contractor adherence to contractual obligations on topics such as civilian arming requirements, personnel reporting systems, property accountability and badging. According to a senior military officer with U.S. Forces Afghanistan's private security contractor taskforce, because of gaps in training, CORs do not always understand the full scope of their responsibilities and so do not always ensure that a contractor is meeting all contract requirements. He noted that CORs do not always understand that they have the responsibility to ensure that the terms of the contract are met and therefore do not bring contractors' performance issues to the contracting officer's attention for resolution. As a result, DOD may pay contractors for poor performance and installations may not receive the level of security contracted. Further, we found that the training programs do not provide enough information on preparing statements of work or preparing documentation for acquisition review boards--two responsibilities that CORs are routinely tasked with. The Defense Contingency COR Handbook describes statements of work as specifying the basic top-level objectives of the acquisition as well as the detailed requirements of the government. The statement of work may provide the contractor with 'how to" instructions to accomplish the required effort, and forms part of the basis for successful performance by the contractor. Well-written statements of work are needed to ensure that units get the services and goods needed in the required time frame. CORs we spoke to highlight the problems they encountered when preparing statements of work. For example, several CORs told us of instances when statements of work needed to be rewritten because the original statements of work did not include all required contractor actions, or because they included incorrect requirements. Military officials responsible for reviewing and approving requests for contract support told us that poorly written statements of work are a principal reason why units do not receive the contract support they require. In 2000 and 2004, we reported that poorly written statements of work can result in increased costs and in contractors providing services that do not meet the requirements of the customer. According to DOD, the acquisition review board--known in Afghanistan as the Joint Acquisition Review Board--reviews and recommends approval or disapproval of proposed acquisitions to ensure efficiency and cost effectiveness and so it is important that CORs understand and are able to complete the required documentation in order to obtain needed goods and services. Furthermore, in addition to required on-line training, CENTCOM Contracting Command guidance requires that contracting officers discuss with CORs their specific contract requirements and responsibilities after they have been nominated and before they have begun their duties. However, contracting officers we interviewed at regional contracting centers in Afghanistan said they are frequently unable to provide the required contract-specific training for CORs because they are busy awarding contracts. Without this follow-on training on the specific contract, the COR may not have a clear understanding of how to perform contract oversight or the full scope of their responsibilities. In contrast, DCMA is able to provide specific contract training and mentoring to its CORs because DCMA has quality assurance personnel who have been tasked with providing COR training and assistance. Although CORs are selected from a group of candidates who have completed the basic COR training, their technical expertise, or lack thereof is not always taken into consideration when they are appointed to oversee contracts. The Defense Contingency COR handbook indicates that CORs are responsible for determining whether products delivered or services rendered by the contractor conform to the requirements for the service or commodity covered under the contract. The COR handbook notes that personnel nominated as CORs should have expertise related to the requirements covered by the contract, and suggests that commanders should consider the technical qualifications and experience of an individual when nominating a COR. In addition, the CENTCOM Contracting Command requires that commanders identify the nominee's qualifying experience. However, these requirements are not always taken into consideration when CORs are selected to oversee certain contracts. According to CORs and other personnel we interviewed in Afghanistan, CORs frequently lack the required technical skills to monitor contractor performance. For example, military personnel have been appointed to oversee construction contracts without the necessary engineering or construction experience, in part because their units lack personnel with those technical skills. While DCMA has subject matter experts in key areas such as fire safety available for CORs needing technical assistance, CORs for contracts written by the CENTCOM Contracting Command have no subject matter experts to turn to for assistance, particularly in the construction trades. As a result, according to officials there have been newly constructed buildings used by both U.S. and Afghan troops that had to be repaired or rebuilt before being used because the CORs providing the oversight were not able to adequately ensure proper construction. According to personnel we interviewed, this resulted in a waste of money as well as lower morale due to substandard facilities; and in an increased risk to bases and installations because required infrastructure such as guard towers, fire stations, and gates were lacking. Contracting officials from one regional contracting center told us that guard towers at a forward operating base were so poorly constructed that they were unsafe to occupy; they were subsequently torn down and reconstructed. According to a contracting officer, it is not uncommon for CORs to accept a portion of the contractor's work only to find, at the project's completion, that the construction was substandard. Similarly, officials told us that before the LOGCAP program will accept responsibility for maintenance of a facility not constructed by the LOGCAP contractor, the LOGCAP contractors are often required to repair or replace wiring or plumbing in buildings constructed by Afghan contractors to meet U.S. building codes. DOD continues to lacks a sufficient number of oversight personnel to oversee the numerous contracts and task orders used in Afghanistan. While there is no specific guidance on the number of contracts for which a COR can be responsible, the CENTCOM Contracting Command's standard operating procedures for COR nomination requires that memoranda for COR nominations, signed by the unit commander, contain a statement verifying that the COR will have sufficient time to complete assigned tasks. Similarly, the Defense Contingency Contracting Officer Representative Handbook states that the requiring unit must allow adequate resources (time, products, equipment, and opportunity) for the COR to perform his or her COR functions. However, we found that CORs do not always have the time needed to complete their oversight responsibilities. While available data do not enable us to determine the precise number of contracts that require CORs, in fiscal year 2010 CENTCOM Contracting Command awarded over 10,000 contracts. According to contracting officials and CORS we interviewed in Afghanistan, some CORs are responsible for providing oversight to multiple contracts in addition to their primary military duty. For example, one COR we interviewed was responsible for more than a dozen construction projects. According to the COR, it was impossible to be at each construction site during key phases of the project, such as the wiring installation or plumbing, because these phases were occurring almost simultaneously at different locations. Consequently, according to officials, construction was completed without sufficient government oversight, and problems were not always identified until the buildings were completed. This often resulted in significant rework, at a cost to the U.S. taxpayer. In addition, in some cases units did not assign enough CORs to provide oversight. For example, we were told at one unit that they did not have a sufficient number of CORs to provide proper oversight of dining facilities. Although the unit was able to provide one COR for each dining facility, the dining facilities operate 24 hours a day, and ideally, enough CORs would have been assigned to provide contract oversight 24 hours a day. Army guidance requires that supervisory staff for dining facilities (military food advisors, food program manager, CORs, and contractors operations) check food for sanitation and safety at dining facilities at every meal period. Without verification that food is prepared in a safe manner, the health of military personnel, DOD civilians, contractors, and others could be put at risk, with the potential to impact ongoing operations. An underlying cause for the oversight issues discussed above is DOD's inability to institutionalize operational contract support. Army officials stated that commanders, particularly those in combat units, still do not perceive contract management and oversight as warfighter tasks. As a result, units may not always use the tools available to help prepare for contract management operations in Afghanistan. For example, according to Army officials, personnel nominated as CORs are not always provided the opportunity to practice their COR roles during pre-deployment training events, despite Army guidance that requires the CORs to be exercised during these training events. Army CORs we interviewed in Afghanistan expressed their desire for more specific and in-depth training at their units' predeployment training events. In addition, we and others have made recommendations to provide operational contract support predeployment training for commanders and senior leaders and DOD agreed with our recommendations. However, little or no operational contract support training for these personnel is available prior to deployment. As a result, commanders do not always understand their units' roles and responsibilities to provide contract management and oversight. For example, some commanders and other personnel we interviewed questioned the idea that units should be responsible for contract oversight, and believe that contract oversight should be provided by other organizations. In response to continued congressional attention and concerns from DOD, USAID, and other agencies about actual and perceived corruption and its impact on U.S. and International Security Assistance Force activities in Afghanistan, several DOD and interagency (including USAID) efforts have been established to identify malign actors, encourage transparency, and prevent corruption. While our recent work has not directly addressed anti-corruption activities in Afghanistan, we can report that these efforts include the establishment of several interagency task forces. One of them is Task Force 2010, an interagency anticorruption task force that aims to provide commanders and civilian acquisition officials with an understanding of the flow of contract funds in Afghanistan in order to limit illicit and fraudulent access to those funds by criminal and insurgent groups. Another is the Afghan Threat Finance Cell, an interagency organization that aims to identify and disrupt the funding of criminal and insurgent organizations. In August 2010, DOD began to vet non-U.S. vendors in Afghanistan by establishing a vetting cell called the Vendor Vetting Reachback Cell (hereinafter referred to as the vetting cell). The purpose of this vetting process--which includes the examination of available background and intelligence information--is to reduce the possibility that insurgents or criminal groups could use U.S. contracting funds to finance their operations. The vetting cell is staffed by 18 contractor employees operating from CENTCOM headquarters and is supervised by DOD officials. The contract used to establish the vetting cell for Afghanistan was awarded in June 2010, and in August 2010 the cell began vetting non-U.S. vendors. Names of non-U.S. contractors who are seeking a contract award with DOD in Afghanistan are forwarded to the cell, and an initial assessment is made about the prospective vendor. Once an initial assessment is made by the cell about a non-U.S. vendor, a final determination is made by a DOD entity in Afghanistan as to whether to accept or reject the prospective vendor for the particular contract. However, some limitations exist in the vendor vetting process. According to the CENTCOM Contracting Command Acquisition Instruction, all awards of and options for contracts equal to or greater than $100,000 to all non-U.S. vendors in Afghanistan are subject to vetting by the vetting cell. Additionally, all information technology contracts in Afghanistan, regardless of dollar value, are subject to vetting. However, while the acquisition instruction does highly recommend that all vendors be submitted for vetting-which would include those with contracts under $100,000-it does not require that vendors with contracts below $100,000 be vetted. This presents a significant gap in the vetting requirements for non-U.S. vendors as nearly three-quarters of the new contracts awarded and options exercised for FY 2010 to non-U.S. vendors were valued at under $100,000. Additionally, currently, CENTCOM Contracting Command does not routinely vet subcontractor vendors, even though according to DOD officials, subcontractors do much of the work in Afghanistan. Also CENTCOM Contracting Command officials said that when the contract was established, it was with the intention of determining a non-U.S. vendor's eligibility to be awarded a contract in Afghanistan prior to award. However, according to CENTCOM Contracting Command officials, when they began submitting names to the vendor vetting cell in 2010, the focus was on vendors who had already received contracts in order to address immediate corruption and illicit funding concerns. CENTCOM Contracting Command has not yet to determined how many of the remaining non-U.S. vendors that have already been awarded contracts valued above $100,000 will be vetted in the future, and at the same time, the number of vendors awarded contracts prior to vetting continues to grow as contracts continue to be awarded in Afghanistan by CENTCOM Contracting Command during fiscal year 2011. This may mean that the number of non-U.S. vendors who have not been vetted will continue to grow and further delayed by the fact that CENTCOM Contracting Command has also not established a timeline for when it will begin vetting vendors prior to award, nor have they developed an estimated number of prospective vendors that it anticipates vetting in the remainder of the fiscal year. Furthermore, the command does not use a formalized risk based approach to prioritize vetting needs. Officials from CENTCOM Contracting Command told us that they considered factors such as the risk, complexity, and nature of the contract to prioritize the first tranche of non-U.S. vendors sent to the cell for vetting, but they have no documentation identifying these considerations as a process. To address these vendor vetting limitations in Afghanistan, in our June 2011 report we made several recommendations to DOD. These recommendations included that CENTCOM Contracting Command consider formalizing a risk-based approach to enable the department to identify and vet the highest-risk vendors--including those vendors with contracts below the $100,000 threshold--as well as subcontractors, and to work with the vendor vetting cell to clearly identify the resources and personnel needed to meet the demand for vendor vetting in Afghanistan, using a risk-based approach. DOD concurred with our recommendations and in their response provided additional clarification about the limitations that currently exist on its resources, including limitations on expanding its joint manning document and the current mandate to reduce staff at CENTCOM. In January 2011, in order to counter potential risks of U.S. funds being diverted to support criminal or insurgent activity, USAID created a process for vetting prospective non-U.S. contract and assistance recipients (i.e., implementing partners) in Afghanistan. This process is similar to the one it has used in the West Bank and Gaza since 2006. This process was formalized in USAID's May 2011 mission order, which established a vetting threshold of $150,000 and identified other risk factors, such as project location and type of contract or service being performed by the non-U.S. vendor or recipient. The mission order also established an Afghanistan Counter-Terrorism Team, which can review and adjust the risk factors as needed. USAID officials said that the agency's vendor vetting process was still in the early stages, and that it is expected to be an iterative implementation process of which aspects could change--such as the vetting threshold and the expansion of vetting to other non-U.S. partners. In our June 2011 report we recommended that USAID consider formalizing a risk-based approach that would enable it to identify and vet the highest-risk vendors and partners, including those with contracts below the $150,000 threshold. We also recommended that in order to promote interagency collaboration so as to better ensure that vendors potentially posing a risk to U.S. forces are vetted, DOD and USAID should consider developing formalized procedures, such as an interagency agreement or memorandum of agreement, to ensure the continuity of communication of vetting results and to support intelligence information, so that other contracting activities may be informed by those results. USAID concurred with our recommendations and noted that the agency has already begun to implement corrective measures to ensure conformity with the GAO recommendations and adherence to various statutes, regulations, and executive orders pertaining to terrorism. As of May 2011, the State Department (State) was not vetting vendors in Afghanistan. As we reported in June 2011, State officials told us that currently many of their contracts are awarded to U.S. prime contractors, and that they award relatively few contracts to non-U.S. vendors. Nonetheless, our analysis of contract data shows that State does work with many non-U.S. vendors in Afghanistan, and embassy officials in Kabul told us they do not do any vetting or background checks on the vendors other than for the security risks posed by individual personnel with physical access to the embassy property or personnel. State has endorsed the Afghan First policy, which will likely result in increased contracting with Afghan vendors in the future, which will in turn increase the need to have procedures in place to prevent funds from being diverted to terrorist or insurgent groups. Given this potential increase in local contracting, and without a way to consider--after specific vendors are known to be candidates--the risk posed by funding non-U.S. vendors to perform particular activities in Afghanistan, the department may increasingly expose itself to contracting with malign actors. To help ensure that State resources are not diverted to insurgent or criminal groups, we recommended that State assess the need and develop possible options for vetting non-U.S. vendors--for example, these could include leveraging existing vendor vetting processes, such as USAID's, or developing a unique process. State partially agreed with our recommendation, and in written comments noted that while it recognized the risk of U.S. funds under State's management being diverted to terrorists or their supporters, there were significant legal concerns related to contracting law, competition requirements, and the conflict between open competition and the use of classified databases to vet contractors and grantees that have required analysis and discussion. We recognize these concerns and encourage State to continue to address these various issues should they develop and implement a vetting process. Although DOD, USAID, and State likely utilize many of the same vendors in Afghanistan, we found and reported in June 2011 that the agencies have not developed a formalized process to share vendor vetting information. Currently, DOD and USAID officials in Afghanistan have established informal communication, such as biweekly meetings, ongoing correspondence, and mutual participation in working groups. Further, DOD and USAID officials said that their vetting efforts are integrally related and are complementary to the work of the various interagency task forces, such as Task Force 2010 and the Afghan Threat Finance Cell, and that their mutual participation in these task forces contributes to interagency information sharing in general and vetting results in particular. However, a formal arrangement for sharing information such as would be included in a standard operating procedure or memorandum of agreement between DOD and USAID has not been developed for vetting efforts. In addition, though the U.S. Embassy also participates in various interagency task forces, such as Task Force 2010, there is no ongoing information sharing of vendor vetting results, either ad hoc or formally. According to CENTCOM Contracting Command officials, the command is in the process of developing a standard operating procedure for sharing the vendor vetting results specifically with USAID, but this document has not yet been completed. To promote interagency collaboration so as to better ensure that non-U.S. vendors potentially posing a risk to U.S. forces are vetted, we recommended that DOD, USAID, and State consider developing formalized procedures, such as an interagency agreement or memorandum of agreement, to ensure the continuity of communication of vetting results and to support intelligence information, so that other contracting activities may be informed by those results. DOD and USAID both concurred with our recommendation, but State did not comment on it. Since the beginning of our work on operational contract support in 1997, we have made numerous recommendations to DOD to help improve the oversight and management of contractors used to support contingency operations. Specifically, we have made recommendations in the areas of developing guidance, planning for contractors in future operations, tracking contractor personnel, providing sufficient numbers of oversight personnel, and training non acquisition personnel including CORs and other key leaders such as unit commanders and senior staff. DOD has implemented some--but not all--of these recommendations. DOD has taken some actions to address or partially address some of our previous recommendations regarding operational contract support, such as establishing a focal point to lead the department's effort to improve contingency contractor management and oversight at deployed locations, issuing new guidance, incorporating operational contract support into professional military education, and beginning to assess its reliance on contractors. For instance, based on our work, in October 2006, the Deputy Under Secretary of Defense for Logistics and Materiel Readiness established the Office of the Assistant Deputy Under Secretary of Defense (Program Support) to act as a focal point for leading DOD's efforts to improve contingency contractor management and oversight at deployed locations. Among the office's accomplishments is the establishment of a community of practice for operational contract support comprising of subject matter experts from the Office of the Secretary of Defense, the Joint Staff, and the services. In March 2010, the office issued an Operational Contract Support Concept of Operations, and it has provided the geographic combatant commanders with operational contract support planners to assist them in meeting contract planning requirements. To provide additional assistance to deployed forces, the department and the Army introduced several handbooks and other guidance to improve contracting and contract management in deployed locations. For example in October 2008, the department issued Joint Publication 4-10, Operational Contract Support, which establishes doctrine and provides standardized guidance for, and information on, planning, conducting, and assessing operational contract support integration, contractor management functions, and contracting command and control organizational options in support of joint operations. Additionally, in 2003 we recommended that DOD develop training for commanders and other senior leaders who are deploying to contingencies and we recommended that CORs be trained prior to assuming their duties. DOD has partially implemented this recommendation; training is available for commanders and other senior leaders however these courses are not required prior to deployment. In 2006, we recommended that Operational Contract Support training be included in professional military education to ensure that military commanders and other senior leaders who may deploy to locations with contractor support have the knowledge and skills needed to effectively manage contractors. Both DOD and the Army have taken some actions to implement this recommendation. For example, the Army includes operational contract support topics in its intermediate leaders course and includes limited operational contract support familiarization in some but not all of its pre-command courses. DOD has established a program of instruction for use in senior leader professional military education but the instruction has yet to be incorporated in this level of professional military education. We have made several recommendations to improve contractor visibility in contingencies. While DOD, along with USAID and State, has implemented a system--the Synchronized Predeployment and Operational Tracker (SPOT)--to track information on its contractor personnel in Afghanistan and other countries, we have issued a series of reports that highlight shortcomings in the system's implementation. The shortcomings are due, in part, to varying interpretations of which contractor personnel should be entered into the system. As a result, the information SPOT does not present an accurate picture of the total number of contractor personnel in Afghanistan. In October 2009, we recommended that DOD, State, and USAID develop a plan, to among other matters, ensure consistent criteria for entering information into SPOT and improve its reporting capabilities to track statutorily required contracting data and meet agency data needs. The agencies did not agree with our recommendation and when we reviewed the system a year later, we found that many of the issues our recommendation was intended to address had not been resolved. We are currently evaluating the status of SPOT's implementations and the agencies' efforts to improve SPOT. DOD and the services have taken some important steps to institutionalize OCS--for example, by issuing joint doctrine, including some training in professional military education, and establishing a vetting cell to vet non- U.S. vendors in Afghanistan, to minimize the risk of criminal groups using contracts to fund their operations but DOD's efforts have not gone far enough. Our previous work has emphasized the need to institutionalize operational contract support within DOD and improved vetting processes for contractor personnel and vendors, as well as highlighting long- standing problems regarding oversight and management of contractors supporting deployed forces. Contract management, including contract oversight, remains on our high risk list in part because of DOD's challenges in managing contracts used to support deployed forces. Since 2004, we have identified the need for a sufficient number of trained oversight personnel, including CORs, as challenge to effective contract management and oversight. While the department has improved contract management and oversight by adding training requirements for CORs, the current system of using CORs to provide contract management and oversight still has significant weaknesses. As a result, contract oversight and management issues are resulting in a waste of money and raises concerns about security, readiness, and morale. The Secretary of Defense recently called for a change in culture related to operational contract support and directed the joint staff to identify the resources and changes in doctrine and policy necessary to facilitate and improve the execution of operational contract support. This reexamination of culture, policies, and resources along with implementing solutions to the contract oversight problems identified by us and others should help DOD address its longstanding issues oversight issues. Madam Chairman, Ranking Member Portman, and members of the Subcommittee this concludes my statement. I would be happy to answer any questions you may have at this time. For further information on this testimony, please contact William Solis at (202) 512-8365 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 are Carole Coffey, Assistant Director; Vincent Balloon, Natalya Barden, Tracy Burney, Carolynn Cavanaugh, Alfonso Garcia, Melissa Hermes, Christopher Miller, James Reynolds, Natasha Wilder and Sally Williamson. Michael Shaughnessy provided legal support, and Cheryl Weissman, Vernona Brevard, and Peter Anderson provided assistance in report preparation. 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 Departments of Defense (DOD) and State (State) and the United States Agency for International Development (USAID) have collectively obligated billions of dollars for contracts and assistance to support U.S. efforts in Afghanistan. The work of GAO and others has documented shortcomings in DOD's contract management and oversight, and its training of the non-acquisition workforce. Addressing these challenges can help DOD meet warfighter needs in a timely and costconscious manner; mitigate the risks of fraud, waste, and abuse; and minimize the operational risks associated with contractors. This testimony addresses the extent to which (1) DOD's Contracting Officer's Representatives (COR) are prepared for their roles and responsibilities and provide adequate contract oversight in Afghanistan; (2) DOD, State, and USAID vet non-U.S. firms for links to terrorist and insurgent groups in Afghanistan; and (3) DOD has implemented GAO's past recommendations. The testimony is based on GAO's recently published reports and testimonies on operational contract support, including a June 2011 report on vetting of non-U.S. vendors in Afghanistan, as well as providing preliminary observations as a result of ongoing audit work in Afghanistan. GAO's work included analyses of a wide range of agency documents, and interviews with defense officials including CORs, contracting officers, and contract management officials in the United States and Afghanistan. DOD has taken actions to better prepare CORs to conduct contract oversight and management in Afghanistan; however, CORs are not fully prepared for their roles and responsibilities to provide adequate oversight there. To improve the capability of CORs to provide contract management and oversight in contingencies, DOD has developed a new, contingency-focused COR training course, issued new guidance, and developed a COR certification program. Nonetheless, gaps in the training exist. For example, according to DOD personnel in Afghanistan, the required training does not provide CORs with enough specificity about contracting in Afghanistan, such as information about the Afghan First Program, which encourages an increased use of local goods and services, or working with private security contractors. Also, whether a COR has relevant technical expertise is not always considered prior to assigning an individual to oversee a contract, even though CORs have a significant role in determining if products or services provided by the contractor fulfill the contract's technical requirements. However, according to officials, some CORs appointed to oversee construction contracts have lacked necessary engineering or construction experience, in some cases resulting in newly constructed buildings that were to be used by U.S. or Afghan troops having to be repaired or rebuilt. According to CORs and commanders in Afghanistan, poor performance on construction contracts has resulted in money being wasted, substandard facilities, and an increased risk to bases. For example, contracting officials from one regional contracting center told GAO that construction of guard towers at a forward operating base was so poor that they were unsafe to occupy. DOD and USAID have both established processes to vet non-U.S. vendors in Afghanistan, but GAO has identified limitations; additionally, State has not yet developed a vendor vetting process. The purpose of DOD's vetting process begun in August 2010--which includes the examination of available background and intelligence information--is to reduce the possibility that insurgents or criminal groups could use U.S. contracting funds to finance their operations. Additionally, in January 2011 USAID also began to implement a process to vet prospective non-U.S. contract and assistance recipients (i.e., implementing partners) in Afghanistan. GAO made recommendations, such as to formalize their vetting processes, which, both agencies concurred with. For example, USAID signed a mission order in May 2011 codifying the details of its vetting process. As of May 2011, State had not developed a vendor vetting process for non-U.S. vendors in Afghanistan, though officials stated they are considering several options. GAO has made numerous recommendations in areas such as developing guidance, tracking contractor personnel, providing oversight personnel, and training, and DOD has made strides in addressing some of them. However, it has not fully implemented other previous recommendations, such as ensuring training for commanders and senior leaders and improvements to the contracting personnel tracking system in Afghanistan.

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss work we have done addressing management and program challenges at the Immigration and Naturalization Service (INS). These challenges have been related to INS' strategic planning process, organizational structure, communications and coordination, financial management, and program implementation. For the most part, our testimony is based on products that we have issued on these matters since 1991. Attached to my statement is a bibliography of this work. INS' mission involves carrying out two primary functions. One is an enforcement function that involves preventing aliens from entering the United States illegally and removing aliens who succeed in doing so. The other is a service function that involves providing services or benefits to facilitate entry, residence, employment, and naturalization of legal immigrants. To enable INS to better implement and enforce immigration laws, Congress significantly increased its resources during the past several years. For example, between fiscal years 1993 and 1998, the number of onboard staff at INS increased from about 19,000 to nearly 31,000. During the same period, INS' budget more than doubled from $1.5 billion in fiscal year 1993 to about $3.8 billion in fiscal year 1998. Funding increases have continued in fiscal year 1999 with Congress providing over $3.9 billion. Earlier this year, we reported on management challenges and program risks in the Justice Department. Most of the challenges and risks that we identified were in INS. However, we noted that, in carrying out its responsibilities, INS has to contend with issues of foreign policy (e.g., U.S. readiness to provide asylum to political refugees); domestic policy (e.g., the tension between the need for cheap labor that immigrants have historically met and the protection of employment and working standards for U.S. citizens); and intergovernmental relations (e.g., between the federal government, which sets policy on immigration, and state and local governments, which largely bear its costs and consequences). (3) communications and coordination; and (4) financial management processes. In 1991, we reported that INS lacked a strategic plan and that past priority management processes were not successful. We also stated that past efforts to implement agencywide planning systems lacked sustained top management support, managers were not held accountable for achieving goals and objectives, and priorities were not used in planning for decisionmaking. Three years later, INS developed and issued a strategic plan to better focus its attention on key mission and operational priorities. The plan identified eight major strategic priorities, including such challenges as facilitating compliance with immigration laws, deterring unlawful migration, and reengineering INS work processes. In fiscal year 1995, INS implemented a priorities management process intended to facilitate the achievement of the strategic priorities identified in the plan. Specific annual goals related to strategic priorities were identified for special management attention, including the establishment of objectives, time frames, and performance measures. In fiscal year 1996, to further focus management attention on the most important goals, INS ranked the annual goals according to their priority. By assigning senior INS managers specific responsibility for achieving the annual priority goals, INS intended to establish better organizational and individual accountability. In 1997, we said that these efforts appeared to be consistent with the intent of the Government Performance and Results Act. However, we also concluded that, while INS' initial steps in developing a strategic plan and management priorities had been positive, our past work at INS had indicated that, to be successful, such initiatives would require sustained management attention and commitment. INS' 33 district directors and 21 Border Patrol chiefs were supervised by a single senior INS headquarters manager. In 1994, with the appointment of a new Commissioner, INS implemented an organizational structure intended to remedy at least two problems with the 1991 structure. First, the Commissioner thought the agency's field performance was uneven and poorly coordinated. In particular, the headquarters operations office had an unrealistically large span of control because of its responsibility for overseeing the operations of 33 district offices and 21 Border Patrol sectors. Second, the Commissioner believed that program planning, review, and integration had suffered because the operations office was preoccupied with matters that should have been handled by field managers and therefore could not focus on program planning. To address these and other problems, the reorganization established Executive Associate Commissioner (EAC) positions for (1) policy and planning, (2) programs, (3) management, and (4) field operations. The EAC for Field Operations had overall responsibility for managing INS' operational field activities through three regional directors, who were delegated budget and personnel authority over INS' district directors and Border Patrol chiefs in their respective areas. In 1997, we reported that the reorganization had succeeded in shifting some management authority to officials closer to the field activities, and many INS managers that we interviewed perceived the reorganization as a positive step in providing oversight to the field units. However, the implementation of the headquarters reorganization also appeared to have created some uncertainty among INS managers and field staff about the relative roles and responsibilities of some of the EACs. This uncertainty had been amplified by internal questions about possible staffing imbalances among the offices. For example, we found that no analysis had been done to determine the appropriate number of staff needed for the office of programs, given the reassignment of some its new responsibilities to other offices. communications challenge involved uncertainty among INS managers about the roles and responsibilities of headquarters executives, which in turn caused uncertainty about proper channels of communication for obtaining policy guidance or implementing program initiatives. Headquarters' efforts to resolve concerns about roles, responsibilities, and communication processes were not successful. For example, there was still confusion among field managers regarding roles and responsibilities, and inconsistent versions of guidance on naturalization procedures were distributed to field offices. INS did not intend to issue written guidance on appropriate communication channels and coordination methods between offices until it obtained a decision on how the agency would be restructured. Lack of up-to-date policies and procedures had also contributed to INS' communications challenges. For example, at the time of our 1991 report, field manuals containing policies and procedures on how to implement immigration laws were out-of-date and had not been updated by the time of our 1997 report. As a result, INS employees were burdened with having to search for information on immigration laws or regulations in multiple sources, which sometimes resulted in their obtaining conflicting information. The lack of current manuals also led some field officers to create policy locally, thus compounding coordination difficulties. However, during the past 2 years, INS has published an administrative manual and established a timetable through January 2001 for issuing five field manuals. management systems. INS has taken action to address some of its financial management problems, including engaging a contractor to reconcile the fund balance differences with Treasury. With respect to INS' financial management systems, the auditor reported that the systems (1) were not integrated, resulting in significant delays and burdensome reconciliation efforts; (2) had significant internal control weaknesses--including computer control problems--affecting the accuracy and reliability of financial information; and (3) limited, rather than enhanced, effective decisionmaking. In 1991, we reported that INS' budget development process, which had evolved with weak controls over expenditures and revenues, significantly impeded INS management's ability to address program weaknesses. In addition, we said that INS did not have fiscal accountability over its resources. Its outdated accounting systems, weak internal controls, and lack of management emphasis on financial management had contributed to this situation. As we reported again in 1993 and more recently in 1997,INS' financial management systems' weaknesses made it difficult for the agency to monitor the status of its budget and to make sound budgetary decisions. For example, in March 1995, INS' budget office projected that the field offices would have about $115 million in surplus funds through the rest of the year. Upon subsequent input from INS' field offices, it turned out that the field offices would experience a $5 million shortfall for the remainder of the year. Earlier this year, concerned that INS would incur a budget shortfall, the House Appropriations Committee asked that we examine INS' fiscal condition for fiscal year 1999. Based on discussions with officials from INS, the Justice Department, and the Office of Management and Budget, and based on our analysis of INS budget documents, we concluded that INS was not experiencing an overall budget shortfall for fiscal year 1999.However, we noted that the hiring policy that INS followed in fiscal year 1998, and the reduced revenues from INS' Examinations Fee revenues, contributed to reduced discretionary funding in fiscal year 1999. Cohen Act of 1996, to ensure that the new system did not automate outmoded, inefficient business processes. Instead of developing and implementing a risk management plan, as we had recommended, INS tasked its contractor with helping to ensure that risks associated with implementation of the new system would be identified and necessary steps taken to mitigate them. According to INS, it had an urgent need to replace its financial management system, which was over 19 years old and did not have the functionality needed for INS to efficiently manage and account for its resources, and INS believed that this was a prudent way to proceed. In addition to the long-standing management challenges that we identified, program implementation issues at INS have been of continuing concern. These issues have been related to INS' efforts to (1) stem the flow of illegal aliens across the border, (2) identify and remove criminal aliens, (3) process applications for naturalization, (4) enforce immigration laws that pertain to the workplace, and (5) process aliens for expedited removal from the country. In 1993, we testified that INS was confronted with the challenge of preventing millions of aliens from entering the country illegally. Our prior work in this area had shown that INS had difficulty in removing illegal aliens once they entered the country and had limited space to detain aliens it apprehended. We concluded, therefore, that the key to controlling the illegal alien population was to prevent their initial entry. Consistent with the Attorney General's strategy, in 1994, INS issued a national Border Patrol strategy intended to deter illegal entry between the ports of entry along the Southwest Border. In the strategy's initial phase, the focus was on two sectors--San Diego and El Paso--that in 1993 accounted for the majority of apprehensions nationwide. In the second phase of the strategy, INS increased the resources it allocated to sectors in Tucson, Arizona, and south Texas. agents at the Southwest Border collectively spent on border enforcement activities did not increase between 1994 and 1997 as planned. Further, the Border Patrol had not determined the most appropriate mix of staffing and other resources needed for its sectors, as called for in the strategy. We also stated in our 1997 report that INS lacked data on several outcomes that the strategy was expected to achieve. For example, there were no data to indicate whether (1) illegal aliens were deterred from entering the United States, (2) there had been a decrease in attempted reentries by those who had been previously apprehended, and (3) the strategy had reduced border violence. We said that, despite the investment of billions of dollars in the strategy, INS had amassed only a partial picture of the effects of increased border control and did not know whether the investment was producing the intended results. Further, INS lacked a systematic and comprehensive evaluation plan to assess the strategy's overall effectiveness. We noted also that developing such a plan would be in keeping with the principles embodied in the Results Act. In September 1998, INS contracted with independent research firms for an evaluation. In an update to our 1997 report, we noted that available data suggested that several anticipated interim effects of the strategy had occurred. For example, apprehensions of illegal aliens continued to shift from traditionally high entry points like San Diego and El Paso to other locations along the border, as resources were deployed. Also, southwest border ports of entry inspectors apprehended an increased number of persons attempting fraudulent entry, and there were reports of higher fees being charged by smugglers, which INS said indicated an increased difficulty in illegal border crossing. However, data were still not available on the overall impact of the strategy and how effective it has been in preventing and deterring illegal entry. work has shown that removing deportable criminal aliens from this country has been one of INS' long-standing challenges. INS' Institutional Hearing Program (IHP) is the Department of Justice's main vehicle for placing aliens who are incarcerated in state and federal prisons into deportation proceedings so that they can be expeditiously deported upon release. In 1997, we reported on the 1995 performance results of the IHP, and more recently, in 1998, we reported on 1997 IHP results. In each year, for a 6-month period, we found that INS failed to identify nearly 2,000 potentially deportable criminal aliens before they completed their prison sentences. Hundreds of those criminal aliens were aggravated felons who, by law, should have been placed in removal proceedings while in prison and taken into INS custody upon release. Some of those aliens were subsequently rearrested for new crimes, including felonies. Even when INS determined that an alien was potentially deportable and should be placed in removal proceedings, INS did not complete the IHP for at least half of such cases in both 1995 and 1997. As a result, INS took many of the released criminal aliens into custody and completed the removal process for them after their prison release. As a result of its failure to complete the IHP before prison release, INS incurred about $37 million in avoidable detention costs in 1995 and about $40 million in 1997. INS took action on some, but not all of our 1997 recommendations to improve the IHP. For example, responding to our recommendation that INS give priority to aliens serving time for aggravated felonies, INS indicated that it should be screening all foreign-born inmates as they enter the prison systems. Therefore, INS took the position that it did not need to single out aggravated felons as a unique group. However, it remains unclear whether INS has the resources needed to screen everyone as they enter the prison system. INS has acknowledged and started to address the need for eliminating the backlog of cases that were not screened in previous years because aggravated felons could be part of the backlog. INS is authorized to charge user fees to recipients of certain INS services, such as the processing of an alien's application. In 1991, we said that INS had a chronic problem with not processing applications for naturalization within its 4-month time frame. In our 1994 report on INS user fees, our analysis of INS' workload in its four largest districts showed that it did not allocate its staff in proportion to its estimated workload. We said that about 80 percent of applicants could expect to wait 4 months or less for their applications to be processed. However, the expected waiting times for two of the four districts in our review exceeded 4 months; in New York and San Francisco, the waiting times for naturalization applications took 7 and 10 months, respectively. More recently, we reported that the number of applications was continuing to grow and that differences in production rates and processing times existed among field units in application processing. For example, our analyses of INS data for the 25-month period of June 1994 through June 1996 showed significant differences in the production rates for the five predominant types of applications processed by INS' district offices and three predominant types of applications processed by its service centers. We also reported large differences in the projected processing times for the types of applications for which these data were readily available. While we did not directly determine the cause of the differences, we noted that differences in processing times mean that aliens in different INS districts have had to wait disparate amounts of time for their applications to be processed. We pointed out that the need to treat applicants fairly and use government resources efficiently makes both determining the causes of the production and timing differences and, if feasible, improving production and timeliness, important goals for INS. results of all requested fingerprint checks from the FBI, and the results were, therefore, not always available to examiners before the alien's hearings. As a result, INS improperly naturalized citizens with felony convictions. In 1997, we testified that INS could still not assure itself and Congress that it was granting citizenship only to deserving applicants. In addition, a report to the Department of Justice by a consulting firm indicated that INS had not ensured that its field units were implementing internal control procedures issued by the INS Commissioner. INS has begun restructuring its naturalization process to address these problems. documents with increased security features, which it hoped would make it easier for employers to verify the documents' authenticity. However, in addition to those INS documents, aliens can show employers various other less secure documents that authorize them to work. Therefore, unauthorized aliens seeking employment can circumvent the improved security features of INS documents by simply presenting fraudulent non- INS documents--such as counterfeit Social Security cards--to employers. Further, we reported that, since no verification system is foolproof, enforcing IRCA's employer sanctions provisions would continue to be important. Since 1994, INS had devoted about 2 percent of its enforcement work years to its worksite enforcement program, which is designed to detect noncompliance with the law. INS completed about 6,500 investigations of employers in 1998--about 3 percent of the U.S. employers believed to have unauthorized workers on their payrolls. INS' worksite enforcement program has infrequently imposed sanctions on employers. INS is in the process of changing its approach to worksite enforcement, but it is too soon to know how these changes will be implemented or to assess their impact on the hiring of unauthorized workers. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 included provisions establishing a new process for dealing with aliens who attempt to enter the United States by engaging in fraud or misrepresentation (e.g., falsely claiming to be a U.S. citizen or misrepresenting a material fact) or who arrive with fraudulent, improper, or no documents (e.g., visa or passport). Known as expedited removal, the new process gives INS officers, rather than immigration judges, the authority to formally order these aliens removed from the country. The process also limits the rights of aliens to appeal a removal order. Aliens who fear being persecuted or tortured if they are returned to their home country are to be granted a "credible fear" interview to determine if their claims of asylum have a significant possibility of succeeding. removal processes at five selected locations. For example, case file documentation indicated that supervisors reviewed the expedited removal orders in an estimated 80 to 100 percent of the cases at the five locations. Further, our report noted that INS had or was in the process of developing mechanisms to monitor the expedited removal procedures, including the credible fear determinations. Those mechanisms included creating an Expedited Removal Working Group to visit locations and address problems, creating a quality assurance team at headquarters to review selected credible fear files, and meeting with nongovernmental organizations to discuss issues and concerns. INS has made changes to its processes on the basis of concerns raised by these internal reviewers and outside organizations. Mr. Chairman, this completes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have. For further information regarding this testimony, please contact Richard M. Stana at (202) 512-8777. Individuals making key contributions to this testimony included Evi Rezmovic and Brenda Rabinowitz. Illegal Aliens: Significant Obstacles to Reducing Unauthorized Alien Employment Exist (GAO/T-GGD-99-105, July 1, 1999). Illegal Immigration: Status of Southwest Border Strategy Implementation (GAO/GGD-99-44, May 19, 1999). Immigration Benefits: Applications for Adjustment of Status Under the Haitian Refugee Immigration Fairness Act of 1998 (GAO/GGD-99-92R, April 21, 1999). Illegal Aliens: Significant Obstacles to Reducing Unauthorized Alien Employment Exist (GAO/GGD-99-33, April 2, 1999). Drug Control: INS and Customs Can Do More To Prevent Drug-Related Employee Corruption (GAO/GGD-99-31, March 30, 1999). Visa Issuance: Issues Concerning the Religious Worker Visa Program (GAO/NSIAD-99-67, March 26, 1999). INS Budget: Overhiring and Decline in Revenues Have Created Fiscal Stress (GAO/T-GGD/AIMD-99-129, March 24, 1999). Major Management Challenges and Program Risks: Department of Justice (GAO/OCG-99-10, January 1, 1999). Criminal Aliens: INS' Efforts to Remove Imprisoned Aliens Continue to Need Improvement (GAO/GGD-99-3, October 16, 1998). INS User Fee Revisions: INS Complied With Guidance but Could Make Improvements (GAO/GGD-98-197, September 28, 1998). H-2A Agricultural Guestworker Program: Experiences of Individual Vidalia Onion Growers (GAO/HEHS-98-236R, September 10, 1998). Immigration Statistics: Information Gaps, Quality Issues Limit Utility of Federal Data to Policymakers (GAO/GGD-98-164, July 31, 1998). Immigration Statistics: Guidance on Producing Information on the U.S. Resident Foreign-Born (GAO/GGD-98-155, July 22, 1998). Immigration Statistics: Status of the Implementation of National Academy of Sciences' Recommendations (GAO/GGD-98-119, June 9, 1998). Assessment of Contractor's Review of INS' Analysis of a Random Sample of Recently Naturalized Aliens (GAO/GGD-98-131R, May 28, 1998). Illegal Aliens: Changes in the Process of Denying Aliens Entry Into the United States (GAO/GGD-98-81, March 31, 1998). Naturalized Aliens: Efforts to Determine if INS Improperly Naturalized Some Aliens (GAO/GGD-98-62, March 23, 1998). Retirement Eligibility of Customs and INS Employees on the Southwest Border (GAO/GGD-98-70R, March 13, 1998). Community Development: Changes in Nebraska's and Iowa's Counties With Large Meatpacking Plant Workforces (GAO/RCED-98-62, February 27, 1998). H-2A Agricultural Guestworker Program: Changes Could Improve Services to Employers and Better Protect Workers (GAO/HEHS-98-20, December 31, 1997). Illegal Immigration: Southwest Border Strategy Results Inconclusive; More Evaluation Needed (GAO/GGD-98-21, December 11, 1997). Customs and Border Patrol: Resources Needed for Reopening Rail Line From Mexico-U.S. Border Into the United States (GAO/GGD-98-20R, November 5, 1997). Combating Terrorism: Federal Agencies' Efforts to Implement National Policy and Strategy (GAO/NSIAD-97-254, September 26, 1997). Illegal Immigration: Information on Illegal Immigrants and Automobile Insurance in California (GAO/GGD-97-172R, September 5, 1997). Higher Education: Verification Helps Prevent Student Aid Payments to Ineligible Noncitizens (GAO/HEHS-97-153, August 6, 1997). INS Management: Follow-up on Selected Problems (GAO/GGD-97-132, July 22, 1997). Immigration and Naturalization Service: Employment Verification Pilot Project (GAO/GGD-97-136R, July 17, 1997). Criminal Aliens: INS' Efforts to Identify and Remove Imprisoned Aliens Need To Be Improved (GAO/T-GGD-97-154, July 15, 1997). INS Criminal Record Verification: Information on Process for Citizenship Applicants (GAO/GGD-97-118R, June 4, 1997). Alien Applications: Processing Differences Exist Among INS Field Units (GAO/GGD-97-47, May 20, 1997). State Department: Efforts to Reduce Visa Fraud (GAO/T-NSIAD-97-167, May 20, 1997). Naturalization of Aliens: INS Internal Controls (GAO/T-GGD-97-98, May 1, 1997). Naturalization of Aliens: Assessment of the Extent to Which Aliens Were Improperly Naturalized (GAO/T-GGD-97-51, March 5, 1997). Federal Law Enforcement: Investigative Authority and Personnel at 13 Agencies (GAO/GGD-96-154, September 30, 1996). Border Patrol: Staffing and Enforcement Activities (GAO/GGD-96-65, March 11, 1996). INS Investment Strategy (GAO/AIMD-96-26R, December 11, 1995). INS Border Crossing Cards (GAO/GGD-96-25R, November 29, 1995). Federal Law Enforcement: Information on Certain Agencies' Criminal Investigative Personnel and Salary Costs (GAO/T-GGD-96-38, November 15, 1995). Law Enforcement Support Center: Name-Based Systems Limit Ability to Identify Arrested Aliens (GAO/AIMD-95-147, August 21, 1995). Illegal Aliens: National Net Cost Estimates Vary Widely (GAO/HEHS-95- 133, July 25, 1995). INS: Information on Aliens Applying for Permanent Resident Status (GAO/ GGD-95-162FS, June 8, 1995). Information Integrity: Using Technology to Determine Eligibility to Work and Receive Benefits (GAO/T-AIMD-95-99, March 7, 1995). Border Control: Revised Strategy Is Showing Some Positive Results (GAO/GGD-95-30, December 29, 1994). INS Fingerprinting of Aliens: Efforts to Ensure Authenticity of Aliens' Fingerprints (GAO/GGD-95-40, December 22, 1994). INS: Management Problems and Program Issues (GAO/T-GGD-95-11, October 5, 1994). Employer Sanctions: Comments on H.R. 3362 - - Employer Sanctions Improvement Act (GAO/T-GGD-94-189, September 21, 1994). INS Drug Task Force Activities: Federal Agencies Supportive of INS Efforts (GAO/GGD-94-143, July 7, 1994). INS User Fees: INS Working to Improve Management of User Fee Accounts (GAO/GGD-94-101, April 12, 1994). INS' EEO Progress in DC/LA (GAO/GGD-94-10R, October 5, 1993). Illegal Aliens: Despite Data Limitations, Current Methods Provide Better Population Estimates (GAO/PEMD-93-25, August 5, 1993). Assessing EEO Progress at INS (GAO/GGD-93-54R, July 15, 1993). Customs Service and INS: Dual Management Structure for Border Inspections Should Be Ended (GAO/GGD-93-111, June 30, 1993). INS Corrective Action (GAO/GGD-93-46R, June 16, 1993). Information on Black Employment at INS (GAO/GGD-93-44R, May 17, 1993). Border Patrol: Southwest Border Enforcement Affected by Mission Expansion and Budget (GAO/T-GGD-92-66, August 5, 1992). Immigration Control: Immigration Policies Affect INS Detention Efforts (GAO/GGD-92-85, June 25, 1992). Immigration and the Labor Market: Nonimmigrant Alien Workers in the United States (GAO/PEMD-92-17, April 28, 1992). Immigrants in Indiana: Northwest Indiana Compared to Other Parts of the State (GAO/GGD-92-32FS, January 10, 1992). U.S.-Mexico Trade: Concerns About the Adequacy of Border Infrastructure (GAO/NSIAD-91-228, May 16, 1991). Employee Drug Testing: Status of Federal Agencies' Programs (GAO/GGD- 91-70, May 6, 1991). Border Patrol: Southwest Border Enforcement Affected by Mission Expansion and Budget (GAO/GGD-91-72BR, March 28, 1991). International Trade: Easing Foreign Visitors' Arrivals at U.S. Airports (GAO/NSIAD-91-6, March 8, 1991). Financial Management: INS Lacks Accountability and Controls Over Its Resources (GAO/AFMD-91-20, January 24, 1991). Immigration Management: Strong Leadership and Management Reforms Needed to Address Serious Problems (GAO/GGD-91-28, January 23, 1991). Information Management: Immigration and Naturalization Service Lacks Ready Access to Essential Data (GAO/IMTEC-90-75, September 27, 1990). Immigration Services: INS Resources and Services in the Miami District (GAO/GGD-90-98, August 6, 1990). Criminal Aliens: Prison Deportation Hearings Include Opportunities to Contest Deportation (GAO/GGD-90-79, May 25, 1990). Immigration Reform: Employer Sanctions and the Question of Discrimination (GAO/GGD-90-62, March 29, 1990). Immigration Reform: Major Changes Likely Under S. 358 (GAO/PEMD-90-5, November 9, 1989). Immigration Control: Deporting and Excluding Aliens From the United States (GAO/GGD-90-18, October 26, 1989). 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 management and program challenges facing the Immigration and Naturalization Service (INS). GAO noted that: (1) GAO and others have identified management and program challenges that have troubled INS for years; (2) GAO's management reports in 1991 and 1997 and related reviews have indicated that urgent attention should be given to INS' management challenges; (3) GAO pointed out significant issues related to INS': (a) strategic planning process; (b) organizational structure; (c) communications and coordination; and (d) financial management processes; (4) specifically, GAO noted that INS': (a) strategic planning required sustained management attention and commitment; (b) reorganization had created some uncertainty about organizational roles and responsibilities; (c) internal communications and coordination were problematic, as evidenced by outdated policies and procedures on how to implement immigration laws; and (d) financial management processes were weak, including outdated accounting systems, weak internal controls, and a lack of management emphasis on financial management; (5) in addition to these management challenges, program implementation issues at INS have been the focus of much of GAO's work; (6) GAO's reports on these issues have been related to INS' efforts to: (a) stem the flow of illegal aliens across the Southwest Border; (b) identify and remove criminal aliens from the country; (c) process applications for naturalization; (d) enforce workplace immigration laws; and (e) process aliens for expedited removal; (7) GAO recognizes that addressing these management and program challenges can be difficult; (8) in carrying out its mission, INS has to contend with issues of foreign policy, domestic policy, and intergovernmental relations; and (9) sustained top-level management commitment and monitoring are necessary to ensure that these challenges are addressed appropriately.

The vast majority of the $48.1 billion of Recovery Act funding for transportation programs went to the Federal Highway Administration (FHWA), FRA, and the Federal Transit Administration (FTA) for highway, road, bridge, rail, and transit projects. Indeed, more than half of all Recovery Act transportation funds were designated for the construction, rehabilitation, and repair of highways, roads, and bridges (see fig. 1). The remaining funds were allocated among other DOT operating administrations. DOT administered most Recovery Act funds through existing transportation programs. For example, highway funds were distributed under rules governing the Federal-Aid Highway Program generally and the Surface Transportation Program in particular. DOT also established new grant processes to award high speed intercity passenger rail and TIGER grants. For these programs, DOT published selection criteria, solicited and reviewed applications, and awarded grants to applicants that it judged best met the criteria and complied with legislative and regulatory requirements. The Recovery Act included obligation deadlines to indicate the temporary nature of the funds and to facilitate their timely use. Therefore, the Recovery Act identified short deadlines for obligating most transportation funds, and it required that preference be given to projects that could be started and completed expeditiously. For example, highway and transit funds were to be fully obligated by September 30, 2010. All TIGER funds must be obligated by September 30, 2011, and all high speed intercity passenger rail funds must be obligated by September 30, 2012. The Recovery Act also introduced new requirements for existing programs to help ensure that funds add to states' and localities' overall economic activity, and are targeted to areas of greatest need. For example, the Recovery Act required governors of each state to certify that their state will maintain its planned level of spending for the types of transportation projects funded by the act and also required states to give priority to projects in economically distressed areas. State and local agencies, contractors, and others that receive Recovery Act funding are required to submit quarterly reports on the number of jobs created or retained, among other data. These job calculations are based on the number of hours worked in a quarter and funded under the Recovery Act--expressed in full-time equivalents (FTE)--but they do not account for the total employment arising from the expenditure of Recovery Act transportation funds. That is, the data recipients report do not include employment at suppliers (indirect jobs) or in the local community (induced jobs). According to DOT data, as of March 31, 2011, DOT had obligated more than $45 billion (about 95 percent) on over 15,000 projects and had expended more than $26 billion (about 59 percent) of the $48.1 billion it received under the Recovery Act (see table 1). States and other recipients continue to report using Recovery Act funds to improve the condition of the nation's transportation infrastructure, as well as invest in new infrastructure. For example, according to DOT data, highway funds have been primarily used for pavement improvement projects, such as resurfacing, reconstruction, and rehabilitation of existing roadways, and public transit funds have been used primarily for upgrading transit facilities and purchasing new vehicles (see fig. 2). New ridge contrction ($0.5) Operting assnce ($0.2) Bridge improvement ($1.2) Bridge replcement ($1.4) Ril cr prchas nd rehabilittion ($0.3) New contrction ($1.8) Preventive mintennce ($0.8) Other ($3.3) Other cpitl expen($1.0) Pvement widening ($4.7) Vehicle prchas nd rehabilittion ($2.0) Pvement improvement: resurfce ($6.1) Trit infrastrctre ($4.5) Pvement improvement: recontrction/rehabilittion ($7.1) Transit obligations include Recovery Act funds that were transferred from FHWA to FTA. The category "other" includes safety projects, such as improving safety at railroad grade crossings; engineering; right-of-way purchases; and transportation enhancement projects, such as pedestrian and bicycle facilities. "Transit infrastructure" includes engineering and design, acuisition, construction, and rehabilitation and renovation activities. "Other capital expenses" includes leases, training, finance costs, mobility management project administration, and other capital programs. Highway data are as of December 1, 2010, and transit data are as September 0, 2010. Recovery Act funding for aviation is reported to have gone to rehabilitating and reconstructing airfield runways and taxiways, as well as air navigation infrastructure such as air traffic control towers, engine generators, back-up batteries, and circuit breakers. The Recovery Act grant provided to Amtrak has been used to make infrastructure improvements and return cars and locomotives to service. Because high speed intercity passenger rail and TIGER were new grant programs, the Recovery Act allowed additional time for DOT to develop criteria, publish notices of funding availability for each program, and award grants. As a result, projects selected for high speed intercity passenger rail and TIGER were announced about a year after enactment, and DOT has been making progress obligating Recovery Act funds for these programs. For example, DOT selected one intercity passenger rail project to rehabilitate track and provide service from Portland to Brunswick, Maine, at speeds up to 70 miles per hour. Another project was selected to initiate the first part of California's high speed rail system, which envisions service at more than 200 miles per hour between Los Angeles, San Francisco and the Central Valley, and eventually, San Diego. DOT's TIGER grants funded projects across different surface transportation modes, including highways, transit, rail, and ports. For example, the California Green Trade Corridor/Marine Highway project is a collaborative effort of three regional ports in California to develop and use a marine highway system as an alternative to existing truck and rail infrastructure for transporting consumer goods and agricultural products. According to DOT, a variety of Recovery Act projects have been completed. Approximately 68 percent of the completed highway projects involve pavement improvement, according to FHWA, and completed transit projects generally included preventative maintenance activities and some vehicle purchases and facility construction, according to FTA. Amtrak had also completed a variety of projects, including construction station upgrades, right-of-way improvements, installing communications and signaling systems, and replacing aging bridges, among other things. While no high speed intercity passenger rail projects had been completed as of March 31, 2011, 15 projects were under way, according to FRA. These projects, which represent more than two-thirds of the allotted funding, include track and signaling work to improve reliability and increase operating speeds, improvements to stations, and the environmental analysis and preliminary engineering required to advance projects to construction. Recovery Act funds helped pay for jobs across various transportation modes. At a time when the construction industry was experiencing historically high unemployment and many states could not afford to maintain existing infrastructure, transportation officials we met with told us that the Recovery Act helped to keep the transportation industry in operation while allowing states to tackle some of their infrastructure maintenance priorities. According to the most recent recipient reported data, Recovery Act transportation projects supported about 50,000 FTEs from October 2010 through December 2010. Transportation recipients reported the highest FTE counts during the quarter that ended September 2010, when many projects were under way (see fig. 3). For the most recent reporting quarter, highway projects accounted for approximately two-thirds of the transportation FTEs reported, and the remaining one-third of FTEs were attributed to transit and all other transportation projects. The relatively low portion of FTEs reported for all other transportation projects is expected to rise in future reporting quarters as more high speed intercity passenger rail and TIGER program funds are obligated and projects get under way. While FTEs reported for the high speed intercity passenger rail and TIGER programs are expected to increase as these projects get under way, other program areas have reported fewer FTEs in the most recent reporting quarter. Recipient reported data for the quarter ending December 31, 2010, showed fewer recipients reporting than in the previous quarter across all program areas (highways, transit, and other). This may indicate that more projects were completed in the quarter ending December 31, 2010, than were started. Also in that quarter, the percentage of recipients that reported any FTEs decreased compared to the previous quarter, which may indicate that some projects are essentially completed but not closed out financially or may reflect interruptions in work due to winter weather for some projects in colder climates. Although recipients reported jobs funded, other long-term impacts of Recovery Act investments in transportation are unknown at this point. Transportation officials in several states we visited told us that Recovery Act funds helped reduce backlogs of "shovel-ready" resurfacing projects. Some states have efforts under way to report on Recovery Act benefits, but federal and state officials told us that attributing transportation benefits to Recovery Act funds can be difficult, particularly when projects are funded from multiple sources or when historic performance data is not available for particular projects. We recommended that DOT ensure that the results of Recovery Act projects are assessed and a determination is made about whether these investments produced long-term benefits. Specifically, in the near term, we recommended that FHWA and FTA determine the types of data and performance measures needed to assess the impact of the Recovery Act and the specific authority they may need to collect data and report on these measures. DOT officials told us that they expect to be able to report on Recovery Act outputs, such as miles of roads paved, bridges built or repaired, and transit vehicles purchased, which will help to assess the act's impact. DOT will not be able to report on outcomes, such as reductions in travel time. DOT has not committed to assessing the long-term benefits of Recovery Act investments in transportation. DOT stated that limitations in its data systems, coupled with the fact that Recovery Act funds represented only about one year of additional funding for some transportation programs, would make assessing the benefits of Recovery Act projects difficult. We continue to believe, however, that it is important for organizations to measure performance to understand the progress they are making toward their goals and to produce a set of performance measures that demonstrates results. For Recovery Act high speed intercity passenger rail and TIGER grant programs, DOT has set broad performance goals and required recipients to identify potential project benefits. Specifically, FRA has outlined goals for developing high speed intercity passenger rail service in its strategic plan and national rail plan and evaluated grant proposals based on the potential project benefits they intended in their applications. However, the identified goals are broad--such as providing for transportation safety and economic competitiveness--and do not contain specific targets necessary to determine how or when FRA will realize intended benefits. DOT also incorporated performance measures tailored to each TIGER grant awardee based on the project design and the capacity of the recipient to collect and evaluate data. DOT is evaluating the best methods for measuring objectives and collecting data and is working collaboratively with applicants to weigh options for measuring performance. As many TIGER projects are just being initiated, the effectiveness of these measures will not be clear for some time. Federal, state, and local transportation officials we contacted reported that while Recovery Act transportation funds provided many positive outcomes, they also provided lessons learned that may be relevant as Congress considers the next surface transportation reauthorization. In addition, our reports on high speed intercity passenger rail and the TIGER grant program identified a number of challenges and key lessons learned. Certain Recovery Act provisions not typically required under existing DOT programs proved challenging for some states to meet. We found that it may have been difficult for states to meet these requirements for a number of reasons, including rapidly changing state economic conditions. Confusion among the states as to how to interpret and apply the new requirements was also a contributing factor. Maintenance of effort. We have reported that there were numerous challenges for DOT and states in implementing the transportation maintenance-of-effort provision in the Recovery Act. This provision required the governor of each state to certify that the state would maintain its planned level of transportation spending from February 17, 2009, through September 30, 2010, to help ensure that federal funds would be used in addition to, rather than in place of, state funds and thus increase overall spending. A January 2011 preliminary DOT report indicated that 29 states met their planned levels of expenditure, and 21 states did not. States had a monetary incentive to meet their certified planned level of spending in each transportation program area funded by the Recovery Act because those that fail will not be eligible to participate in the August 2011 redistribution of obligation authority under the Federal-Aid Highway Program. States had until April 15, 2011, to verify their actual expenditures for transportation programs covered by the Recovery Act. DOT is reviewing this information to determine if any more states met their planned levels of spending. The DOT preliminary report summarized reasons states did not meet their certified planned spending levels, such as experiencing a reduction in dedicated revenues for transportation due to a decline in state revenues or a lower-than-expected level of approved transportation funding in the state budget. The preliminary report also identified a number of challenges DOT encountered in implementing the provision, such as insufficient statutory definitions of what constitutes "state funding" or how well DOT guidance on calculating planned expenditures would work in the many different contexts in which it would have to operate. As a result, many problems came to light only after DOT had issued initial guidance and states had submitted their first certifications. DOT issued seven pieces of guidance to clarify how states were to calculate their planned or actual expenditures for their maintenance-of-effort certifications. DOT invested a significant amount of time and work to ensure consistency across states on how compliance with the maintenance-of-effort provision is certified and reported. As a result, DOT is well-positioned to understand lessons learned--what worked, what did not, and what could be improved in the future. DOT and state officials told us that while the maintenance-of- effort requirement can be useful for ensuring continued investment in transportation, more flexibility to allow for differences in states and programs, and to allow adjustments for unexpected changes to states' economic conditions, should be considered for future provisions. For example, the Recovery Act allows the Secretary of Education to waive state maintenance-of-effort requirements under certain circumstances and allows states to choose the basis they use to measure maintenance of effort. The maintenance-of-effort requirement for transportation programs proved difficult for states to apply across various transportation programs because of different and complicated revenue sources to fund the programs. Many states did not have an existing means to identify planned transportation expenditures for a specific period and their financial and accounting systems did not capture that data. Therefore, according to DOT, a more narrowly focused requirement applying only to programs administered by state DOTs or to programs that typically receive state funding could help address maintenance-of-effort challenges. Consideration of economically distressed areas. Our previous reports have identified challenges DOT faced in implementing the Recovery Act requirement that states give priority to highway projects located in economically distressed areas. For example, while an economically distressed area is statutorily defined, we found that there was substantial variation in how some states identified economically distressed areas and the extent to which some states prioritized projects in those areas. We reported instances of states developing their own eligibility requirements for economically distressed areas using data or criteria not specified in the Public Works and Economic Development Act. Three states--Arizona, California, and Illinois--developed their own eligibility requirements or interpreted the special-needs criterion in a way that overstated the number of eligible counties, and thus the amount of funds, directed to economically distressed areas. Officials in these three states told us that they did so to respond to rapidly changing economic conditions. In May 2010, we recommended that DOT advise states to correct their reporting on economically distressed area designations, and in July 2010 FHWA instructed its division offices to advise states with identified errors to revise their economically distressed area designations. In September 2010, we recommended that DOT make these data publicly available to ensure that Congress and the public have accurate information on the extent to which Recovery Act funds were directed to areas most severely affected by the recession and the extent to which states prioritized these areas in selecting projects for funding. DOT recently posted an accounting of the extent to which states directed Recovery Act transportation funds to projects located in economically distressed areas on its website, and we are in the process of assessing these data. Most states we visited as part of our ongoing Recovery Act oversight considered the requirement to prioritize projects in economically distressed areas in addition to other immediate and long-term transportation goals, as the Recovery Act required. For example, officials in Washington state said that they considered federally-recognized economically distressed areas as one of several criteria when selecting projects. Other criteria included state economic data and projects that would be ready to proceed in a short amount of time. However, state officials were also uncertain what the economically distressed area requirement was intended to accomplish, such as whether it was intended to provide jobs to people living in those areas or to deliver new infrastructure to those areas. The economically distressed area provision proved difficult to implement because of changing economic conditions, and it is unclear that it achieved its intended goal. We have reported that allocating federal funding for surface transportation based on performance in general, and directing some portion of federal funds on a competitive basis to projects of national or regional significance in particular, can more effectively address certain challenges facing the nation's surface transportation programs. In our recent reports on the high speed intercity passenger rail and TIGER programs, we found that while DOT generally followed recommended grantmaking practices, DOT could have documented more information about its award decisions. The Recovery Act and the Passenger Rail Investment and Improvement Act of 2008 required FRA to implement a plan to award and oversee billions of dollars for high speed intercity passenger rail grants. This was challenging for FRA as it did not have a large-scale grantmaking infrastructure in place and had to develop that capability within a short time frame to meet Recovery Act goals. We mostly found that FRA substantially followed recommended practices for awarding these grants, including communicating key information to applicants and planning for the grant competition. However, one area in which FRA could have done better is to develop clearer records for how it made final grant award decisions. Specifically, while FRA maintained detailed records on how officials evaluated applications on technical merit, the documented reasons for making final grant selections were typically vague and provided little insight into why projects were or were not selected. In addition, FRA provided only general reasons for adjusting applicants' requested funding amounts. We recommended that FRA should better document the rationales for award decisions in any future high speed and intercity passenger rail funding rounds by including substantive reasons why individual projects are or are not selected and for any changes made to requested funding amounts. Without a clear record of selection decisions, FRA is vulnerable to criticism about the integrity of its decisions. This is important because FRA has already been criticized for its award decisions and for providing incremental improvements to existing systems rather than providing more funds to meet the administration's expectations of developing a true national high speed rail intercity passenger network. To evaluate the more than 1,450 TIGER grant applications it received, DOT developed criteria to assess the merits of these projects. We evaluated these criteria and concluded that DOT had followed key federal guidance and standards. The criteria clearly indicated that projects should produce long-term benefits, such as improving the state of repair of existing transportation infrastructure, reducing fatalities and injuries, and improving the efficient movement of workers or goods. To apply its criteria, DOT used 10 Evaluation Teams of five reviewers to conduct a technical review of all applications. The evaluators drafted narratives explaining their assessments, assigned ratings such as "highly recommended" and "recommended," and advanced those that best met the criteria for further review. A Control and Calibration Team, made up of senior staff from the Office of the Secretary of Transportation, also selectively reviewed and advanced applications throughout the process to ensure consistency across Evaluation Teams' ratings and to help meet statutory requirements such as an equitable distribution of funds. The Evaluation Teams advanced 115 highly recommended applications. The Control and Calibration Team advanced an additional 50 recommended applications as well as 1 application that was not recommended. Together, the teams advanced 166 applications for further review. The TIGER Review Team--composed of 12 senior DOT officials, such as the Deputy Secretary and cognizant operating administrators--reviewed those 166 applications. This team--which considered a broader set of factors than the Evaluation Teams, including project readiness and whether expected project benefits outweighed costs--developed a final list of 51 projects that it recommended to the Secretary of Transportation for award. All 51 projects were accepted by the Secretary, and the awards were announced on February 17, 2010. Of the 51 applications that received awards, 26 were from the highly recommended applications advanced by the Evaluation Teams and the other 25, which received one-third of the TIGER funds, were from the recommended applications advanced by the Control and Calibration Team (see fig. 4). While DOT thoroughly documented the Evaluation Teams' assessments and the Review Team's memorandum recommending projects to the Secretary of Transportation for award described the strengths of projects recommended for award, it did not document the Review Team's final decisions and its rationale for selecting recommended projects for half the awards over highly recommended ones. DOT officials told us that some highly recommended projects were not selected to achieve a more equitable geographic distribution of award funds, as required by the Recovery Act. Furthermore, our discussions with DOT officials indicated that the Review Team raised some valid concerns about some highly recommended projects, such as whether a project's economic benefits were overstated. However, without adequate documentation of final decisions, DOT cannot definitively demonstrate the basis for its award selections, particularly the reasons why recommended projects were selected for half the awards over highly recommended ones. Developing internal documentation is a key part of accountability for decisions, and DOT guidance states that officials should explain how discretionary grant projects were selected when projects with the highest priority in a technical review were not funded. The absence of documentation can give rise to challenges to the integrity of the decisions made, and DOT is vulnerable to criticism that projects were selected for reasons other than merit. We recommended that DOT document key decisions for all major steps in the review of applications, particularly decisions in which lower- rated applications are selected for award over higher-rated applications, and, in consultation with Congress, develop and implement a strategy to disclose information regarding award decisions. Both the high speed intercity passenger rail and TIGER programs represent important steps toward investing in projects of regional and national significance through a merit-based, competitive process. We noted a natural tension between providing funding based on merit and performance and providing funds on a formula basis to achieve equity among the states as the formula approach can potentially result in projects of national or regional significance that cross state lines and involve more than one transportation mode not competing well at the state level for funds. Given that the Recovery Act was intended to create and preserve jobs and promote economic recovery nationwide, Congress believed it important that TIGER grant funding be geographically dispersed. As we noted in our recent report discussing the TIGER grant program, when Congress considers future DOT discretionary grant programs, it may wish to consider balancing the goals of merit-based project selection with geographic distribution of funds and limit, as appropriate, the influence of geographic considerations. Chairman Mica, Ranking Member Rahall, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions at this time. For further information regarding this statement, please contact Phillip R. Herr at (202) 512-2834 or [email protected] or Susan A. Fleming 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 statement. Individuals making key contributions to this testimony were Steve Cohen, Assistant Director; Heather MacLeod, Assistant Director; James Ratzenberger, Assistant Director; Jonathan Carver; Matt Cook; John Healey; Joah Iannotta; Bert Japikse; Delwen Jones; SaraAnn Moessbauer; Josh Ormond; and Pamela Vines. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided more than $48 billion to the Department of Transportation (DOT) to be distributed through existing programs and through two new competitive grant programs--high speed intercity passenger rail and the Transportation Investment Generating Economic Recovery (TIGER) program. As requested, this testimony addresses the (1) status and use of Recovery Act transportation funds, (2) outcomes and long-term benefits of Recovery Act transportation investments, and (3) lessons learned from DOT's and states' experiences implementing the Recovery Act. GAO reviewed prior and ongoing work, federal legislation, and guidance. GAO also analyzed Recovery Act data and interviewed federal, state, and local officials. As of March 31, 2011, more than $45 billion (about 95 percent) of Recovery Act transportation funds had been obligated for over 15,000 projects nationwide, and more than $26 billion had been expended. States and other recipients continue to report using Recovery Act funds to improve the nation's transportation infrastructure. Highway funds have been primarily used for pavement improvement projects and transit funds have been primarily used to upgrade transit facilities and purchase new vehicles. Recovery Act funds have also been used to rehabilitate airport runways and improve Amtrak's infrastructure. DOT continues to obligate funds for its high speed intercity passenger rail and TIGER grant programs. As of March 31, 2011, DOT had obligated nearly all of the $1.5 billion in TIGER funds for 51 surface transportation projects. The Recovery Act helped to fund transportation jobs, but long-term benefits are unclear. For example, according to available data, Recovery Act transportation projects supported about 50,000 full-time equivalents (FTE) in the three months from October through December 2010. The most recent data showed that highway projects accounted for about two-thirds of the transportation FTEs reported, and the remaining one-third of the FTEs were attributed to transit and other transportation projects. However, the impact of Recovery Act investments in transportation is unknown, and GAO has recommended that DOT determine the data needed to assess the impact of these investments. Although DOT has set broad performance goals for its high speed intercity passenger rail and TIGER programs--and is currently evaluating the best methods for measuring objectives and collecting data--it has not committed to assessing the long-term benefits of the Recovery Act investments in transportation. Certain Recovery Act provisions meant to stimulate the economy, but not typically required under existing DOT programs, proved challenging. For example, GAO has reported on numerous challenges DOT and states faced in implementing the transportation maintenance-of-effort requirement, which required states to maintain their planned levels of spending over approximately 18 months or be ineligible to participate in the August 2011 redistribution of obligation authority under the Federal-Aid Highway Program. A January 2011 preliminary DOT report found that 29 states met the requirement while 21 states did not. In this report, DOT also discussed how the maintenance-of-effort provision could be improved. With regard to the high speed intercity passenger rail and TIGER programs, GAO found that while DOT generally followed recommended grant-making practices, DOT could have better documented its award decisions. For example, the Federal Railroad Administration could have developed clearer records for how it made award decisions. Without a clear record of selection decisions, DOT is vulnerable to criticism about the integrity of its decisions. Likewise, DOT did not clearly document its final decisions and rationale for selecting recommended TIGER projects. This testimony does not include new recommendations. In our past work, GAO recommended that the Secretary of Transportation take several actions, such as directing the Federal Highway and Federal Transit administrations to determine the data needed to assess the impact of Recovery Act projects; we recently recommended that the Federal Railroad Administration and DOT better document decisions regarding their competitive grant programs. DOT has addressed some GAO recommendations, but others remain open. We will continue to track them. GAO provided a draft of this statement to DOT and incorporated its comments where appropriate.

HUD defines elderly households as those in which the householder--the person whose name is on the lease, mortgage, or deed--or the householder's spouse is at least 62 years old. Elderly households occupied about one-quarter (26 million) of the approximately 106 million housing units in the United States in 2001, according to the American Housing Survey. A large majority of these elderly households were homeowners. A small share of elderly households, about 19 percent or 5 million, rented their homes (compared to about 36 percent of nonelderly households), and about 3.3 million of these elderly households were renters with very low incomes--that is, 50 percent or less of area median income. The Housing Act of 1959 (P.L. 86-372) established the Section 202 program, which began as a direct loan program that provided below-market interest rate loans to private nonprofit developers, among others, to build rental housing for the elderly and people with disabilities. In 1990, the Cranston- Gonzalez National Affordable Housing Act (P.L. 101-625) modified Section 202 by converting it from a direct loan program to a capital advance program. In its current form, Section 202 provides capital advances--effectively grants--to private nonprofit organizations (usually referred to as sponsors or owners) to pay for the costs of developing elderly rental housing. As long as rents on the units remain within the program's guidelines for at least 40 years, the sponsor does not have to pay back the capital advance. HUD calculates capital advances in accordance with development cost limits that it determines annually, and HUD's policy is that these limits should cover the reasonable and necessary costs of developing a project of modest design that complies with HUD's project design and cost standards as well as meets applicable state and local housing and building codes. To be eligible to receive Section 202 housing assistance, households must have very low income and one member who is at least 62 years old. Section 202 tenants generally pay 30 percent of their income for rent. Because their rental payments are not sufficient to cover the property's operating costs, the project sponsor receives rental assistance payments from HUD to cover the difference between the property's operating expenses (as approved by HUD) and total tenant rental receipts. In addition, the project sponsor can make appropriate supportive services, such as housekeeping and transportation, available to these elderly households. From year to year, Section 202 has carried significant balances of unexpended appropriated dollars for capital advances and rental assistance payments. In fiscal year 2002, the unexpended balance for Section 202 was approximately $5.2 billion. About 41 percent of this balance was in capital advance funds and 59 percent was in rental assistance funds. Some of these unexpended funds have not yet been awarded to projects, and others are for projects that have not begun construction. Once construction begins, funds are expended over several years during the construction phase and during the term of the rental assistance contracts. Other federal programs can provide housing assistance to needy elderly households, albeit not exclusively. For example, low income housing tax credits and tax-exempt multifamily housing bonds provide federal tax incentives for private investment and are often used in conjunction with other federal and state subsidies in the production of new and rehabilitated rental housing. The Housing Choice Voucher Program supplements tenants' rental payments in privately owned, moderately priced apartments chosen by the tenants. Currently, about 260,000 of the approximately 1.5 million voucher households are elderly. Other programs are discussed in an appendix to the report. Section 202 is the only federal housing program that targets all of its rental units to very low income elderly households. Because these households often have difficulty affording market rents, program funding is directed to localities based in part on their proportions of elderly renter households that have a housing affordability problem. Section 202 insulates tenants in housing units subsidized by the program from increases in housing costs by limiting rents to a fixed percentage of household income. The program is a significant source of new and affordable housing for very low income elderly households. Even with the program's exclusive focus on the very low income elderly, Section 202 has reached only a small share of eligible households. Congress specifically intended the Section 202 program to serve very low income elderly households and to expand the supply of affordable housing that can accommodate the special needs of this group. HUD takes into account the need for the kind of housing Section 202 provides when allocating program funds to the field offices. The criteria for allocating funds to the field offices include, among other things, the total number of very low income elderly renters in the area and the number in this group that pay more than 30 percent of their incomes for rent. According to the American Housing Survey, in 2001 about 1.7 of the 3.3 million elderly renters with very low incomes paid over 30 percent of their incomes for rent. The rent that tenants in Section 202 housing pay equals a percentage of their household incomes--generally 30 percent. This percentage remains constant, so the amount of rent tenants pay increases only when household income rises, protecting them from rent increases that might be imposed by the private housing market when market conditions change. In contrast, very low income elderly renter households that do not receive this type of assistance are vulnerable to high rent burdens and increases in market rents. Most of these households have few or no financial resources, such as cash savings and other investments, and rely primarily on fixed incomes that may not increase at the same rate as market rents. Section 202 serves another important function, potentially allowing elderly households to live independently longer by offering tenants a range of services that support independent living--for example, meal services, housekeeping, personal assistance, and transportation. HUD ensures that sponsors have the managerial capacity to assess tenants' needs, coordinate the provision of supportive services, and seek new sources of assistance. HUD pays a small portion of the costs of providing these services through its rental assistance payments. According to the American Housing Survey, in 2001 about 1.3 million, or 40 percent, of elderly renter households with very low incomes received some form of rental assistance from a government housing program, including Section 202. According to our analysis of HUD program data, about 260,000 Section 202 units with rental assistance generally served very low income elderly households in 2001. Taken together, these two sources of data suggest that Section 202 served around one-fifth of the 1.3 million assisted elderly households identified in the American Housing Survey. While Section 202 is an important source of affordable elderly housing, the program has reached a relatively small fraction of very low income elderly renter households. Between 1985 and 2001, Section 202 reached no more than about 8 percent of elderly households eligible for assistance under the program. Also, during this period, many of the elderly renter households with very low incomes--ranging from about 45 to 50 percent--had housing affordability problems. Other federal programs that develop rental housing generally target different income levels, serve other populations in addition to the elderly (including families with children and people with disabilities) and do not require housing providers to offer supportive services for the elderly. Most of the Section 202 projects funded between fiscal years 1998 and 2000 did not meet HUD's guideline for approving the start of construction within 18 months. However, a slight majority of the projects were processed and approved to start construction within 24 months. Timeliness varied both across HUD's field offices and by project location (metropolitan versus nonmetropolitan areas). As well as taking longer to complete than other projects and thus delaying benefits to very low income elderly households, projects that were not approved for construction after the 18-month time frame increased the Section 202 program's year-end balances of unexpended appropriations. HUD's guidelines state that within 18 months of the funding award date, field offices and project sponsors must complete various task before construction can commence (fig.1). Altogether, 73 percent of the Section 202 projects funded from fiscal years 1998 through 2000 did not meet this 18-month processing time guideline. These projects accounted for 79 percent of the nearly $1.9 billion in funding awarded to projects during this period. Also during this period, 78 percent of projects located in metropolitan areas exceeded the 18-month guideline as opposed to 61 percent of projects located in nonmetropolitan areas. HUD field offices may grant an extension of up to 6 months after the 18- month guideline for projects needing more time to gain approval to start construction, and many projects were approved within that 6-month time frame. Of the projects funded from fiscal years 1998 through 2000, HUD approved 55 percent for construction within 24 months of the funding award--27 percent within 18 months and 28 percent within 19 to 24 months. The remaining 45 percent of projects took longer than 24 months to be approved. We looked at the performance of HUD's 45 field offices that process Section 202 projects and found that they had varying degrees of success in meeting the 18-month guideline. We evaluated their performance by estimating the percentage of projects approved for construction within 18 months for each field office. Among these offices, the median project approval rate for construction within 18 months was 22 percent, but their performance varied widely. Eight field offices had no projects that met the 18-month guideline, while at one office more than 90 percent of projects met the guideline. Field offices' performance varied by region, with those located in the northeast and west being least likely to approve projects within 18 months of the funding award. Meeting processing time guidelines is important because most of the delays in total production time--that is, the time between funding award and construction completion--stem from the project processing phase. When we compared the average total production times for completed projects that did not meet HUD's 18-month processing guideline and those that did, the delayed projects took 11 months longer than other projects to proceed from funding award to construction completion. Since the average time taken for the construction phase was very similar for all projects, most of the 11-month difference in total production time was attributable to the extra 10 months that delayed projects took to complete the processing phase. Delayed processing of Section 202 projects also affected the Section 202 program's overall balances of unexpended appropriations. At the end of fiscal year 2002, for example, HUD had a total of $5.2 billion in unexpended Section 202 funds. A relatively small part of these unexpended funds--about 14 percent--was attributable to projects that had not yet been approved to start construction and had exceeded HUD's 18-month processing time guideline. Consequently, none of the funds reserved for these projects had been expended. By contrast, the remaining 86 percent of unexpended funds were associated with projects for which HUD was in the process of expending funds for construction or rental assistance. For example, almost half of the unexpended balances--about 48 percent--resulted from projects that had already been completed but were still drawing down their rental assistance funds as intended under the multiyear project rental assistance contract between HUD and the project sponsor. Our review of projects funded from fiscal years 1998 through 2000 shows that several factors impeded Section 202 projects from meeting the 18- month processing time guideline, including insufficient capital advances, limited training and guidance for HUD field office staff on processing policies and procedures, and limitations in HUD's project monitoring system. Factors external to HUD, such as sponsors' level of development experience and requirements established by local governments, also hindered processing. Although HUD policy intends for capital advances to fund the cost of constructing a modestly designed project, capital advances have not always been sufficient to cover these expenses. HUD field office staff, project sponsors, and consultants reported that program limits on capital advances often kept projects from meeting HUD's time guideline for approving projects for construction. Most field offices, and every sponsor and consultant that we surveyed, reported that insufficient capital advances negatively affected project processing time, and a substantial majority of respondents indicated that this problem occurred frequently. Many respondents also reported that securing secondary financing to supplement the capital advance amount often added to processing time. According to nearly all sponsors and consultants, the capital advance amounts set by HUD were frequently inadequate to cover land, labor, and construction costs as well as fees imposed by local governments. As a result, sponsors had to seek secondary financing from other federal, state, and local sources--including other HUD programs--or redesign projects to cut costs, or both. According to a HUD official, the agency is currently initiating steps to study the sufficiency of capital advances in covering project development costs. In 1996, to help ensure that field office staff and project sponsors could complete project processing requirements within the 18-month time guideline, HUD adopted changes that were intended to streamline processing procedures. One of the key changes included requiring field office staff to accept sponsor-provided certifications of architectural plans, cost estimates, and land appraisals. Previously, field office staff performed detailed technical reviews of these items. According to our survey, differences in the procedures field offices used to approve projects for construction and the lack of staff training and experience affected project processing time. For example, most consultants and sponsors in our survey responded that inconsistent implementation of streamlined processing procedures by field offices caused delays, as did insufficient training for and inexperience of field office staff. Some consultants and sponsors whom we interviewed told us that some field offices continued to conduct much more detailed and time- consuming technical reviews of project plans than HUD's current policies require. HUD has provided limited guidance for field office staff on the current processing policies and procedures. At the time of our review, most field office staff had not received any formal training on Section 202 project processing. According to HUD, in 2002, the agency required representatives from each field office to attend the first formal training on project processing for field office staff since at least 1992. Although HUD headquarters expected those who attended to relay what they had learned to other staff members in their own offices, our survey showed that by November 2002 no on-site training had occurred at about a quarter of the field offices. We also found that HUD's field office staff was relying on out- of-date program handbooks that did not reflect the streamlined processing procedures. HUD's project monitoring system was not as effective as it could have been and may have impeded HUD's oversight of project processing. HUD officials told us that headquarters periodically uses its Development Application Processing (DAP) system to identify projects that have exceeded the 18-month processing time guideline. In addition, headquarters contacts field offices on a quarterly basis to discuss the status of these delayed projects. Nevertheless, HUD officials have acknowledged that there are data inaccuracies in the DAP system. The lack of reliable, centralized data on the processing of Section 202 projects has limited HUD headquarters' ability to oversee projects' status, determine problematic processing stages, and identify field offices that may need additional assistance. HUD officials indicated that enhancing the DAP system is a priority, but that a lack of funding has hindered such efforts. Finally, other factors outside of HUD's direct control kept some projects from meeting the time guideline, according to field office representatives and sponsors and consultants responding to our survey. Almost all survey respondents agreed that project processing time was negatively affected when sponsors were inexperienced in project development. Nearly 60 percent of field offices, and almost 40 percent of sponsors and consultants, indicated that this problem occurred frequently. A majority of survey respondents reported that local government permitting and zoning requirements prolonged project processing, although we found differences of opinion on whether these problems occurred frequently. Community opposition and environmental issues were also reported to negatively affect project processing time, but not frequently. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678 or Paul Schmidt at (312) 220-7681. Individuals making key contributions to this testimony included Emily Chalmers, Mark Egger, Daniel Garcia-Diaz, William Sparling, and Julianne Stephens. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In 2001, an estimated 2 million elderly households with very low incomes (50 percent or less of area median income) did not receive housing assistance. The Department of Housing and Urban Development (HUD) considered most of these households to be "rent burdened" because they spent more than 30 percent of their incomes on rent. The Section 202 Supportive Housing for the Elderly Program provides capital advances (grants) to nonprofit organizations to develop affordable rental housing exclusively for these households. Based on a report issued in May 2003, this testimony discusses the role of the Section 202 program in addressing the need for affordable elderly housing and factors affecting the timeliness of approving and constructing new projects. As the only federal housing program that targets all of its rental units to very low-income elderly households, HUD's Section 202 program provides a valuable housing resource for these households. Although they represent a small share of all elderly households, very low income elderly renters have acute housing affordability problems because of their limited incomes and need for supportive services. The Section 202 program offers about 260,000 rental units nationwide and ensures that residents receive rental assistance and access to services that promote independent living. However, even with the program's exclusive focus, Section 202 has only reached an estimated 8 percent of very low-income elderly households. More than 70 percent of Section 202 projects in GAO's analysis did not meet HUD's time guideline for gaining approval to start construction. These delays held up the delivery of housing assistance to needy elderly households by nearly a year compared with projects that met HUD's guideline. Several factors contributed to these delays, particularly capital advances that were not sufficient to cover development costs. Project sponsors reported that because of insufficient capital advances, they often had to spend time seeking additional funds from HUD and other sources. Although HUD's policy is to provide sufficient funding to cover the cost of constructing a modestly designed project, HUD has acknowledged that its capital advances for the Section 202 program sometimes fall short. Other factors affecting the timeliness of the approval process include inadequate training and guidance for field staff responsible for the approval process, inexperienced project sponsors, and local zoning and permit requirements.

Our work on Customs' efforts to interdict drugs has focused on four distinct areas: (1) internal controls over Customs' low-risk cargo entry programs; (2) the missions, resources, and performance measures for Customs' aviation program; (3) the development of a specific technology for detecting drugs; and (4) Customs drug intelligence capabilities. In July 1998, at the request of Senator Dianne Feinstein, we reported on Customs' drug-enforcement operations along the Southwest border of the United States. Our review focused on low-risk, cargo entry programs in use at three ports--Otay Mesa, California; Laredo, Texas; and Nogales, Arizona. To balance the facilitation of trade through ports with the interdiction of illegal drugs being smuggled into the United States, Customs initiated and encouraged its ports to use several programs to identify and separate low-risk shipments from those with apparently higher smuggling risk. One such program is the Line Release Program, designed to expedite cargo shipments that Customs determined to be repetitive, high volume, and low risk for narcotics smuggling. The Line Release Program was first implemented on the Northern border in 1986 and was expanded to most posts along the Southwest border by 1989. This program requires importers, brokers (companies who process the paperwork required to import merchandise), and manufacturers to apply for the program and to be screened by Customs to ensure that they have no past history of narcotics smuggling and that their prior shipments have been in compliance with trade laws and Customs' commercial importing regulations. In 1996, Customs implemented the Land Border Carrier Initiative Program, which required that the Line Release shipments across the Southwest border be transported by Customs-approved carriers and driven by Customs-approved drivers. After the Carrier Initiative Program was implemented, the number of Southwest Border Line Release shipments dropped significantly. At each of the three ports we visited, we identified internal control weaknesses in one or more of the processes used to screen Line Release applicants for entry into the program. These weaknesses included (1) an absence of specific criteria for determining applicant eligibility at two of the three ports, (2) incomplete documentation of the screening and review of applicants at two of the three ports, and (3) lack of documentation of supervisory review for aspects of the applicant approval process. During our review, Customs representatives from northern and southern land- border cargo ports approved draft Line Release volume and compliance eligibility criteria for program applicants and draft recertification standards for program participants. The Three Tier Targeting Program--a method of targeting high-risk shipments for narcotics inspection--was used at the three Southwest border ports that we visited. According to officials at the three ports, they lost confidence in the program's ability to distinguish high- from low-risk shipment because of two operational problems. First, there was little information available in any database for researching foreign manufacturers. Second, local officials doubted the reliability of the designations. They cited examples of narcotics seizures from shipments designated as "low-risk" and the lack of a significant number of seizures from shipments designated as "high-risk." Customs suspended this program until more reliable information is developed for classifying low- risk importations. One low-risk entry program--the Automated Targeting System--was being pilot tested at Laredo. It was designed to enable port officials to identify and direct inspectional attention to high-risk shipments. That is, the Automated Targeting System was designed to assess shipment entry information for known smuggling indicators and thus enable inspectors to target high-risk shipments more efficiently. Customs is evaluating the Automated Targeting System for expansion to other land-border cargo ports. In September 1998, we reported on Customs' aviation program missions, resources, and performance measures. 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. Originally, the program had two principal missions: border interdiction of drugs being smuggled by plane into the United law enforcement support to other Customs offices as well as other federal, state, and local law enforcement agencies. In 1993, the administration instituted a new policy to control drugs coming from South and Central America. 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. 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. Customs Aviation Program funding decreased from about $195 million in fiscal year 1992, to about $135 million in fiscal year 1997--that is, about 31 percent in constant or inflation-adjusted dollars. While available funds decreased, operations and maintenance costs per aircraft flight hour increased. Customs Aviation Program officials said that this increase in costs was one of the reasons they were flying fewer hours each year. From fiscal year 1993 to fiscal year 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. The size of Customs' fleet dropped in fiscal year 1994, when Customs took 19 surveillance aircraft out of service because of funding reductions. The fleet has remained at about 114 since then. The number of Customs Aviation Program onboard personnel decreased, from a high of 956 in fiscal year 1992 to 745 by the end of fiscal year 1997. Customs has been using traditional law enforcement measures to evaluate the aviation program (e.g., number of seizures, weight of drugs seized, number of arrests). These measures, however, are used to track activity, not measure results or effectiveness. Until 1997, Customs also used an air threat index as an indicator of its effectiveness in detecting illegal air traffic. However, Customs has discontinued use of this indicator, as well as some other performance measures, because Customs determined that they were not good measures of results and effectiveness. Having recognized that these measures were not providing adequate insights into whether the program was producing desired results, Customs said it is developing new performance measures in order to better measure results. However, its budget submission for fiscal year 2000 contained no new performance measures. The pulsed fast neutron analysis (PFNA) inspection system is designed to directly and automatically detect and measure the presence of specific materials (e.g., cocaine) by exposing their constituent chemical elements to short bursts of subatomic particles called neutrons. Customs and other federal agencies are considering whether to continue to invest in the development and fielding of this technology. The Chairman and the Ranking Minority Member of the Subcommittee on Treasury and General Government, Senate Committee on Appropriations, asked us to provide information about (1) the status of plans for field testing a PFNA system and (2) federal agency and vendor views on the operational viability of such a system. We issued the report responding to this request on April 13, 1999. Customs, the Department of Defense (DOD), the Federal Aviation Administration (FAA), and Ancore Corporation--the inspection system inventor--recently began planning to field test PFNA. Because they were in the early stage of planning, they did not expect the actual field test to begin until mid to late 1999 at the earliest. Generally speaking, agency and vendor officials estimated that a field test covering Customs' and DOD's requirements will cost at least $5 million and that the cost could reach $8 million if FAA's requirements are included in the joint test. Customs officials told us that they are working closely with the applicable congressional committees and subcommittees to decide whether Customs can help fund the field test, particularly given the no-federal-cost language of Senate Report 105-251. In general, a complete field test would include (1) preparing a test site and constructing an appropriate facility; (2) making any needed modifications to the only existing PFNA system and its components; (3) disassembling, shipping, and reassembling the system at the test site; and (4) conducting an operational test for about 4 months. According to agency and Ancore officials, the test site candidates are two seaports in California (Long Beach and Oakland) and two land ports in El Paso, Texas. Federal agency and vendor views on the operational viability of PFNA vary. While Customs, DOD, and FAA officials acknowledge that laboratory testing has proven the technical feasibility of PFNA, they told us that the current Ancore inspection system would not meet their operational requirements. Among their other concerns, Customs, DOD, and FAA officials said that a PFNA system not only is too expensive (about $10 million to acquire per system), but also is too large for operational use in most ports of entry or other sites. Accordingly, these agencies question the value of further testing. Ancore disputes these arguments, believes it can produce an operationally cost-effective system, and is proposing that a PFNA system be tested at a port of entry. The Office of National Drug Control Policy has characterized neutron interrogation as an "emerging" or future technology that has shown promise in laboratory testing and thus warrants field testing to provide a more informed basis for deciding whether PFNA has operational merit. At the request of the Subcommittee on National Security, International Affairs and Criminal Justice, House Committee on Government Reform and Oversight, in June 1998 we identified the organizations that collect and/or produce counterdrug intelligence, the role of these organizations, the federal funding they receive, and the number of personnel that support this function. We noted that more than 20 federal or federally funded organizations, including Customs, spread across 5 cabinet-level departments and 2 cabinet-level organizations, have a principal role in collecting or producing counterdrug intelligence. Together, these organizations collect domestic and foreign counterdrug intelligence information using human, electronic, photographic, and other technical means. Unclassified information reported to us by counterdrug intelligence organizations shows that over $295 million was spent for counterdrug intelligence activities during fiscal year 1997 and that more than 1,400 federal personnel were engaged in these activities. The Departments of Justice, the Treasury, and Defense accounted for over 90 percent of the money spent and personnel involved. Customs spent over $14 million in 1997 on counterdrug intelligence, and it is estimated that 63 percent of its 309 intelligence research specialists' duties involved counterdrug intelligence matters. Among its many missions, Customs is the lead agency for interdicting drugs being smuggled into the United States and its territories by land, sea, or air. Customs' primary counterdrug intelligence mission is to support its own drug enforcement elements (i.e., inspectors and investigators) in their interdiction and investigation efforts. Customs is responsible for producing tactical, operational, and strategic intelligence concerning drug-smuggling individuals, organizations, transportation networks, and patterns and trends. In addition to providing these products to its own drug enforcement elements, Customs is to provide this information to other agencies with drug enforcement or intelligence responsibilities. Customs is also responsible for analyzing the intelligence community's reports and integrating them with its own intelligence. Customs' in-house collection capability is heavily weighted toward human intelligence, which comes largely from inspectors and investigators who obtain information during their normal interdiction and investigation activities. In 1998, we reported on selected aspects of the Customs Service's process for determining its need for inspectional personnel--such as inspectors and canine enforcement officers--for the commercial cargo or land and sea passengers at all of its 301 ports. Customs officials were not aware of any formal agencywide efforts prior to 1995 to determine the need for additional cargo or passenger inspectional personnel for its 301 ports. However, in preparation for its fiscal year 1997 budget request and a new drug enforcement operation called Hard Line,Customs conducted a formal needs assessment. The needs assessment considered (1) fully staffing all inspectional booths and (2) balancing enforcement efforts with the need to move complying cargo and passengers quickly through the ports. Customs conducted two subsequent assessments for fiscal years 1998 and 1999. These assessments considered the number and location of drug seizures and the perceived threat of drug smuggling, including the use of rail cars to smuggle drugs. However, all these assessments were focused exclusively on the need for additional personnel to implement Hard Line and similar initiatives, limited to land ports along the Southwest border and certain sea and air ports considered to be at risk from drug smuggling, conducted each year using generally different assessment factors, and conducted with varying degrees of involvement by Customs' headquarters and field units. We concluded that these limitations could prevent Customs from accurately estimating the need for inspectional personnel and then allocating them to ports. We further concluded that, for Customs to implement the Results Act successfully, it had to determine its needs for inspectional personnel for all of its operations and ensure that available personnel are allocated where they are needed most. We recommended that Customs establish an inspectional personnel needs assessment and allocation process, and Customs is now in the process of responding to that April 1998 recommendation. Customs has awarded a contract for the development of a resource allocation model, and Customs officials told us that the model was delivered in March 1999 and that they are in the early stages of deciding how to use the model and implement a formal needs assessment system. Under the Results Act, executive agencies are to develop strategic plans in which they, among other things, define their missions, establish results- oriented goals, and identify strategies they plan to use to achieve those goals. In addition, agencies are to submit annual performance plans covering the program activities set out in the agencies' budgets (a practice which began with plans for fiscal year 1999); these plans are to describe the results the agencies expect to achieve with the requested resources and indicate the progress the agency expects to make during the year in achieving its strategic goals. The strategic plan developed by the Customs Service addressed the six requirements of the Results Act. Concerning the elements required, the mission statement was results oriented and covered Customs' principal statutory mission--ensuring that all goods and persons entering and exiting the United States do so in compliance with all U.S. laws and regulations. The plan's goals and objectives covered Customs' major functions--processing cargo and passengers entering and cargo leaving the United States. The plan discussed the strategies by which Customs hopes to achieve its goals. The strategic plan discussed, in very general terms, how it related to annual performance plans. The plan discussed some key factors, external to Customs and beyond its control, that could significantly affect achievement of the strategic goals, such as the level of cooperation of other countries in reducing the supply of narcotics. Customs' strategic plan also contained a listing of program evaluations used to prepare the plan and provided a schedule of evaluations to be conducted in each of the functional areas. In addition to the required elements, Customs' plan discussed the management challenges it was facing in carrying out its core functions, including information and technology, finance, and human resources management. However, the plan did not adequately recognize Customs' need to improve financial management and internal control systems, controls over seized assets, plans to alleviate Year 2000 problems, and plans to improve computer security. We reported that these weaknesses could affect the reliability of Customs' performance data. Further, our initial review of Customs' fiscal year 2000 performance plan showed that it is substantially unchanged in format from the one presented for 1999. Although the plan is a very useful document for decisionmakers, it still does not recognize Customs' need to improve its internal control systems, control over seized assets, or plans to improve computer security. You asked us to comment on the performance measures proposed by Customs, which are to assess whether Customs is achieving its goals. Customs has included 26 performance measures in its fiscal year 2000 performance plan. These measures range from general information on the level of compliance of the trade community with trade laws and Customs' regulations (which Customs has traditionally used) to very complex measures, such as transportation costs of drug smuggling organizations. Many of these complex measures were still being developed by Customs when the fiscal year 2000 performance plan was issued. In addition, Customs did not include performance targets for 8 of the 26 measures in its fiscal year 2000 plan. Computing Crisis: Customs Has Established Effective Year 2000 Program Controls (GAO/AIMD-99-37, Mar. 29, 1999). responsible for ranges from 1 to 37. The first action plan was issued in February 1999 and has since been updated three times. According to the plan, it is Customs' intention to implement all action items included in the plan by 2000. Customs' Director for Planning is to manage and monitor the plan on an ongoing basis. He told us that items are usually added at the behest of the Commissioner. The Management Inspection Division (part of the Office of Internal Affairs) is responsible for verifying and validating the items that have been reported as completed, including determining whether the action taken was effective. The action plan of May 7--the latest version available--shows that 91 of the 203 items had been completed; 110 were ongoing, pending, or scheduled; and 2 had no description of their status. Overall, use of this kind of management tool can be very helpful in communicating problems and proposed solutions to executives, managers, and the Customs Service workforce, as well as to other groups interested in Customs such as this Committee and us. Mr. Chairman, this completes my 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. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO discussed efforts by the Customs Service to interdict drugs, allocate inspectional personnel, and develop performance measures, including information on Customs' action plan for resolving management problems. GAO noted that: (1) Customs initiated and encouraged its ports to use several programs to identify and separate low-risk shipments from those with apparently higher smuggling risk; (2) GAO identified internal control weaknesses in one or more of the processes used to screen Line Release program applicants for entry into the program; (3) the Three Tier Targeting program was used at the Southwest border ports where officials say they lost confidence in the program's ability to distinguish high- from low-risk shipments; (4) Customs is evaluating the Automated Targeting System for expansion to other land-border cargo ports; (5) Customs has been using traditional law enforcement measures to evaluate the Aviation program; (6) these measures, however, are used to track activity, not measure results or effectiveness; (7) Customs has discontinued the use of the threat index as an indicator of its effectiveness in detecting illegal air traffic, as well as some other performance measures, because Customs determined that they were not good measures of results and effectiveness; (8) Customs, Department of Defense (DOD), Federal Aviation Administration (FAA), and Ancore Corporation recently began planning to field test the pulsed fast neutron analysis (PFNA) inspection system; (9) while Customs, DOD, and FAA officials acknowledge that laboratory testing has proven the technical feasibility of PFNA, they told GAO that the Ancore inspection system would not meet their operational requirements; (10) agency officials said that a PFNA system not only is too expensive, but also is too large for operational use in most ports of entry or other sites; (11) Customs officials were not aware of any formal agencywide efforts prior to 1995 to determine the need for additional cargo or passenger inspectional personnel for its 301 ports; (12) in preparation for its fiscal year 1997 budget request, Customs conducted a formal needs assessment; (13) GAO concluded that the assessments had limitations that could prevent Customs from accurately estimating the need for inspectional personnel and then allocating them to ports; (14) GAO found that Customs' strategic plan contained weaknesses that could affect the reliability of Customs' performance data; (15) Customs' first action plan was issued in February 1999 and has since been updated three times; (16) it is Customs' intention to implement all action items included in the plan by 2000; and (17) use of this kind of management tool can be very helpful in communicating problems and proposed solutions to executives, managers, and the Customs Service workforce.

The Arms Export Control Act gives the President authority to sell defense articles and services to eligible foreign countries, generally at no cost to the U.S. government. While the Defense Security Assistance Agency (DSAA) has overall responsibility for administering the FMS program, the Army, Navy, and Air Force normally execute the sales agreements--commonly referred to as sales cases. Foreign military sales are made on an individual case basis. The cases are initiated by a foreign country representative sending a letter of request to DOD asking for various information, such as precise price data. Once the customer decides to proceed with the purchase, DOD prepares a Letter of Offer and Acceptance (LOA) stating the terms of the sale for the goods and services being provided. The Arms Export Control Act requires that, after September 30, 1976, letters of offer for the sale of major defense equipment shall include a proportionate amount of nonrecurring costs related to the research, development, and production of major defense equipment. DOD interpreted the act as requiring the recovery of these costs on a pro rata basis. The military services calculate the pro rata rate by dividing the 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 and is included in the LOA as part of the price that FMS customers are to pay for the purchase of major defense equipment. After the LOA is accepted, the FMS customer is generally required to pay, in advance, amounts necessary to cover costs associated with the sales agreement, including any nonrecurring costs. These advance payments are held in an FMS trust fund by the Department of the Treasury. DOD then uses these funds to pay private contractors and reimburse DOD activities for the costs of executing and administering the FMS agreement. In addition, as deliveries of major defense equipment occur, the military services are to prepare delivery reports and related cost statements which, among other things, are used as support to charge FMS customers' trust fund accounts for applicable nonrecurring research, development, and production costs. Nonrecurring costs collected from the FMS trust funds are to be deposited into the general fund of the Treasury. The funds are returned to the Treasury instead of to DOD since the Congress had previously provided DOD with appropriated funds to pay for the research, development, and production costs of major defense equipment. If, for some reason, DOD fails to process the charges to recover applicable nonrecurring costs from the FMS customers' trust fund, amounts paid in advance to reimburse the U.S. government for nonrecurring costs would eventually be returned to the FMS customer. As deliveries of major defense equipment are made, the military services are to report the detailed delivery and recovery of nonrecurring costs within 30 days to a central accounting activity--the Defense Finance and Accounting Service (DFAS), Denver Center--which maintains records of each country's trust fund balance and issues quarterly statements to foreign customers summarizing deliveries and amounts charged to their cases. The objective of this assignment was to determine if the Air Force and Navy were correctly recovering nonrecurring research, development, and production costs owed by FMS customers for purchases of major defense equipment. To determine the regulatory requirements for charging and collecting these nonrecurring costs from FMS customers, we obtained and reviewed applicable laws, policies, procedures, regulations, and guidance. During our visits to DOD locations, we gathered and analyzed financial information from pertinent accounting reports and records to identify data on reported deliveries of major defense equipment items and related charges for nonrecurring research, development, and production costs. We judgmentally selected 30 FMS cases for detailed review from a total of 93 Air Force and Navy FMS sales cases listed on their March 1998 reports entitled Recoupment of Nonrecurring Costs on Sales of USG Products and Technology (RCS DSAA (Q) 1112). According to DOD accounting officials, the quarterly reports are to include only ongoing current FMS cases since all nonrecurring costs should be recovered and transferred to the general fund of the Treasury before a case is completed and closed. The reports generally included the country, case, item description, quantity of items to be sold, scheduled delivery dates, quantity of items delivered to date, amount of nonrecurring research, development, and production costs to be collected, and amount of nonrecurring research, development, and production costs collected to date. We selected the 30 FMS cases for detailed review based on whether the unrecovered amount of nonrecurring research, development, and production costs was large and whether the report showed, among other things, that (1) items had been delivered to the customers, but that there had been little or no recovery of nonrecurring costs or (2) scheduled delivery dates were for March 1998 or earlier and no or few deliveries had been made. The 30 FMS cases accounted for about $266 million (40 percent) of the two services' total unrecovered nonrecurring research, development, and production costs of over $655 million. For the selected cases, we contacted the staff responsible for managing the case or other responsible officials knowledgeable about the case, to determine the (1) quantity of items to be delivered, (2) quantity of items delivered to date, (3) total amount of nonrecurring costs to be recovered, and (4) total amount of nonrecurring costs recovered to date. We also asked the staff to provide an explanation for why nonrecurring research, development, and production costs that should have been recovered earlier had not yet been recovered. The dollar values of nonrecurring research, development, and production costs related to major defense equipment items discussed in this report were obtained from DOD reports or responsible program officials. We did not independently verify these costs. We performed our work at the headquarters, departments of the Navy and Air Force; Defense Security Assistance Agency; Office of the Under Secretary of Defense (Comptroller), Washington, D.C.; Naval Air Systems Command, Patuxent River, Maryland; Naval Sea Systems Command, Arlington, Virginia; Air Force Aeronautical Systems Center and Air Force Security Assistance Center, Wright Patterson Air Force Base, Dayton, Ohio; and the Defense Finance and Accounting Service centers in Denver, Colorado, and Columbus, Ohio. We performed our work between February 1998 and August 1998 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Secretary of Defense or his designee. The Under Secretary of Defense (Comptroller) provided written comments. These comments are discussed in the "Agency Comments and Our Evaluation" section and throughout the report where appropriate and are reprinted in appendix I. We found that the Air Force and Navy were not following prescribed policies and procedures for reporting the delivery of items to FMS customers in order to recover the nonrecurring research, development, and production costs. As a result, FMS customers' trust fund accounts were not being charged for millions of dollars of these costs for major defense equipment items they had received. Volume 15 of DOD's Financial Management Regulation 7000.14-R, entitled Security Assistance Policy and Procedures, states that "Charges for nonrecurring costs are earned as items are physically delivered to the FMS customer." It also requires that deliveries be reported to DFAS Denver within 30 days of shipment. While the DOD policy is not specific about the length of time after delivery during which an activity is to charge an FMS customer's trust fund account for the nonrecurring costs, responsible DOD accounting officials told us that the nonrecurring costs should be recouped as items are delivered. According to the DOD accounting officials, DOD activities should prepare the delivery report, recover the nonrecurring costs, and submit both the delivery and recovery of costs data to DFAS Denver within 30 days of shipment of the items. Therefore, DOD policy recognizes delivery reporting as a key step toward initiating the charges to recover nonrecurring costs from FMS customers' trust funds. The following describes what generally should be a typical transaction flow to report the delivery of major defense equipment and recovery of nonrecurring research, development, and production costs. The military service program office is generally responsible for reporting the delivery of items as they are made. It also prepares a cost statement, which serves as the supporting documentation for recording earnings, and forwards these data along with the delivery report to its budget or finance office. The budget or finance office reviews the information and reports the delivery to DFAS Denver. The budget or finance office also attaches a letter to the cost statement requesting that the area accounting office prepare a voucher to collect the nonrecurring costs. The letter and cost statement are then forwarded to the area accounting office for processing. The area accounting office processes the transaction to charge the FMS trust fund and transfer the amount to the general fund of the Treasury and reports the transaction to DFAS Denver, which records the charge against the FMS customer's trust fund account. DOD's reports on nonrecurring costs for current sales cases show that as of March 1998, the Air Force and Navy had over $655 million of nonrecurring research, development, and production costs for major defense equipment sales that had not been recovered from FMS customers. Our analysis and discussions with program officials concerning $266 million of this amount found that at least $183 million of the reported outstanding nonrecurring costs was related to equipment that had been delivered, and therefore, should have already been recovered from the FMS customers' trust fund accounts and deposited in the general fund of the Treasury. In most cases where nonrecurring costs had not been recovered, we found that the military activities' program offices generally had failed to provide the budget or finance office or appropriate accounting station with the proper delivery or cost documentation to support the recoupment of the nonrecurring costs. Following are several examples of FMS cases where nonrecurring research, development, and production costs were not recovered. From July 1993 through November 1995, 48 F-16 aircraft were delivered to South Korea. While DOD's accounting records showed that the FMS customer's account had been charged for over $1.3 billion to pay the contractor and DOD activities for their costs, the Air Force program office had not completed the necessary delivery and cost reports in order to recover the U.S. government's nonrecurring costs of $1,018,050 per aircraft. As a result, as of May 1998, 5 years after the first aircraft had been delivered and over 2 years after the delivery of the 48th aircraft, nearly $49 million of nonrecurring research, development, and production costs, which should have been charged against South Korea's trust fund account and transferred to the general fund of the Treasury, was still outstanding. The program official responsible for preparing the delivery reports could not explain why he had not reported the deliveries of the aircraft. Air Force officials agreed that they had not prepared the delivery reports to recoup the nonrecurring costs and told us that, in response to our finding, they were in the process of preparing the necessary delivery reports and cost statements in order to recover the nearly $49 million from South Korea's trust fund account. Between April 1996 and March 1998, the Air Force reported that it had delivered a total of 78 F-16 aircraft to Taiwan. Based on these reported deliveries, the Air Force should have charged Taiwan's trust fund account $49,920,000 for nonrecurring research, development, and production costs--$640,000 for each delivered aircraft. We found, however, that while Taiwan's trust fund account had been charged over $2.3 billion to pay the contractor and other costs, only $1,574,366 of nonrecurring research, development, and production costs had been charged against the trust fund account. In discussing this case with officials in the program and budget offices, we found that the program office had reported the delivery of the items to the budget office and DFAS Denver but that the delivery report did not include the cost statement, which the budget office required for processing nonrecurring costs charges. As a result, over $48 million of nonrecurring costs had not been charged to Taiwan's trust fund account and transferred to the general fund of the Treasury. Air Force officials agreed with our finding and told us that they have instructed the program office to include the cost statement with the delivery report so that this does not happen again, and that they have begun the process of preparing the necessary cost statements for the aircraft that have already been delivered. The officials anticipate that they will recover the $48 million from Taiwan's trust fund account. A review of the nonrecurring costs report for another Taiwan case, this one managed by the Navy, showed that between June 1993 and February 1998, Taiwan had received 43 attack helicopters, 53 night target systems, and 20 spare engines. Based on these reported deliveries, the Navy should have charged Taiwan's trust fund account for $19,819,858 of nonrecurring research, development, and production costs. While our review of financial records disclosed that Taiwan's trust fund account had over $600 million recorded against it for contractor payments and other miscellaneous charges, we found that none of the over $19 million of nonrecurring costs had been charged to Taiwan's account. Navy program officials responsible for reporting the delivery of the items agreed that Taiwan's trust fund account had not been charged for nonrecurring costs but could not explain why this was allowed to happen. They added that they were not aware of this problem until we brought it to their attention. They now plan to take the necessary actions to charge Taiwan's trust fund account for the over $19 million of outstanding nonrecurring costs. A review of the nonrecurring costs report for a Navy sale of 482 target detectors to Japan showed that all of the items had been delivered as of 1989. However, the report showed that only $163,398 of the $557,444 of the nonrecurring research, development, and production costs associated with the items had been recovered. At our request, the Navy program official reviewed the case and told us that the original amount had been miscalculated and should have been $376,442, not the $557,444 shown on the report. He told us that based on his new calculations, an additional $213,044 of nonrecurring costs should have been charged to Japan's trust fund account; but he could not tell us why this amount had not been recovered earlier. He told us that the Navy plans to recoup the $213,044 of outstanding nonrecurring costs from Japan's trust fund account. As noted earlier, our review focused only on 30 of the 93 FMS cases that were included in the March 1998 reports, which should only include current ongoing cases, of DOD recoupment of nonrecurring costs of U.S. government products and technology. Over the years DOD has routinely closed FMS cases as they were completed. In response to our request for nonrecurring cost data on these closed cases, DOD officials told us that a query of their FMS system's database disclosed that over 11,000 cases, involving major defense equipment, had been closed since 1976. However, their database did not include information on the total amounts of nonrecurring costs owed or collected. The officials did acknowledge, however, that there would have been hundreds of millions of dollars of nonrecurring research, development, and production costs associated with these closed cases. Because of the magnitude of nonrecurring research, development, and production costs we identified that had not been charged to FMS customers' trust fund accounts as a result of the services' noncompliance with established DOD policies and procedures for recovering these costs, some FMS cases may have been erroneously closed before all nonrecurring costs were recovered from FMS customers' trust fund accounts. A responsible DOD accounting official agreed that this was a major concern and acknowledged that, given the level of the services' noncompliance with DOD's policies and procedures for reporting the deliveries of items and recovery of applicable nonrecurring costs, FMS cases could have easily been closed before all nonrecurring costs were recovered. Not recovering nonrecurring research, development, and production costs from the FMS trust fund promptly after major defense equipment is delivered to the FMS customer represents a poor financial management practice that delays the transfer of millions of dollars into the general fund of the Treasury. Also, it raises the risk that amounts will never be recovered and that these funds, deposited in advance into the FMS trust fund for this purpose, will erroneously be returned to customers. The Air Force and Navy should begin to comply with DOD's established policies and procedures for reporting the delivery of major defense equipment and recouping applicable nonrecurring research, development, and production costs. This will help ensure that all amounts of nonrecurring research, development, and production costs associated with the sale of major defense equipment are promptly recovered and deposited in the general fund of the Treasury and that no FMS cases are erroneously closed before all costs are recovered. We recommend the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to require the Air Force and Navy to recover the over $183 million identified in this report as nonrecurring research, development, and production costs that have not been charged to FMS customers' trust fund accounts for major defense equipment that has already been delivered, review all the other open FMS cases that require FMS customers to pay a proportionate amount of nonrecurring research, development, and production costs for major defense equipment and recoup nonrecurring costs that have not yet been recovered for items that have already been delivered to FMS customers, and follow DOD policies and procedures for reporting the delivery of major defense equipment so that the FMS customers' accounts can be charged with nonrecurring research, development, and production costs and amounts transferred to the general fund of the Treasury within the 30 days required by DOD policy. We also recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to direct the Air Force and Navy to review closed FMS cases to ensure that all nonrecurring research, development, and production costs for delivered major defense equipment have been recouped. Initially, this review of closed cases could be limited to a specific period. For example, the review could include FMS cases that were closed during the last 5 fiscal years. If this review discloses that there have been FMS cases closed before all nonrecurring research, development, and production costs were recouped, (1) any amounts due the U.S. government should be recovered from the FMS customer and (2) the review should be expanded to include closed cases for additional fiscal years. The Under Secretary of Defense (Comptroller) agreed to instruct the Navy and Air Force to recover all applicable nonrecurring costs we identified as not billed to FMS customers. The Comptroller also agreed to require the Navy and Air Force to review all other open cases for outstanding nonrecurring costs and to instruct them to follow DOD policies and procedures for reporting the delivery of defense articles and the collection of applicable nonrecurring costs. He also agreed with our recommendation that a review be conducted of closed foreign military sales cases to determine if any cases were closed before all nonrecurring costs were recovered. However, he pointed out that since the Air Force and Navy retain their respective records for the closed foreign military sales cases, it would be appropriate that they conduct those reviews rather than the Defense Security Assistance Agency. We have revised our recommendation accordingly. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, the House and Senate Committees on Appropriations, and the House Subcommittee on Government Management, Information and Technology; the Secretary of Defense; the Secretary of the Navy; the Acting Secretary of 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 contact me at (202) 512-6240 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Frank Maguire, 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 reviewed the Department of Defense's (DOD) ability to account for and report on the full costs of the foreign military sales (FMS) program, focusing on DOD's: (1) recoupment of monies owed by FMS customers for the U.S. government's research, development, and production costs of major defense equipment; and (2) accountability over expenditures of FMS customers' funds. GAO focused on Air Force and Navy activities. GAO noted that: (1) the Air Force and Navy were not always recovering nonrecurring research, development, and production costs from the FMS trust fund as major defense equipment items were delivered to the FMS customer; (2) specifically, GAO identified over $183 million of nonrecurring costs related to items that were delivered--some as long ago as 1989--that had not been charged to the FMS customers' trust fund account; (3) for example, between July 1993 and November 1995, South Korea received 48 F-16 aircraft on a FMS case managed by the Air Force; (4) GAO's review of the case disclosed that no deliveries had been reported for the purpose of recovering nonrecurring research, development, and production costs; (5) had the Air Force followed DOD's procedures and reported the deliveries and recouped the nonrecurring costs within 30 days of physical delivery of the aircraft, it would have already charged South Korea's trust fund account for over $49 million of nonrecurring research, development, and production costs; and (6) Air Force and Navy officials agreed that FMS customers were not being properly charged for millions of dollars of nonrecurring costs for major defense equipment items they had received and have begun to take actions to recover the outstanding amounts.

Since the 1960s, the United States has used both polar-orbiting and geostationary satellites to observe the earth and its land, oceans, atmosphere, and space environments. Polar-orbiting satellites constantly circle the earth in an almost north-south orbit, providing global coverage of conditions that affect the weather and climate. As the earth rotates beneath it, each polar-orbiting satellite views the entire earth's surface twice a day. In contrast, geostationary satellites maintain a fixed position relative to the earth from a high orbit of about 22,300 miles in space. Both types of satellites provide a valuable perspective of the environment and allow observations in areas that may be otherwise unreachable. Used in combination with ground, sea, and airborne observing systems, satellites have become an indispensable part of monitoring and forecasting weather and climate. For example, polar-orbiting satellites provide the data that go into numerical weather prediction models, which are a primary tool for forecasting weather days in advance--including forecasting the path and intensity of hurricanes, and geostationary satellites provide the graphical images used to identify current weather patterns. These weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help mitigate its effects. Polar satellites also provide data used to monitor environmental phenomena, such as ozone depletion and drought conditions, as well as long-term data sets that are used by researchers to monitor climate change. For over forty years, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar- orbiting Operational Environmental Satellite series, which is managed by NOAA, and the Defense Meteorological Satellite Program, which is managed by the Air Force. Currently, there is one operational Polar- orbiting Operational Environmental Satellite and two operational Defense Meteorological Satellite Program satellites that are positioned so that they cross the equator in the early morning, midmorning, and early afternoon. In addition, the government is also relying on data from a European satellite, called the Meteorological Operational (MetOp) satellite program. With the expectation that combining the Polar-orbiting Operational Environmental Satellite program and the Defense Meteorological Satellite Program would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two satellite programs into a single satellite program--the National Polar-orbiting Operational Environmental Satellite System (NPOESS)--capable of satisfying both civilian and military requirements. However, in the years after the program was initiated, NPOESS encountered significant technical challenges in sensor development, program cost growth, and schedule delays. Specifically, within 8 years of the contract's award, program costs grew by over $8 billion, and launch schedules were delayed by over 5 years. In addition, as a result of a 2006 restructuring of the program, the agencies reduced the program's functionality by decreasing the number of originally planned satellites, orbits, and instruments. Even after this restructuring, however, the program continued to encounter technical issues, management challenges, schedule delays, and further cost increases. Therefore, in August 2009, the Executive Office of the President formed a task force, led by the Office of Science and Technology Policy, to investigate the management and acquisition options that would improve the program. As a result of this review, the Director of the Office of Science and Technology Policy announced in February 2010 that NOAA and DOD would no longer jointly acquire NPOESS; instead, each agency would plan and acquire its own satellite system. Specifically, NOAA and NASA would be responsible for the afternoon orbit, and DOD would be responsible for the early morning orbit. The partnership with the European satellite agencies for the midmorning orbit would continue as planned. When this decision was announced, NOAA immediately began planning for a new satellite program in the afternoon orbit--called JPSS--and DOD began planning for a new satellite program in the morning orbit-- called the Defense Weather Satellite System. NOAA transferred management responsibilities to its new satellite program, defined its requirements, and transferred contracts to the new program. Specifically, NOAA established a program office to guide the development and launch of the NPOESS Preparatory Project (NPP)that was developed under NPOESS and managed by the National Aeronautics and Space Administration (NASA)--as well as the two planned JPSS satellites, known as JPSS-1 and JPSS-2. NOAA also worked with NASA to establish its program office to oversee the acquisition, system engineering, and integration of the satellite program. By 2011, the two agencies had established separate--but co-located-- JPSS program offices, each with different roles and responsibilities. In addition, DOD established its Defense Weather Satellite System program office, started defining its requirements, and modified contracts to reflect the new program. These efforts, however, have been halted. In early 2012, in response to congressional direction, DOD decided to terminate the program because it still has two satellites to launch within its legacy Defense Meteorological Satellite Program. DOD is currently identifying alternative means to fulfill its future environmental satellite requirements. We have issued a series of reports on the NPOESS program--and the transition to JPSS--highlighting technical issues, cost growth, key management challenges, and key risks of transitioning from NPOESS to In these reports, we made multiple recommendations to, among JPSS.other things, improve executive-level oversight and develop realistic time frames for revising cost and schedule baselines. NOAA has taken steps to address our recommendations, including taking action to improve executive-level oversight, but as we note in our report being released today, the agency is still working to establish cost and schedule baselines. In addition to polar-orbiting satellites, NOAA operates GOES as a two- satellite geostationary satellite system that is primarily focused on the United States. The GOES-R series is the next generation of satellites that NOAA is planning; the satellites are planned to replace existing weather satellites that will likely reach the end of their useful lives in about 2015. NOAA is responsible for overall mission success for the GOES-R program. The NOAA Program Management Council, which is chaired by NOAA's Deputy Undersecretary, is the oversight body for the GOES-R program. However, since it relies on NASA's acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for GOES-R. Within the program office, two project offices manage key components of the GOES-R system. NOAA has entered into an agreement with NASA to manage the Flight Project Office, including awarding and managing the spacecraft contract and delivering flight- ready instruments to the spacecraft. The Ground Project Office, managed by NOAA, oversees the Core Ground System contract and satellite data product development and distribution. NOAA has made a number of changes to the program since 2006, including the removal of certain satellite data products and a critical instrument (the Hyperspectral Environmental Suite), and a reduction in the number of satellites from four to two. NOAA originally decided to reduce the scope and technical complexity of the GOES-R program because of the expectation that total costs, which were estimated to be $6.2 billion, could reach $11.4 billion. Recently, NOAA restored two satellites to the program's baseline, making GOES-R a four-satellite program once again. In February 2011, as part of its fiscal year 2012 budget request, NOAA requested funding to begin development for two additional satellites in the GOES-R series. The program estimates that the development for all four satellites in the GOES-R series is to cost $10.9 billion through 2036. The current anticipated launch date for the first GOES-R satellite is planned to be in October 2015, with the last satellite in the series planned for launch in calendar year 2024. In September 2010, we reported that as a result of delays to planned launch dates for the first two satellites in the GOES-R series, NOAA might not be able to meet its policy of having a backup satellite in orbit at all times, which could lead to a gap in satellite coverage if an existing satellite failed prematurely. document plans for the operation of geostationary satellites that included the implementation procedures, resources, staff roles, and time tables needed to transition to a single satellite, an international satellite, or other solution. We recommended that NOAA develop and NOAA has since developed a continuity plan that generally includes the key elements we recommended. As a result, NOAA has improved its ability to fully meet its mission-essential function of providing continuous satellite imagery in support of weather forecasting. NOAA and NASA have made progress on the JPSS program since it was first formed in 2010, but are modifying requirements to limit program costs. After establishing a JPSS program office and transferring contracts to NASA, the program successfully launched the NPP satellite on October 28, 2011. After this launch, NASA began the process of activating the satellite and commissioning the instruments, a process that was completed in March 2012. NOAA is receiving data from the five sensors on the NPP satellite, and has begun calibration and validation. NOAA's satellite data users began to use validated products from one sensor in May 2012, and NOAA expects that they will increase the amount and types of data they use in the following months. In addition, NOAA established initial requirements for the JPSS program in September 2011. Key components include acquiring and launching JPSS-1 and JPSS-2, developing and integrating five sensors on the two satellites, finding alternate host satellites for selected instruments that would not be accommodated on the JPSS satellites, and providing ground system support. NOAA also developed a cost estimate for the JPSS program, which it reconciled with an independent cost estimate. Specifically, from January to December 2011, the agency went through a cost estimating exercise for the JPSS program. At the end of this exercise, NOAA validated that the cost of the full set of JPSS functions from fiscal year 2012 through fiscal year 2028 would be $11.3 billion. After adding the agency's sunk costs of $3.3 billion, the program's life cycle cost estimate totaled $14.6 billion. This amount is $2.7 billion higher than the $11.9 billion estimate for JPSS when NPOESS was disbanded in 2010. Although NOAA has established initial requirements for the program, these requirements could--and likely will--change in the near future, in order to limit program costs. In working with the Office of Management and Budget to develop the president's fiscal year 2013 budget request, NOAA officials stated that they agreed to fund JPSS at roughly $900 million per year through 2017, to merge funding for two climate sensors into the JPSS budget, and to cap the JPSS life cycle cost at $12.9 billion through 2028. Because this cap is $1.7 billion below the expected $14.6 billion life cycle cost of the full program, our report being released today discusses NOAA's plans to remove selected elements from the satellite program. These included NOAA potentially discontinuing the development of certain sensors, plans for a network of ground-based receptor stations, planned improvements in the time it takes to obtain satellite data from JPSS-2, and plans to install a data processing system at two Navy locations. Recently, NOAA briefed us on updated plans to address this cost cap by changing the way the agency approached operations and sustainment, and restructuring the free-flyers project. The removal of these elements from the JPSS program will affect both civilian and military satellite data users. The loss of certain sensors could cause a break in the over 30-year history of satellite data and would hinder the efforts of climatologists and meteorologists focusing on understanding changes in the earth's ozone coverage and radiation budget. The loss of ground-based receptor stations means that NOAA may not be able to improve the timeliness of JPSS-2 satellite data from 80 minutes to the current 30 minute requirement, and as a result, weather forecasters will not be able to update their weather models using the most recent satellite observations. Further, the loss of the data processing systems at the two Navy locations means that NOAA and the Navy will need to establish an alternative way to provide data to the Navy. The major components of the JPSS program are at different stages of development, and important decisions and program milestones lie ahead. NASA's JPSS program office organized its responsibilities into three separate projects: (1) the flight project, which includes sensors, spacecraft, and launch vehicles; (2) the ground project, which includes ground-based data processing and command and control systems, and (3) the free-flyer project, which involves developing and launching the instruments that are not going to be included on the JPSS satellites (including a data collection system used to transmit ground-based observations from remote locations, such as ocean-based buoys; a search and rescue system, and a total solar irradiance sensor). Within the flight project, development of the sensors for the first JPSS satellite is well under way; however, selected sensors are experiencing technical issues and the impact of these issues has not yet been determined. For example, the program plans to address communication issues that could affect a key sensor's ability to provide data in every orbit, but they have not identified the potential cost and schedule impact of this issue. The ground project is currently in operation supporting NPP, and NOAA is planning to upgrade selected parts of the ground systems to increase security and reliability. The free-flyer project is still in a planning stage because NOAA has not yet decided which satellites will host the instruments or when these satellites will launch. One of these projects has recently completed a major milestone and one project has its next milestone approaching. Specifically, the flight project completed a separate system requirements review in April 2012, while the ground project's system requirements review is scheduled for August 2012. Since its inception, NPOESS was seen as a constellation of satellites providing observations in the early morning, midmorning, and afternoon orbits. Having satellites in each of these orbits ensures that satellite observations covering the entire globe are no more than 6 hours old, thereby allowing for more accurate weather predictions. Even after the program was restructured in 2006 and eventually terminated in 2010, program officials and the administration planned to ensure coverage in the early morning, midmorning, and afternoon orbits by relying on DOD satellites for the early morning orbit, the European satellite program for the midmorning, and NOAA's JPSS program for the afternoon orbit. However, recent events have made the future of the polar satellite constellation uncertain: Early morning orbit--As discussed earlier in this statement, in early fiscal year 2012, DOD terminated its Defense Weather Satellite System program. While the agency has two more Defense Meteorological Satellite Program satellites--called DMSP-19 and DMSP-20--to launch and is working to develop alternative plans for a follow-on satellite program, there are considerable challenges in ensuring that a new program is in place and integrated with existing ground systems and data networks in time to avoid a gap in this orbit. DOD officials stated that they plan to launch DMSP-19 in 2014 and DMSP-20 when it is needed. If DMSP-19 lasts 6 years, there is a chance that DMSP-20 will not be launched until 2020. Thus, in a best- case scenario, satellites from the follow-on program will not need to be launched until roughly 2026. However, civilian and military satellite experts have expressed concern that the Defense Meteorological Satellite Program satellites are quite old and may not work as intended. If they do not perform well, DOD could be facing a satellite data gap in the early morning orbit as early as 2014. Midmorning orbit--The European satellite organization plans to continue to launch MetOp satellites that will provide observations in the midmorning orbit through October 2021. The organization is also working to define and gain support for the follow-on program, called the Eumetsat Polar System-2nd Generation program. However, in 2011, NOAA alerted European officials that, because of the constrained budgetary environment, they will no longer be able to provide sensors for the follow-on program. Due to the uncertainty surrounding the program, there is a chance that the first European follow-on satellite will not be ready in time to replace the final MetOp satellite at the end of its expected life. In that case, this orbit, too, would be in jeopardy. Afternoon orbit--There is likely to be a gap in satellite observations in the afternoon orbit that could last well over one year. According to our analysis, this gap could span from 17 months to 3 years or more. In one scenario, NPP would last its full expected 5-year life (to October 2016), and JPSS-1 would launch as soon as possible (in March 2017) and undergo on-orbit checkout for a year (until March 2018). In that case, the data gap would extend 17 months. In another scenario, NPP would last only 3 years as noted by NASA managers concerned with the workmanship of selected NPP sensors. Assuming that the JPSS-1 launch occurred, as currently scheduled, in March 2017 and the satellite data was certified for official use by March 2018, this gap would extend for 41 months. Of course, any problems with JPSS-1 development could delay the launch date and extend the gap period. Given the history of technical issues and delays in the development of the NPP sensors and the current technical issues on the sensors, it is likely that the launch of JPSS-1 will be delayed. While the scenarios in our analysis demonstrated gaps lasting between 17 and 53 months, NOAA program officials believe that the most likely scenario involves a gap lasting 18 to 24 months. Figure 1 depicts the polar satellite constellation and the uncertain future coverage in selected orbits. According to NOAA, a data gap would lead to less accurate and timely weather prediction models used to support weather forecasting, and advanced warning of extreme events--such as hurricanes, storm surges, and floods--would be diminished. To illustrate this, the National Weather Service performed several case studies to demonstrate how its weather forecasts would have been affected if there were no polar satellite data in the afternoon orbit. For example, when the polar satellite data were not used to predict the "Snowmaggedon" winter storm that hit the Mid-Atlantic coast in February 2010, weather forecasts predicted a less intense storm, slightly further east, and producing half of the precipitation at 3, 4, and 5 days before the event. Specifically, weather prediction models under- forecasted the amount of snow by at least 10 inches. The agency noted that this level of degradation in weather forecasts could place lives, property, and critical infrastructure in danger. The NOAA Administrator and other senior executives acknowledge the risk of a data gap in each of the orbits of the polar satellite constellation and are working with European and DOD counterparts to coordinate their respective requirements and plans; however, they have not established plans for mitigating risks to the polar satellite constellation. NOAA plans to use older polar satellites to provide some of the necessary data for the other orbits. However, it is also possible that other governmental, commercial, or international satellites could supplement the data in each of the three orbits. For example, foreign nations continue to launch polar- orbiting weather satellites to acquire data such as sea surface temperatures, sea surface winds, and water vapor. Also, over the next few years, NASA plans to launch satellites that will collect information on If there are viable options from external precipitation and soil moisture.sources, it could take time to adapt NOAA systems to receive, process, and disseminate the data to its satellite data users. Until NOAA identifies these options and establishes mitigation plans, it may miss opportunities to leverage alternative satellite data sources. While the GOES-R program has made progress in completing its design, many key milestones were completed later than planned. The program demonstrated progress towards completing its design in part by completing its set of preliminary design reviews, which indicated readiness to proceed with detailed design activities. The program and its projects are also making progress towards the final design for the entire GOES-R system, which is expected to be completed at the program's critical design review planned for August 2012. However, many key design milestones were completed later than the dates established for them in December 2007 (when the flight and ground project plans were established, prior to entering the program's development phase), and were also later than the dates established following award of the contracts for the instruments, spacecraft, and ground system components. For example, the program's preliminary design review was completed 19 months later than planned, and its critical design review is expected to be completed 13 months later than planned. The program has also revised planned milestone dates for certain components by at least 3 months--and up to 2 years--since its originally estimated dates. Changes in planned completion dates have occurred for all five flight project instruments, as well as in major components of the ground project. Figure 2 summarizes these changes in planned completion dates. GOES-R has also encountered a number of technical challenges, some of which remain to be fully addressed. For example, in early 2011 the program discovered that the ground project development schedule included software deliveries from flight project instruments that were not properly integrated--they had not yet been defined or could not be met. To address these problems and avoid potential slippages to GOES-R's launch date, project officials decided to switch to an approach where software capabilities could be delivered incrementally. While the revised plan was to reduce schedule risk with greater schedule flexibility, the plan was also expected to cost an additional $85 million and introduce other risks associated with the incremental development such as additional contractor staff and software development and verification activities that require government oversight and continuous monitoring. So far, NOAA has been able to address certain delays and technical challenges with an available contingency reserve, in which a portion of the program's budget is allocated to mitigate risks and manage problems as they surface during development, and has not changed its 2007 cost estimates for the development of the first two program satellites. However, contractors' cost estimates for major project components have increased by $757 million, or 32 percent, between January 2010 and January 2012. Given the recent increases in contract costs, the program plans to determine how to cover these increased costs by reducing resources applied to other areas of program development and support, delaying scheduled work, or absorbing additional life cycle costs. Furthermore, as a result of changes in budget reserve allocations and reserve commitments, the program's reserves have declined in recent years from $1.7 billion to $1.2 billion. Between January 2009 and January 2012, the program reported that its reserves fell from 42 percent of remaining development costs to 29 percent. NOAA's ability to effectively limit milestone delays and component cost increases depends in part on having an integrated and reliable programwide schedule--called an integrated master schedule--that defines, among other things, necessary detailed tasks, when work activities and milestone events will occur, how resources will be applied, how long activities will take, and how activities are related to one another. GOES-R has a programwide integrated master schedule that is created manually once a month directly from at least nine subordinate contractor schedules. We analyzed four of these subordinate contractor schedules and discovered instances where certain best practices had been implemented in the schedules, as well as weaknesses in each schedule when compared to nine scheduling best practices. When viewed in conjunction with manual program-level updates, we concluded that the program-level schedule may not be fully reliable. A full set of analysis results is listed in table 1. Selected schedule weaknesses existed across each of the four schedules analyzed. For example, each of the contractor schedules either did not include information on allocation of resources or allocated too much work to many of its resources. In addition, none of the contractors had completed usable schedule risk analyses that included risk simulations. Particularly important is the absence of a valid critical path throughout all the schedules. Establishing a valid program-level critical path depends on the resolution of issues with the respective critical paths for the spacecraft and Core Ground System components. Without a valid critical path, management cannot determine which delayed tasks will have detrimental effects on the project finish date. The program office has taken specific positive actions that address two of the scheduling weaknesses we identified. First, the program implemented a tool that tracks deliverables between the flight and ground projects. This initiative is intended to address a program-recognized need for better integration among the program components. Second, the program conducted a schedule risk analysis designed to identify the probability of completing a program on its target date. This initiative, while not addressing risk analyses for component schedules, is intended to address a program-recognized need to conduct a schedule risk analysis. In addition, GOES-R officials also stated that they are in the process of creating an automated process for updating their integrated master schedule sometime in 2012 and our analysis did find improvements between July 2011 and December 2011 to weaknesses in each of the four contractors' schedules. While the program has taken positive steps to improve its scheduling, weaknesses that have the potential to cause delays nonetheless still exist as the instruments, spacecraft, and ground project components complete their design and testing phases. For example, according to program officials, the Geostationary Lightning Mapper shipment date remains at risk of a potential slip due to redesign efforts. The current projected delivery for this instrument is August 2013, leaving only 1 month before it is on the critical path for GOES-R's launch readiness date. As another example, the schedule reserve for the first satellite in the GOES-R series is being counted on to complete activities for the second satellite in the series. As a result, delays to certain program schedule targets for the first satellite could impact milestone commitments for the second satellite. The schedule risk analysis conducted by the program indicated that there is a 48 percent confidence level that the program will meet its current launch readiness date of October 2015. Program officials plan to consult with the NOAA Program Management Council to determine the advisability of moving the launch readiness date to a 70 percent confidence level for February 2016. Even these confidence levels may not be reliable, since the establishment of accurate confidence estimates depends on reliable data that, in turn, results from the implementation of a full set of scheduling best practices not yet in place in the program. Delays in GOES-R's launch date could impact the continuity of GOES satellite coverage and could produce milestone delays for subsequent satellites in the series. Program documentation indicates that there is a 37 percent chance of a gap in the availability of two operational GOES- series satellites at any one time given the current October 2015 launch readiness date and an orbital testing period, assuming a normal lifespan for the satellites currently on-orbit. Any delays in the launch readiness date for GOES-R, which is already at risk due to increasing development costs and use of program reserves, would further increase the probability of a gap in satellite continuity. This could result in the need for NOAA to rely on older satellites that are not fully functional. Both the JPSS and GOES-R programs face risks going forward during their development; implementing the recommendations in our accompanying reports should help mitigate those risks. In the JPSS report being released today, we recommend that NOAA establish mitigation plans for risks associated with pending satellite data gaps in the afternoon orbit as well as potential gaps in the morning and midmorning orbits. NOAA agreed with our recommendation and noted that the National Environmental Satellite, Data, and Information Service-- a NOAA component agency--has performed analyses on how to mitigate potential gaps in satellite data, but has not yet compiled this information into a report. The agency plans to provide a report to NOAA by August 2012. To improve NOAA's ability to execute GOES-R's remaining planned development with appropriate reserves, improve the reliability of its schedules, and address identified program risks, we are recommending in our report being released today that NOAA Assess and report to the NOAA Program Management Council the reserves needed for completing remaining development for each satellite in the series. Assess shortfalls in schedule management practices, including creating a realistic allocation of resources and ensuring an unbroken critical path from the current date to the final satellite launch. Execute the program's risk management policies and procedures to provide more timely and adequate evaluations and reviews of newly identified risks, and provide more information, including documented handling strategies, for all ongoing and newly-identified risks in the risk register. Add to the program's critical risk list the risk that GOES-S milestonesthat this risk and the program-identified funding stability risk are adequately monitored and mitigated. may be affected by GOES-R development, and ensure In commenting on a draft of our GOES-R report, NOAA agreed with three of our four recommendations. It partially concurred with the fourth recommendation to fully further execute the program's risk management policies and procedures and to include timely review and disposition of candidate risks. NOAA stated that it did not consider the "concerns" listed in its risk database to be risks or candidate risks and that the risk management board actively determines whether recorded concerns should be elevated to a risk. However, the GOES-R program is not treating concerns in accordance with its risk management plan, which considers these to be "candidate risks" and requires their timely review and disposition, as evidenced by the many concerns in the database that were more than 3 months old and had not been assessed or dispositioned. Unless NOAA follows its risk management plan by promptly evaluating "concerns," it cannot ensure that it is adequately managing the full set of risks that could impact the program. In summary, after spending about $3.3 billion on the now-defunct NPOESS program, NOAA officials have established a $12.9-billion JPSS program and made progress in launching NPP, establishing contracts for the first JPSS satellite, and enhancing the ground systems controlling the satellites and processing the satellite data. In the coming months, program officials face changing requirements, technical issues on individual sensors, key milestones in developing the JPSS satellite, and important decisions on the spacecraft, launch vehicles, and instruments that are not included on the JPSS satellite. In addition, NOAA has not established plans to mitigate the almost certain satellite data gaps in the afternoon orbit or the potential gaps in the early and mid-morning orbits. These gaps will likely affect the accuracy and timeliness of weather predictions and forecasts and could affect lives, property, military operations, and commerce. Until NOAA identifies its mitigation options, it may miss opportunities to leverage alternative satellite data sources. Completing many of GOES-R's early design activities is an accomplishment for this complex program, but this accomplishment has been accompanied by milestone delays and increased contractor cost estimates for GOES-R's components. The unreliability of GOES-R's schedules adds further uncertainty as to whether the program will meet its commitments. NOAA has taken steps to improve schedule reliability, but until the program implements and uses a full set of schedule best practices throughout the life of the program, further delays to program milestones may occur. Moreover, until all contractor and subcontractor information is included in the program's integrated master schedule and regular schedule risk assessments are conducted, program management may not have timely and relevant information at its disposal for decision making, undercutting the ability of the program office to manage this high- risk program. Chairman Broun, Chairman Harris, Ranking Member Tonko, Ranking Member Miller, 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 have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or at [email protected]. Other key contributors include Colleen Phillips (Assistant Director), Paula Moore (Assistant Director), Shaun Byrnes, Kate Feild, Nancy Glover, Franklin Jackson, Fatima Jahan, and Josh Leiling. 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 two satellite acquisition programs within the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA). The Joint Polar Satellite System (JPSS) and the Geostationary Operational Environmental Satellite-R (GOES-R) programs are meant to replace current operational satellites, and both are considered critical to the United States' ability to maintain the continuity of data required for weather forecasting. As requested, this statement summarizes our two reports being released today on (1) the status, plans, and risks for JPSS and (2) the status, schedule management process, and risk management process within the GOES-R program. We found that the JPSS cost and GOES-R contractor cost data were sufficiently reliable for our purposes. Further, while we found that the GOES-R schedule and management reserve data were not sufficiently reliable, we reported on the data's shortcomings in our report.

The US-VISIT program is a governmentwide endeavor intended to enhance national security, facilitate legitimate trade and travel, contribute to the integrity of the U.S. immigration system, and adhere to U.S. privacy laws and policies by collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States; identifying foreign nationals who (1) have overstayed or violated the terms of their visit; (2) can receive, extend, or adjust their immigration status; or (3) should be apprehended or detained by law enforcement officials; detecting fraudulent travel documents, verifying traveler identity, and determining traveler admissibility through the use of biometrics; and facilitating information sharing and coordination within the border management community. The program involves interdependencies among people, processes, technology, and facilities, as shown in figure 1. Within DHS, organizational responsibility for the US-VISIT program lies with the Border and Transportation Security Directorate. In July 2003, DHS established a US-VISIT program office with responsibility for managing the acquisition, deployment, operation, and sustainment of the US-VISIT system and supporting people (e.g., inspectors), processes (e.g., entry exit policies and procedures), and facilities (e.g., inspection booths). DHS plans to deliver US-VISIT capability incrementally. Currently, it has defined four increments, with Increments 1 through 3 being interim or temporary solutions, and Increment 4 being the yet-to-be-defined end vision for US-VISIT. Increments 1 through 3 include the interfacing and enhancement of existing system capabilities and the deployment of these capabilities to air, sea, and land ports of entry (POE). 1. The first increment includes the electronic collection and matching of biographic and biometric information at all major air and some sea POEs for selected foreign travelers with non-immigrant visas. Increment 1 entry capability was deployed to 115 airports and 14 seaports on January 5, 2004. Increment 1 exit capability was deployed as a pilot to two POEs on January 5, 2004--one airport and one seaport. 2. The second increment is divided into two parts--2A and 2B. Increment 2A is to include the capability to process machine-readable visas and other travel and entry documents that use biometric identifiers at all POEs. This increment is to be implemented by October 26, 2004. Increment 2B is to expand the Increment 1 solution for entry to secondary inspection at the 50 highest volume land POEs by December 31, 2004. According to the US-VISIT Request for Proposal (RFP), 2B is also to include radio frequency (RF) capability at the 50 busiest land POEs for both entry and exit processes. 3. Increment 3 is to expand the 2B capability to the remaining 115 land POEs. It is to be implemented by December 31, 2005. 4. Increment 4 is the yet-to-be-defined end vision of US-VISIT, which will likely consist of a series of capability releases. DHS plans to award a single, indefinite-delivery/indefinite-quantity contract to a prime contractor for integrating existing and new business processes and technologies. DHS plans to award the contract by May 2004. According to the RFP, the prime contractor's scope of work is to include, but is not limited to, Increments 2B, 3, and 4. By definition, US-VISIT is a risky undertaking because it is to perform a critical mission, its scope is large and complex, it must meet a demanding implementation schedule, and its potential cost is enormous. In announcing the US-VISIT system, the DHS Under Secretary for Border and Transportation Security stated that the system's goal is to "give America a 21st Century 'smart border'--one that speeds through legitimate trade and travel, but stops terrorists in their tracks." Achieving these goals is daunting: the United States shares over 7,500 miles of land border with Canada and Mexico, and it has approximately 95,000 miles of shoreline and navigable waterways to protect. In fiscal year 2002, there were about 279 million inspections of foreign nationals at U.S. POEs. In these circumstances, preventing the entry of persons who pose a threat to the United States cannot be guaranteed, and the missed entry of just one can have severe consequences. Relatedly, US-VISIT is to achieve the important law enforcement goal of identifying those among these millions of visitors each year who overstay or otherwise violate the terms of their visas. Complicating achievement of these security and law enforcement goals are other key US-VISIT goals: facilitating the movement of legitimate trade and travel through the POEs and providing for enforcement of U.S. privacy laws and regulations. US-VISIT is to provide for the interfacing of a number of existing systems. It is also to support and refine a large and complex governmentwide process involving multiple departments and agencies. This process involves the pre-entry, entry, status, and exit of hundreds of millions of foreign national travelers to and from the United States at over 300 air, sea, and land POEs. The interfaced systems included in Increment 1 are Arrival Departure Information System (ADIS), a database that stores traveler arrival and departure data received from air and sea carrier manifests and that provides query and reporting functions; Advance Passenger Information System (APIS), a system that captures arrival and departure manifest information provided by air and sea carriers; Interagency Border Inspection System (IBIS), a system that maintains lookout data, interfaces with other agencies' databases, and is currently used by inspectors at POEs to verify traveler information and modify data; Automated Biometric Identification System (IDENT), a system that collects and stores biometric data about foreign visitors; Student Exchange Visitor Information System (SEVIS), a system that contains information on foreign students; Computer Linked Application Information Management System (CLAIMS 3), a system that contains information on foreign nationals who request benefits, such as change of status or extension of stay; and Consular Consolidated Database (CCD), a system that includes information on whether a visa applicant has previously applied for a visa or currently has a valid U.S. visa. Figure 2 shows these systems and their relationships. In addition to integrating numerous systems, US-VISIT also involves complex processes governing the stages of a traveler's visit to the United States: pre-entry, entry, status management, and exit. These processes for Increment 1 are as follows: Pre-entry process. Pre-entry processing begins with initial petitions for visas. When the Department of State issues the travel documentation, biographic (and in some cases biometric) data are collected and made available to border management agencies. The biometric data are transmitted from State to DHS, where the prints are run against the US- VISIT IDENT biometric database to verify identity and to check the biometric watchlist. The results of the biometric check are transmitted back to State. Commercial air and sea carriers are required by law to transmit crew and passenger manifests to appropriate immigration officers before arriving in the United States. These manifests are transmitted through APIS. The APIS lists are run against the biographic lookout system and identify those arrivals who have biometric data available. In addition, POEs review the APIS list in order to identify foreign nationals who need to be scrutinized more closely. Entry process. When a foreign national arrives at a POE's primary inspection booth, biographic information, such as name and date of birth, is displayed on the bottom half of a computer workstation screen, along with a photograph obtained from State's CCD. The inspector at the booth scans the foreign national's fingerprints (left and right index fingers) and takes a digital photograph. This information is forwarded to the IDENT database, where it is checked against stored fingerprints in the IDENT lookout database. If the foreign national's fingerprints are already in IDENT, the system performs a match (a comparison of the fingerprint taken during the primary inspection to the one on file) to confirm that the person submitting the fingerprints is the person on file. During this process, the inspector also questions the foreign national about the purpose of his or her travel and length of stay. Status management process. The status management process manages the foreign national's temporary presence in the United States, including the adjudication of benefits applications and investigations into possible violations of immigration regulations. ADIS matches entry and exit manifest data to ensure that each record showing a foreign national entering the United States is matched with a record showing the foreign national exiting the United States. ADIS receives status information from CLAIMS 3 and SEVIS on foreign nationals. Exit process. The exit process includes the carriers' submission of electronic manifest data to IBIS/APIS. This biographic information is passed to ADIS, where it is matched against entry information. At the two POEs where the exit pilot is being conducted, foreign nationals use a self- serve kiosk where they are prompted to scan their travel documentation and provide their fingerprints (right and left index fingers). This departure record is then stored in ADIS (along with the person's arrival record) and used to verify if a foreign national has complied with the admission terms of his or her visa. Key US-VISIT milestones are legislatively mandated. For example, the Immigration and Naturalization Service Data Management Improvement Act of 2000 requires that US-VISIT be implemented at all air and sea POEs by December 31, 2003; at the 50 highest volume land POEs by December 31, 2004; and at all remaining POEs by December 31, 2005. Because of limited progress during the 7 years following the legislation that originated the entry exit system requirement, DHS acknowledged that it could not complete permanent solutions in these time frames, and thus it planned to implement interim (temporary) solutions. For example, Increments 1 through 3 include the interfacing of existing systems and the design and construction of interim facilities at land POEs. Further, DHS officials have stated that it will be difficult to develop and implement even the interim solutions at some of the highest volume land POEs (such as San Ysidro, California; Otay Mesa, California; and Laredo, Texas) by December 31, 2004, because even minor changes in the inspection time can greatly affect the average wait time at these high-volume POEs. Moreover, achievement of interim solutions is based on assumptions that, if changed, could significantly affect facility and staffing plans. Despite DHS's estimate in February 2003, that the total overall cost of the US-VISIT program would be about $7.2 billion through fiscal year 2014, the potential governmentwide cost of US-VISIT over just a 10-year period could be about twice as much. Although the DHS estimate included a wide range of costs, it omitted some costs and may have understated others. The estimate included system investment costs, such as information technology hardware and communications infrastructure, software enhancements, and interfaces; the cost of facilities and additional inspectors; system and facilities operation and maintenance costs; the cost of planning, designing, and constructing permanent facilities, which according to DHS was about $2.9 billion (this estimate was based on the assumptions that (1) no additional traffic lanes would be required to support the entry processes and (2) exit facilities would mirror entry facilities--i.e., that a land POE with 10 entry traffic lanes would require 10 exit traffic lanes); costs to design and construct building space to house additional computer equipment and inspectors; and costs for highway reconfiguration at land POEs. However, the estimate did not include the costs to design and construct interim facilities at land POEs. DHS officials estimated that the cost of constructing the interim facilities at the 50 highest volume POEs was about $218 million. Moreover, the estimate is based on assumptions that, if changed, could significantly affect, for example, land POE facility and staffing needs. Finally, although the estimate did include the cost of implementing biometrics, these costs are understated, because they did not include, for example, State Department costs. Specifically, in November 2002, we reported that a rough order of magnitude estimate of the cost to implement visas with biometrics would be between $1.3 billion and $2.9 billion initially and between $0.7 and $1.5 billion annually thereafter. This estimate is based on certain assumptions, including that all current visa- issuing embassies and consulates will be equipped to collect biometrics from visa applicants. Assuming that biometrics are implemented by December 2004, this means that the recurring cost of having biometric visas through DHS's fiscal year 2014 life cycle period would be between $7 and $15 billion. In contrast, DHS's estimate for the entire program through fiscal year 2014 was about $7.2 billion. Compounding the risk factors inherent in the scale and significance of the US-VISIT program are a number of others that can be attributed to its state of management and its acquisition approach. As described in our September 2003 report on US-VISIT, these include relying on existing systems to provide the foundation for the first three program increments (and thus having to accept the performance limitations of these existing systems), not having mature program management capabilities, not having fully defined near-term facilities solutions, and not knowing the mission value that is to be derived from US-VISIT increments. Our recently completed audit work for the appropriations committees addressed each of these factors, which our next report will discuss, including why each is still an area of risk. The system performance of the interim releases of US-VISIT (Increments 1, 2, and 3) will depend largely on the performance of the existing systems that are to be interfaced to create the overall system. Thus, US-VISIT system availability and associated downtime, for example, will be constrained by the availability of the interfaced systems. In this regard, some of the existing systems have had availability and reliability problems that could limit US-VISIT performance. Two examples are SEVIS and CLAIMS 3. Problems have been identified with the availability and reliability of SEVIS, the system designed to manage and monitor foreign students in the United States. For example, in April 2003, the Justice Inspector General reported that many users had difficulty logging on to the system, and that as the volume of users grew, the system became increasingly sluggish. According to other reports, university representatives complained that it was taking hours to log on to the system and to enter a single record, or worse, that the system accepted the record and later deleted it. We are required to report to the House and Senate Appropriations Committees by April 1, 2004, on SEVIS performance, among other things. We also reported in May 2001 that CLAIMS 3 was unreliable. This system contains information on foreign nationals who request benefits and is used to process benefit applications other than naturalization. Specifically, we reported that INS officials stated that the system was frequently unavailable and did not always update and store important case data when field offices transferred data from the local system to the mainframe computer. Our experience with major modernization programs, like US-VISIT, shows that they should be managed formally, which includes establishing a program office that (1) is adequately staffed (both in numbers and skill levels), (2) has clearly defined its staff's roles and responsibilities, and (3) is supported by rigorous and disciplined acquisition management processes. DHS established a US-VISIT program office in June 2003 and determined that this office's staffing needs were, in all, 115 government and 117 contractor personnel to perform key acquisition management functions. These functions fall into categories described by the Software Engineering Institute's Software Acquisition Capability Maturity Model (SA-CMM®️), which defines a suite of key acquisition process areas that are necessary for rigorous and disciplined management of a system acquisition program. These process areas include acquisition planning, requirements development and management, project management, solicitation, contract tracking and oversight, evaluation, and transition to support. Our latest report stated that the US-VISIT program's staffing levels were far below its stated needs. Moreover, specific roles and responsibilities had not been defined beyond general statements. Further, the program had not yet defined plans and associated time frames for achieving needed staffing levels and defining roles, responsibilities, and relationships. According to the Program Director, positions were being filled with detailees from various DHS component organizations. Additionally, although the approved program office structure provided for positions to perform the SA-CMM key process areas (including acquisition planning, requirements development and management, project management, and contract tracking and oversight), none of the process areas were defined and implemented. Until they are, the program office must rely on the knowledge and skills of its existing staff to execute these important acquisition functions. According to the Program Director, needed program staffing and key process areas were not in place because the program was just getting off the ground, and it would take considerable time to establish a fully functioning and mature program management capability. Until the program office is adequately staffed, positional roles and responsibilities are clearly defined and understood, and rigorous and disciplined acquisition process controls are defined, understood, and followed, DHS's efforts to acquire, deploy, operate, and maintain system capabilities will be at risk of not producing promised performance levels, functionality, and associated benefits on time and within budget. Work by the Data Management Improvement Act Task Force has shown that existing facilities do not adequately support the current entry exit process at land POEs. In particular, more than 100 land POEs have less than 50 percent of the required capacity to support current inspection processes and traffic levels. As a result, as part of US-VISIT (Increment 2), DHS plans to construct interim facilities at about 40 of the 50 highest volume land POEs by December 31, 2004, and construct interim facilities at the remaining portion of these 50 POEs by February 2005. According to DHS officials, the department plans to design and construct interim facilities to (1) support the US-VISIT inspection process, technology, and staff requirements and (2) meet current traffic wait time requirements at each land POE. To plan for the design and construction of interim facilities that meet these requirements, DHS modeled various inspection process and facilities scenarios to define what inspection process to follow and what interim facilities to construct. The modeling was based on two key assumptions: (1) the current staffing level and (2) the current number of inspection booths staffed for each POE. According to preliminary DHS modeling exercises, small incremental increases in average inspection times at some high-volume land POEs could significantly increase average wait times. Moreover, any changes to decisions about which foreign travelers are subject to US-VISIT could significantly affect these assumptions and thus near-term facility requirements. OMB Circular Number A-11, part 7, requires that investments in major systems be implemented incrementally, with each increment delivering tangible and measurable benefits. Incremental investment involves justifying investment in each increment on the basis of benefits, costs, and risks. Although DHS is pursuing US-VISIT incrementally, it has not defined incremental costs and benefits to justify its proposed investments in each increment. In the case of Increment 1, DHS' 2003 expenditure plan stated that this increment would provide "immediate benefits," but it did not describe them. Instead, it described capabilities to be provided, such as the ability to determine whether a foreign national should be admitted and to perform checks against watch lists. It did not describe in meaningful terms the benefits that are to result from implementation of these capabilities (e.g., X percent reduction in inspection times or Y percent reduction in false positive matches against watch lists). Also, DHS did not identify the estimated cost of Increment 1. The Program Director told us that the $375 million requested in the 2003 plan included not only all the funding required for Increment 1, but also funding for later increments. However, the plan did not separate the funds by increment, and program officials did not provide this information. While DHS developed a benefits and cost analysis for the former entry exit program in February 2003, this analysis had limitations, such as an absence of meaningful benefit descriptions. Program officials acknowledged that this analysis is out of date and is not reflective of current US-VISIT plans. According to these officials, an updated analysis will be issued in the very near future. Without a reliable understanding of whether near-term increments will produce mission value justifying its costs and whether known risks can be effectively mitigated, DHS is investing in and implementing near-term solutions that have not been adequately justified. To the credit of the hard-working and dedicated staff working on the program, an initial US-VISIT operating capability was deployed to major air and selected sea POEs at the beginning of this year. However, the US- VISIT program still faces the risk factors described in this testimony, each of which will be discussed in our soon to be released report. To address these risk factors, our published reports presented several recommendations regarding the US-VISIT program, including ensure that future expenditure plans fully disclose US-VISIT system capabilities, schedule, cost, and benefits to be delivered; determine whether proposed US-VISIT increments will produce mission value commensurate with costs and risks; define performance standards for each increment that are measurable and reflect the limitations imposed by relying on existing systems; develop a risk management plan and regularly report all high risks; develop and implement a plan for satisfying key acquisition management controls and implement these in accordance with Software Engineering Institute guidance; ensure that human capital and financial resources are provided to establish a fully functional and effective US-VISIT program office; define program office positions, roles, and responsibilities; and develop and implement a human capital strategy for the program office that provides for staffing positions with individuals who have the appropriate knowledge, skills, and abilities. Unless DHS addresses the risk factors described in this testimony, successful deployment of US-VISIT increments is doubtful, because achieving success will depend too much on heroic efforts by the people involved, rather than being the predictable outcome of sound investment and acquisition management capabilities. Mr. Chairman, this concludes our statement. We would be happy to answer any questions that you or members of the committee may have at this time. If you should have any questions about this testimony, please contact Randolph C. Hite at (202) 512-3870 or [email protected]. Other major contributors to this testimony included Barbara Collier, Deborah Davis, Tamra Goldstein, David Hinchman, and Jessica Waselkow. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

US-VISIT (United States Visitor and Immigrant Status Indicator Technology) is a governmentwide program to enhance national security, facilitate legitimate trade and travel, contribute to the integrity of the U.S. immigration system, and adhere to U.S. privacy laws and policies by (1) collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States; (2) identifying foreign nationals who (1) have overstayed or violated the terms of their visit; (2) can receive, extend, or adjust their immigration status; or (3) should be apprehended or detained by law enforcement officials; (3) detecting fraudulent travel documents, verifying traveler identity, and determining traveler admissibility through the use of biometrics; and (4) facilitating information sharing and coordination within the border management community. GAO was asked to testify on its completed work on the nature, status, and management of the USVISIT program. The US-VISIT program is inherently risky, both because of the type of program it is and because of the way it is being managed. First, US-VISIT is inherently risky because it is to perform a critical, multifaceted mission, its scope is large and complex, it must meet a demanding implementation schedule, and its potential cost is enormous. That is, one critical aspect of the program's mission is to prevent the entry of persons who pose a threat to the United States; failing in this mission could have serious consequences. To carry out this mission, the program aims to control the pre-entry, entry, status, and exit of millions of travelers--a large and complex process. In addition, through legislative mandate, it has challenging milestones (such as the system being implemented at all U.S. ports of entry by December 31, 2005). Finally, DHS estimated that the program would cost $7.2 billion through fiscal year 2014, but this estimate did not include all costs and underestimated some others. All these factors add risk. Second, several factors related to the program's management increase the risk of not delivering mission valued commensurate with costs or not delivering defined program capabilities on time and within budget. For example, the program is to rely initially on integrating existing systems with reported problems that could limit US-VISIT performance. In addition, the requirements for interim facilities at high-volume land ports of entry are not only demanding, they are based on assumptions that, if altered, could significantly affect facility plans. Further, DHS did not define the benefits versus costs of near-term program increments (that is, the interim versions of the program that are being pursued while the final version is being defined). Addressing these issues is the responsibility of the program office, which however was not adequately staffed, had not clearly defined roles and responsibilities for its staff, and had not established key processes for managing the acquisition and deployment of US-VISIT. Despite the program management challenges confronting US-VISIT, the first increment was deployed at the beginning of this year. However, the program still faces a number of risks, including the ones described above. To address these, GAO has made a series of recommendations regarding the planned scope of US-VISIT and its management. Addressing the identified risks increases the likelihood that the deployment of US-VISIT will be successful--the predictable outcome of sound management of a welljustified and designed program.

FQHCs and RHCs operate under separate programs, both of which were established to increase access to care for low-income people in medically underserved areas. FQHCs are required to provide a comprehensive set of primary care services to any individual, regardless of ability to pay. In addition, a distinguishing feature of FQHCs is that they provide enabling services that help patients gain access to health care, such as outreach, translation, and transportation. FQHCs include community health centers, migrant health centers, public housing programs, health care for the homeless, and other centers and clinics. FQHCs vary considerably based on their location, size of their uninsured and Medicaid populations, revenue mix, market competition, and managed care penetration in the surrounding area. For instance, an FQHC may be located in an urban area with a large uninsured or Medicaid population and high capitated Medicaid managed care penetration, or in a rural area, where it serves as the only source of primary health care for several communities. Currently, there are over 1,200 FQHCs operating over 3,000 delivery sites that provide services to about 11 million people each year. Unlike FQHCs, RHCs are not required to provide services to all individuals; however, they are required to operate in areas that are designated as underserved. RHCs can operate either independently or as parts of larger organizations, such as hospitals, skilled nursing facilities, or home health agencies. RHCs can serve as specialty clinics, focusing their services on particular populations or specialties such as pediatrics or obstetrics and gynecology. There are now approximately 3,500 RHCs. FQHCs and RHCs receive, on average, one-quarter to one-third of their revenues from Medicaid, a joint federal-state program that annually finances health care for more than 40 million low-income Americans. (See fig. 1.) FQHCs primarily rely on Medicaid reimbursement and HRSA grant funds as sources of revenue. From 1996 through 1999, Medicaid dollars per Medicaid patient increased from $348 to $383, while HRSA grant dollars per uninsured FQHC patient declined from $228 to $219. FQHCs also receive revenue from state, local, and private grants; Medicare and other public insurance; and self-pay and commercial insurance. In contrast, RHCs receive a smaller proportion of revenue from Medicaid and a much higher proportion of Medicare, commercial insurance, and self-pay revenue. Prior to BBA, federal law required state Medicaid programs to pay FQHCs and RHCs on a cost-related basis. In determining payments, states required FQHCs and RHCs to submit cost reports. States reviewed these cost reports to determine which reported costs were allowable (related to providing services to Medicaid beneficiaries) and reasonable (not an excessive amount for a type of cost or service). For purposes of reimbursing FQHCs and RHCs for services, the Medicaid statute directs states to follow the Medicare statute and regulations. The Medicare regulations provide guidance on the types of allowable costs, citing activities such as compensation for physicians and other staff, supplies, administrative overhead, and other items. With regard to reasonableness of cost, states may set limits, or in the case of RHCs, may rely on Medicare limits on the cost of providing a service. These limits can include a ceiling on recognized costs per service, such as a medical visit, or a limit on a type of cost, such as administrative costs. Since regulations require payments to be based on actual costs--which could only be reported after the close of an FQHC's or RHC's fiscal year-- states generally made interim payments to FQHCs and RHCs throughout the year and subsequently adjusted these payments after actual cost reports were filed. The regulations state that these interim payments to FQHCs and RHCs are subject to reconciliation, which generally occurred after the submission of a cost report. During reconciliation, the total amount of reasonable costs was determined and compared to the interim payments that the FQHCs or RHCs received, and the state Medicaid program either paid any shortfall or recouped any overage. BBA gave states the option of phasing out cost-based reimbursement by percentage reductions in reasonable costs reimbursed--to 95 percent of an FQHC's or RHC's reasonable costs in 2000, 90 percent in 2001, 85 percent in 2002, and 70 percent in 2003--and discontinuing the cost-based reimbursement requirement after 2003. States were simultaneously required to make supplemental payments to FQHCs and RHCs that served capitated Medicaid managed care plan enrollees. Under BBA, states were required to compare the aggregate managed care plans' payments to the amount that an FQHC or RHC would receive under the cost-based reimbursement methodology. In the event that total managed care payments were less, states were expected to provide supplemental payments to FQHCs and RHCs to make up the difference. BBRA slowed the phase out of cost-based reimbursement, freezing allowed reductions at 95 percent for 2001 and 2002. It allowed states to resume reductions to 90 percent of costs in 2003, 85 percent of costs for 2004, and a complete phase out of the cost-based reimbursement requirement in 2005. BBRA also extended requirements for supplemental payments through 2004 for FQHCs and RHCs participating in capitated Medicaid managed care. BIPA specified a new nationwide PPS to reimburse FQHCs and RHCs for Medicaid visits. An FQHC's or RHC's PPS rate is the average of its own 1999 and 2000 reasonable costs per visit, effective for services provided beginning January 1, 2001. For future years' payments, this amount will be adjusted annually for inflation. In addition to this annual adjustment, BIPA requires that payments to FQHCs and RHCs be adjusted in the event of any increase or decrease in the scope of services furnished. States also may receive approval from HCFA to use an alternative system if they can demonstrate that the alternative payment methodology used results in rates no lower than the prospective system's minimum payment and if the FQHC or RHC agrees to its use. In fulfilling prior federal requirements to use cost-based reimbursement for FQHCs and RHCs, many states controlled payment rates by imposing limits on costs considered reasonable. States generally reported using three types of spending limits--setting overall caps, limiting administrative costs, or setting performance standards--in defining reasonable costs. As a result, not all costs incurred by FQHCs, RHCs, or both were reimbursed. A few states did not reconcile costs--that is, compare the total Medicaid reimbursement with the total amount of Medicaid payments for a reporting period and settle any over- or under-payments--as required by HCFA regulation. BBA contained two major provisions regarding Medicaid reimbursement for FQHCs and RHCs: allowing states to reduce the percentage of reasonable cost reimbursed and mandating that states make supplemental payments. With regard to the first provision, most states did not choose to modify their payment practices and reduce the percentage of reasonable costs reimbursed. With regard to the second provision, 38 states and the District of Columbia were subject to the BBA requirement to provide supplemental payments to FQHCs and RHCs that were contracting with capitated Medicaid managed care plans in the event that plan payments were less than what these FQHCs and RHCs would have received under cost-based reimbursement. Many states' Medicaid programs reported imposing one or more limits in defining FQHCs' and RHCs' reasonable costs. These limits can significantly affect what FQHCs and RHCs are paid. While most states employed a retrospective system that reconciled reimbursement with actual reasonable costs, at least seven states based payments for FQHCs, RHCs, or both on a prior period's reasonable costs, and most adjusted them for inflation without a reconciliation process--a practice that is inconsistent with HCFA reconciliation regulations. For FQHCs, states reported using three types of limits in defining reasonable costs: setting overall caps, setting performance standards, or limiting administrative costs. Twenty-four states reported limits on how much they reimbursed for a patient's visit, sometimes by comparing FQHCs' costs across the state to establish a cap. Alabama and Florida, for example, limited reasonable costs to the 80th percentile of FQHCs' costs per visit, while Maryland limited reasonable costs by establishing an overall cap at 115 percent of the median cost per visit across FQHCs. Twelve states limited reasonable costs by setting performance or productivity standards. For instance, some states stipulated the number of visits per year that a full-time-equivalent physician should provide; similar guidelines were used for nurse practitioners and physician assistants. Similarly, New Jersey required a certain number of visits per hour for physicians and other medical personnel. Ten states reported limits on administrative costs, disallowing administrative costs exceeding 30 to 45 percent of total costs. For example, Maryland limited the amount of administrative costs reimbursed to one-third of total costs, while Wisconsin did not reimburse administrative costs in excess of 30 percent of the center's total costs. With regard to RHCs, 32 of the 45 states with RHCs reported relying on Medicare's payment methodology for determining reasonable costs. Medicare payment policies include both an overall cap and a performance or productivity standard. In 2000, the Medicare payment cap for RHCs was $61.85 per visit. As noted above, HCFA regulations provide that Medicaid interim payments to FQHCs and RHCs are subject to reconciliation based on actual reasonable costs. Most states reimbursed FQHCs and RHCs under a retrospective system that includes interim payments based on estimated costs and a year-end reconciliation process to account for differences in reimbursement and actual reasonable costs. However, seven states (Colorado, Connecticut, Delaware, Florida, Maryland, New York, and Rhode Island) and the District of Columbia reported setting payment rates for FQHCs based on a prior year's costs with most adjusting for inflation-- essentially establishing prospectively determined rates. The difference between these states' processes and states with end-of-year reconciliation is illustrated in figure 2. Four of the seven states--Delaware, Maryland, New York, and Rhode Island--were granted a waiver of the reconciliation requirement under Section 1115 of the Social Security Act. However, the remaining three states--Colorado, Connecticut, and Florida--and the District of Columbia were not in compliance with the reconciliation regulation since they did not reconcile with their FQHCs and RHCs and did not obtain a waiver of this requirement. Most states chose not to reduce their reimbursements to FQHCs and RHCs as allowed by BBA. According to our survey, five states and the District of Columbia chose to implement the BBA reduction to 95 percent of reasonable costs for their FQHCs, RHCs, or both. Alabama, Minnesota, and Nevada reduced payments to both FQHCs and RHCs. Connecticut and the District of Columbia reduced payments to FQHCs, while Maine did so for RHCs. As required by BBA, states with capitated managed care plans did make supplemental payments to FQHCs or RHCs or received a waiver from HCFA from this requirement. These supplemental payments were to make up the difference between the reimbursement FQHCs and RHCs received from managed care organizations and what they would have received under cost-based reimbursement. Not all states were required to make supplemental payments. Thirty-eight states and the District of Columbia were subject to this BBA requirement, while the remaining 12 states received approval from HCFA to waive supplemental payments. (See fig. 3.) Of the 38 states and the District of Columbia that were subject to the BBA requirement for supplemental payments, 12 states did not have capitated Medicaid managed care, so the BBA policy did not affect them. Twenty- five of the remaining 26 states and the District of Columbia made supplemental payments to FQHCs participating in Medicaid managed care, while 16 states made payments to RHCs. Fewer RHCs qualified for supplemental payments because many operated in areas that did not have managed care. (App. II shows states' practices with regard to supplemental payments.) The 12 states that have received approval to waive supplemental payments are operating under Section 1115 waivers, under which HCFA can allow states to waive most federal Medicaid requirements for a demonstration project that is likely to assist in promoting program objectives. Of the 12 states with waivers, 4 states--Arizona, Hawaii, New York, and Rhode Island--made supplemental payments, but not the full amount that would be required under BBA. New York, for example, provided varying percentages of the difference between reasonable costs and managed care payments, depending on when mandatory managed care enrollment began in the county where the FQHC is located. New York reimbursed FQHCs 90 percent of the difference during the first year of mandatory managed care and 50 percent in subsequent years. RHCs in New York received supplemental payments only if (1) at least 50 percent of the RHC's visits were provided to Medicaid beneficiaries or (2) 60 percent of the visits were provided to Medicaid beneficiaries and indigent persons; as of April 2001, no RHCs had qualified under this provision. In Rhode Island, supplemental payments were unrelated to the costs of an FQHC or RHC; instead, the state legislature allocated funds that were distributed to FQHCs and RHCs based on a set per-member-per-month amount. BIPA established a new nationwide PPS for Medicaid that is likely to constrain future payments. In particular, some FQHCs and RHCs may receive Medicaid payment increases that are lower than what they have received in the past. Ultimately, an FQHC's or RHC's ability to manage under the new PPS will depend on its initial payment rate, and changes it can make to keep its cost growth at or below the inflation index. All states--including those with 1115 waivers--will have to comply with the new payment system requirement established by BIPA. Under this new system, an FQHC's or RHC's prospective payment rate is the average of its own 1999 and 2000 reasonable costs per visit, which will be updated for inflation in future years. These initial rates became effective for services provided beginning January 1, 2001. States may receive approval from HCFA to use an alternative system to reimburse some or all of their FQHCs and RHCs, if they can demonstrate that the alternative payment methodology would result in rates no lower than the prospective system's minimum payment and if the FQHC or RHC agrees to the alternative methodology. In addition, BIPA requires that we assess the need for adjusting the initial rate for FQHCs and RHCs. States can continue to use their prior methods of determining reasonable costs in establishing the 2001 payment rate under the PPS. Under these circumstances, the initial PPS rates would reflect average 1999 and 2000 per-visit reasonable costs rather than the actual costs incurred by the FQHC or RHC. For the FQHCs and RHCs in the states that have applied limits in determining reasonable costs, this could result in 2001 PPS rates well below their actual costs. In contrast, the 2001 PPS rate for FQHCs and RHCs in states that did not incorporate reasonable cost limits--or that have costs below their states' overall caps--will be closer to their actual costs. Further, the 2001 PPS rate will not be updated for inflation from 1999 through 2001. This could mean that most FQHCs and RHCs would receive lower per-visit payments in 2001 than in the prior year. BIPA does require the rates for 2002 be adjusted for inflation using the Medicare Economic Index for primary care services (MEI-PC). This adjustment will be the only automatic annual modification of Medicaid rates to reflect increasing costs. If changes in patients' needs or other factors result in costs increasing more than the index, those additional costs will not result automatically in higher Medicaid rates as they did under the prior state systems. The MEI-PC has increased less than other measures of inflation, making the Medicaid payment increases under the PPS less than what some states have used in the past. For example, four states that previously set prospective rates using a prior year's cost updated for inflation used inflation indexes that have grown faster than the MEI-PC. (See table 1.) The PPS created by BIPA provides stronger control over state payments to FQHCs and RHCs than the previously required cost-based systems by limiting per-visit payment increases to what appears to be a historically low measure of inflation. It also creates incentives and pressures for FQHCs and RHCs to operate efficiently. However, the pressure on individual FQHCs and RHCs to control or reduce costs, created by the PPS, could vary considerably. If payment increases lag behind necessary cost increases, FQHCs and RHCs with low average costs may have less ability to keep future costs at or below their payment rates than higher cost centers. FQHCs' and RHCs' ability to manage under the new PPS will depend on their initial rate and their ability to keep cost growth at or below the inflation index. For example, FQHCs and RHCs that had a low volume of visits and high per-visit costs when the rates were established may be better able to manage by increasing service volume to lower their per-visit costs. FQHCs and RHCs with low initial per-visit costs, however, may have more difficulties. To the extent that lower initial per-visit costs already reflect greater efficiency, there may be fewer options for an efficient FQHC or RHC to adapt to necessary cost increases not reflected in the inflation index. FQHCs and RHCs that face an increasingly complex mix of patients may be also disadvantaged as the PPS incorporates payment increases only related to inflation or changes in scope of service. Because of their heightened reliance on Medicaid, FQHCs are likely to be more affected than RHCs by the new payment system. As noted earlier, grant dollars per uninsured FQHC patient have been declining, making Medicaid reimbursement even more critical to FQHC operations. In part because of their mandate to preserve and expand necessary primary care health services, FQHCs and RHCs have received reimbursement based on their costs in an effort to ensure adequate payment. However, this approach does little to encourage efficiency. The new payment system mandated by BIPA attempts to ensure adequacy by basing payments on historical rates while promoting efficiency by limiting increases. However, the combination of reimbursement limits imposed historically by many states and the inflation adjustments in the new PPS may constrain future Medicaid payment to some FQHCs and RHCs. Finding a mechanism to strike the proper balance between payment adequacy and incentives for efficiency has been, and will likely be, a challenge. We provided HHS an opportunity to comment on a draft of this report. In its comments, HHS generally concurred that the new BIPA PPS has the potential to limit payments to FQHCs and RHCs. Although HHS stated that the BIPA payment system may result in higher payments than the staged phase out of cost-based reimbursement, as we note in the report, we found that few states had taken action aimed at making reductions in cost-based reimbursement. HHS also agreed that the effects of the new system would vary among FQHCs and RHCs, and that FQHCs and RHCs that are already operating efficiently could be penalized. HHS suggested that we place greater emphasis on three aspects of the BIPA PPS. In particular, HHS suggested that we include more discussion about potential adjustments to the base rate in addition to those for inflation. We have done so by including additional reference to BIPA's provision that rates should be adjusted to account for a change in the scope of service. Second, HHS suggested that we place greater emphasis on states' ability to implement an alternative payment methodology under BIPA, which may result in higher payments to FQHCs and RHCs. Our draft report already recognized that payments under the alternative methodology can be no lower than payments under the PPS, and we have not changed the report. Third, HHS requested that we emphasize that states cannot impose a stricter definition of reasonable costs in establishing 2001 payment rates than they had under the prior reimbursement system. We have no basis to question HHS' position, but because BIPA does not include explicit language to that effect, we have not modified the report. HHS also provided technical comments, which we incorporated where appropriate. HHS' comments are provided in appendix III. 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 on request. If you or your staffs have questions about this report, please contact me or Janet Heinrich at (202) 512-7114. An additional GAO contact and the names of other staff who made key contributions to this report are listed in appendix IV. To describe how states implemented cost-based reimbursement and the extent to which states' practices changed as a result of BBA, we surveyed Medicaid officials in the 50 states and the District of Columbia regarding their FQHC and RHC reimbursement policies. We analyzed responses to our mail survey from all 50 states and the District of Columbia regarding whether states were phasing out or continuing cost-based reimbursement or had a waiver of the cost-based reimbursement requirement, states' reimbursement practices, managed care participation and supplemental payments, and general information on other funding sources. Additionally, we interviewed representatives from 12 state Primary Care Associations, which are private, nonprofit membership organizations that receive grant funds from HRSA. We also analyzed national demographic, financial, and utilization information on FQHCs using HRSA's Uniform Data System (UDS) for 1996 through 1999. We conducted site visits in five states: Michigan, New York, Ohio, Oklahoma, and Rhode Island. We selected these states because they had (1) unique reimbursement methodologies, (2) rural and/or urban populations, or (3) different levels of managed care penetration. These states also varied in their policies regarding supplemental payments, ranging from making the full payments required by BBA to having received approval to waive supplemental payments entirely. Within each state, we interviewed representatives from the Medicaid office and Medicaid managed care organizations. We also met with officials from eight FQHCs and nine RHCs. To assess the impact of the new PPS enacted under BIPA for 2001, we examined BIPA in light of previous statutes regarding Medicaid reimbursement for FQHCs and RHCs and HCFA regulations applicable to the new statute. We examined the indexes used by four states- Connecticut, Colorado, Delaware, and Florida--from 1996 through 1999 and compared them to the annual inflation adjustments specified in BIPA. Our work was conducted from May 2000 through May 2001 in accordance with generally accepted government auditing standards. Table 2 shows states' practices regarding the provision of supplemental payments to FQHCs and RHCs participating in capitated Medicaid managed care. As shown below, 25 states and the District of Columbia have made supplemental payments to FQHCs as required by BBA. Additionally, four states have made payments to FQHCs that are not the full amount required under BBA since the states have 1115 waivers. RHCs have received supplemental payments as required by BBA in 16 states, while 2 states with 1115 waivers have made some level of payment to RHCs. The remaining states do not make supplemental payments to FQHCs or RHCs because there is no capitated Medicaid managed care in the state, no FQHCs or RHCs contract with Medicaid managed care organizations, or the state has an 1115 waiver and thus is not required to make supplemental payments. Catina Bradley, Barbara Chapman, Michelle Rosenberg, Behn Miller, Sharon Brigner, Anne Dievler, and Evan Stoll made key contributions to this report. Health Care Access: Programs for Underserved Populations Could Be Improved (GAO/T-HEHS-00-81, Mar. 23, 2000). Community Health Centers: Adapting to Changing Health Care Environment Key to Continued Success (GAO/HEHS-00-39, Mar. 10, 2000). Health Care Access: Opportunities to Target Programs and Improve Accountability (GAO/T-HEHS-97-204, Sept. 11, 1997). Rural Health Clinics: Rising Program Expenditures Not Focused on Improving Care in Isolated Areas (GAO/HEHS-97-24, Nov. 22, 1996).

To increase the accessibility of primary and preventive health services for low-income people living in medically underserved areas, Congress made federally qualified health centers and rural health clinics eligible for Medicaid payments. Since 1989, federal law has required Medicaid to reimburse both the centers and the clinics on the basis of reasonable costs they incurred in providing services to beneficiaries. Cost-based reimbursement can ensure that service providers are reimbursed for necessary costs; it is also regarded as inflationary because providers can increase their payments by raising their costs. In part because of their mandate to preserve and expand necessary primary health care services, the centers and the clinics have traditionally been reimbursed on the basis of their costs in an effort to ensure adequate payment. However, this approach does little to encourage efficiency. The new payment system mandated by the Benefits Improvement and Protection Act attempts to ensure adequacy by basing payments on historical rates while promoting efficiency by limiting increases. However, the combination of reimbursement limits imposed historically by most states and the inflation adjustments in the new prospective payment system may contain future Medicaid payment to some centers and clinics. Finding a way to strike the proper balance between payment adequacy and incentives for efficiency has been, and will likely be, a challenge.

Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. It is especially important for government agencies, where the public's trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards they also pose enormous risks that make it easier for individuals and groups with malicious intent to intrude into inadequately protected systems and use such access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Protecting the computer systems that support critical operations and infrastructures has never been more important because of the concern about attacks from individuals and groups, including terrorists. These concerns are well founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive attacks to come. Computer-supported federal operations are likewise at risk. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of critical federal operations, including those at IRS, at risk of disruption, fraud, and inappropriate disclosure. We have designated information security as a governmentwide high-risk area since 1997--a designation that remains today. In December 2002, Congress enacted the Federal Information Security Management Act of 2002 (FISMA) to strengthen security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk-based approach to information security management. In addition, FISMA requires that the Secretary of the Treasury be responsible for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency's information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency chief information officer (CIO) the authority to ensure compliance with the requirements imposed on the agency under the act. Treasury's CIO is responsible for developing and maintaining a departmentwide information security program and for developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements. Each Treasury bureau, including the IRS, is responsible for implementing Treasury-mandated security policies within its domain. In order to implement departmentwide security policies, IRS is required to develop its own information security program, including its own security compliance functions. As the nation's tax collector, IRS has the demanding responsibility of collecting taxes, processing tax returns, and enforcing the nation's tax laws. In fiscal years 2004 and 2003, IRS collected about $2 trillion in tax payments, processed hundreds of millions of tax and information returns, and paid about $278 billion and $300 billion, respectively, in refunds to taxpayers. IRS employs tens of thousands of people in its 10 service campuses, three computing centers, and numerous field offices throughout the United States. To efficiently fulfill its tax processing responsibilities, IRS relies extensively on interconnected networks of computer systems to perform various functions, such as collecting and storing taxpayer data, processing tax returns, calculating interest and penalties, generating refunds, and providing customer service. Because of the nature of its mission, IRS also collects and maintains a significant amount of personal and financial data on each American taxpayer. The confidentiality of this sensitive information must be protected; otherwise, taxpayers could be exposed to loss of privacy and to financial loss and damages resulting from identity theft or other financial crimes. To help provide information security for its operations and assets (including computing resources and taxpayer information), IRS has developed and is implementing an agencywide information security program. The Commissioner of Internal Revenue has overall responsibility for ensuring the confidentiality, availability, and integrity of information and information systems supporting the agency and its operations. The Chief of MASS is responsible for developing policies and procedures regarding information technology security; providing assurance services to improve physical, data, and personnel security; conducting independent testing; and ensuring security is integrated into its modernization activities. To help accomplish these goals, IRS has developed and published information security policies, guidelines, standards, and procedures in the Internal Revenue Manual, Law Enforcement Manual, and other documents. In addition to processing its own financial and tax information, IRS provides information processing support to FinCEN, another Treasury bureau. FinCEN administers and enforces the Bank Secrecy Act (BSA) and its implementing provisions. Congress enacted the BSA to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. Since its passage, Congress has amended the BSA to enhance law enforcement effectiveness. Today, more than 170 crimes are listed in federal money-laundering statutes. They cover a broad range, including drug trafficking, gunrunning, murder for hire, fraud, acts of terrorism, and the illegal use of wetlands. The list also includes certain foreign crimes. The reporting and record keeping requirements of the BSA regulations create a paper trail for law enforcement to investigate money laundering schemes and other illegal activities. This paper trail operates to deter illegal activity and provides a means to trace the movements of money through the financial system. FinCEN relies on IRS to operate and maintain computer systems that process and store a significant amount of FinCEN's sensitive information. This information includes reports and filings from banks and other financial institutions that are required under BSA, such as currency transactions, foreign bank and financial accounts, international transportation of currency or monetary instruments, and criminal referrals of suspicious activities reports. This information is determined by FinCEN to have a high degree of usefulness in criminal, tax, regulatory, intelligence, and counterterrorism investigations, and in implementing counter money laundering programs and compliance procedures. This network supports federal, state, and local law enforcement, and intelligence and investigative agencies as part of the federal government's effort to combat terrorism and to investigate and prosecute crime. The objectives of our review were to determine (1) the status of IRS's actions to correct or mitigate previously reported weaknesses and (2) whether controls over key financial and tax processing systems located at the facility have been effective in ensuring the confidentiality, integrity, and availability of sensitive financial and taxpayer data. We concentrated our evaluation primarily on threats emanating from internal sources on IRS's computer networks. To guide our work, we used the audit methodology described in our Federal Information System Controls Audit Manual, which discusses the scope of such reviews and the type of testing required for evaluating general controls. We also used FISMA to guide our review of IRS's implementation of its information security program. Specifically, we evaluated information system controls intended to limit, detect, and monitor logical and physical access to sensitive computing resources and facilities, thereby safeguarding them from misuse and protecting them from unauthorized disclosure and modification; maintain operating system integrity through effective administration and control of powerful computer programs and utilities that execute privileged instructions; prevent the introduction of unauthorized changes to application software in the existing software environment; ensure that work responsibilities are segregated, so that one individual does not perform or control all key aspects of computer-related operations and thereby have the ability to conduct unauthorized actions or gain unauthorized access to assets or records; minimize the risk of unplanned interruptions and recover critical computer processing operations in the case of disaster or other unexpected interruptions; and implement an agencywide information security program that includes a continuing cycle of assessing risk, implementing and promoting policies and procedures to reduce such risk, and monitoring the effectiveness of those activities. To evaluate these controls, we identified and reviewed pertinent IRS information security policies and procedures, guidance, security plans, relevant reports, and other documents, and we tested the effectiveness of these controls. We also discussed with key security representatives and management officials whether information security controls were in place, adequately designed, and operating effectively. We performed our review at the IRS facility, at IRS's National Office in New Carrollton, Maryland, and at our headquarters in Washington, D.C., in accordance with generally accepted government auditing standards from August through December 2004. We discussed the results of our review with IRS, Treasury, and FinCEN officials. IRS has made progress in correcting previously reported information security weaknesses. The agency has corrected or mitigated 32 of the 53 weaknesses that we reported as unresolved at the time of our last review in 2002. For example, IRS has improved perimeter security by installing barriers at the facility's entrance to prevent unauthorized vehicles from entering the premises, implemented policies and procedures to ensure that system software products are tested and evaluated prior to installation, discontinued the practice of using shared accounts and passwords to administer its network authentication server and firewall, and implemented procedures to ensure that disaster recovery plans are up- to-date and maintained at the off-site storage facility. While IRS has taken steps to strengthen its information security controls, it had not completed actions to correct or mitigate the remaining 21 previously reported weaknesses. These weaknesses include granting and authorizing inappropriate access permissions over Unix system files, permitting remote access capabilities that expose passwords and user identifications, allowing users to implement easily guessed passwords, and permitting unrestricted physical access to sensitive computing areas. Failure to resolve these issues will leave IRS facilities and sensitive data vulnerable to unauthorized access, manipulation, and destruction. IRS has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of data processed by the facility's computers and networks. In addition to the 21 previously reported weaknesses that remain uncorrected, we identified 39 new information security weaknesses during this review. Serious weaknesses related to electronic access to computing resources from sources located on IRS's internal computer network place sensitive taxpayer and Bank Secrecy Act data--including information related to financial crimes, terrorist financing, money laundering, and other illicit activities--at significant risk of unauthorized disclosure, modification, or destruction. In addition, information security weaknesses that exist in other control areas, such as physical security, segregation of duties, and service continuity, further increase risk to the computing environment. Collectively, these weaknesses threaten IRS's ability to perform its operational missions, such as processing tax returns and law enforcement information, both of which rely on IRS's computer systems and networks to process, store, and transmit data. A basic management objective for any organization is to protect the data supporting its critical operations from unauthorized access. Organizations accomplish this objective by designing and implementing electronic controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, and data. Electronic access controls include user accounts and passwords, access rights and permissions, network services and security, and audit and monitoring of security-related events. Inadequate electronic access controls diminish the reliability of computerized data and increase the risk of unauthorized disclosure, modification, and destruction of these data. Electronic access controls were not effectively implemented to prevent, limit, and detect unauthorized access to the facility's computer systems and data. Numerous vulnerabilities existed in IRS's computing environment because of the cumulative effects of control weaknesses in the areas of user accounts and passwords, access rights and permissions, network services and security, and audit and monitoring of security-related events. A computer system must be able to identify and differentiate among users so that activities on the system can be linked to specific individuals. Unique user accounts assigned to specific users allow systems to distinguish one user from another--a process called identification. The system must also establish the validity of a user's claimed identity through some means of authentication, such as a password, known only to its owner. The combination of identification and authentication, such as user account/password combinations, provides the basis for establishing individual accountability and controlling access to the system. Accordingly, agencies should (1) implement procedures to control the creation, use, and removal of user accounts and (2) establish password parameters, such as length, life, and composition, to strengthen the effectiveness of account/password combinations for authenticating the identity of users. IRS did not adequately control user accounts and passwords to ensure that only authorized individuals were granted access to its systems and data. For example, it did not adequately protect mainframe systems files that contain embedded user accounts and passwords. Access to these files was not adequately restricted, and user account and password combinations could have been read by any authorized user--IRS, law enforcement, and contractors--of the system. In addition, IRS did not adequately control user accounts and passwords to ensure that only authorized individuals were allowed access to its servers and networks. As a result, increased risk exists that unauthorized users could gain authorized user ID and password combinations to claim a user identity and then use that identity to gain access to sensitive taxpayer or Bank Secrecy Act data. A basic underlying principle for securing computer systems and data is the concept of least privilege. This means that users are granted only those access rights and permissions they need to perform their official duties. Organizations establish access rights and permissions to restrict the access of legitimate users to only the specific programs and files that they need to do their work. User rights are allowable actions that can be assigned to users or groups. File and directory permissions are rules associated with a file or directory; they regulate which users can access them and in what manner. Assignment of rights and permissions must be carefully considered to avoid giving users unnecessary access to sensitive files and directories. IRS routinely permitted excessive access to the facility's computer systems--mainframes, Unix, and Windows--that support sensitive taxpayer and Bank Secrecy Act data and to critical datasets and files. Access controls over the mainframe computing environment did not logically separate IRS's data from FinCEN's data. For example, IRS granted all 7,460 mainframe users--IRS employees, non-IRS employees, contractors--regardless of their official duties, the ability to read and modify sensitive taxpayer and Bank Secrecy Act data, including information about citizens, law enforcement personnel, and individuals subject to investigation. In addition, IRS also did not adequately restrict access rights and permissions on its Windows servers. For example, it did not adequately restrict access to Windows accounts with powerful rights over the operating system. Inappropriate access to accounts with powerful rights can compromise the integrity of the operating system and the privacy of the data that reside on the servers. Networks are series of interconnected devices and software that allow individuals to share data and computer programs. Because sensitive programs and data are stored on or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests and deny unauthorized requests and by limiting the services that are available on the network. Network devices include (1) firewalls designed to prevent unauthorized access into the network, (2) routers that filter and forward data along the network, (3) switches that forward information among parts of a network, and (4) servers that host applications and data. Network services consist of protocols for transmitting data between computers. Insecurely configured network services and devices can make a system vulnerable to internal or external threats, such as denial-of-service attacks. Since networks often provide the entry point for access to electronic information assets, failure to secure those networks increases the risk of unauthorized use of sensitive data and systems. IRS did not securely control network services to prevent unauthorized access to and ensure the integrity of IRS's computer networks and systems at the facility. For example, IRS did not adequately secure its network against known vulnerabilities or misconfigured network services on several of its infrastructure devices. As a result, an unauthorized user could gain access to these network devices and gain control of the facility's network, placing IRS and FinCEN data at risk. Further, this unauthorized control could seriously disrupt computer operations. Determining what, when, and by whom specific actions were taken on a system is crucial to establishing individual accountability, monitoring compliance with security policies, and investigating security violations. Organizations accomplish this by implementing system or security software that provides an audit trail for determining the source of a transaction or attempted transaction and for monitoring users' activities. How organizations configure the system or security software determines the nature and extent of audit trail information that is provided. To be effective, organizations should (1) configure the software to collect and maintain sufficient audit trails for security-related events; (2) generate reports that selectively identify unauthorized, unusual, and sensitive access activity; and (3) regularly monitor and take action on these reports. Without sufficient auditing and monitoring, organizations increase the risk that they may not detect unauthorized activities or policy violations. The risks created by the serious electronic access control weaknesses discussed above were heightened because IRS did not effectively audit and monitor system activity on its servers. For example, not all Windows servers at the facility were configured to ensure sufficient retention of security logs. As a result, there was a higher risk of unauthorized system activity going undetected. The cumulative effect of inadequate electronic access controls specific to user accounts and passwords, access rights and permissions, network services and security, and audit and monitoring places sensitive taxpayer and Bank Secrecy Act data at risk of unauthorized disclosure, use, modification, or destruction, possibly without detection. More specifically, electronic access controls over authorized users--IRS employees, contractors, and law enforcement officials--were not effectively implemented to restrict these users to the data they needed in order to perform their official duties and to protect sensitive programs and data from unauthorized access, manipulation, and use. As a result, we were able to view and print Bank Secrecy Act data from datasets containing Suspicious Activity Reports that have been filed under the Bank Secrecy Act. The information we were able to capture included, among other things, dates of the investigation, the name, Social Security number, and driver's license number of the individual under investigation, the number and total dollar amount of financial transactions, and suspected terrorist activity, if any. Moreover, the weaknesses in electronic access controls also allowed FinCEN users, who include federal, state, and local law enforcement officials, the capability to access sensitive IRS systems and view taxpayer information. The Internal Revenue Code prohibits disclosure of taxpayer data generally, and the Taxpayer Browsing Protection Act prohibits unauthorized browsing of taxpayer returns or information by federal, state, and local employees. We have previously reported violations of IRS employees browsing taxpayer information and on IRS's efforts to monitor employee browsing. Given the weaknesses with its audit and monitoring controls, it is unlikely that IRS would be able to detect any illegal browsing of taxpayer information with the systems currently in use. Unless these weaknesses are corrected, sensitive taxpayer and Bank Secrecy Act data will remain at risk of unauthorized disclosure, use, modification, or destruction, possibly without detection. In addition to the electronic access security controls, other information security controls should be in place to ensure the confidentiality, integrity, and availability of an organization's systems and data. These controls include policies, procedures, and control techniques that physically secure an organization's computer resources and systems, provide proper segregation of incompatible duties and computer functions among computer users, and ensure continuity of computer processing operations in the event of a disaster or unexpected interruption. Physical security controls are important for protecting computer facilities and resources from vandalism and sabotage, theft, accidental or deliberate alteration or destruction of information or property, attacks on personnel, and unauthorized access to computing resources. Physical security controls should prevent, limit, and detect access to facility grounds, buildings, and sensitive work areas and the agency should periodically review the access granted to computer facilities and resources to ensure that this access continues to be appropriate. Examples of physical security controls include perimeter fencing, surveillance cameras, security guards, and locks. Inadequate physical security could lead to the loss of life and property, the disruption of functions and services, and the unauthorized disclosure of documents and information. Although IRS has implemented physical security controls, certain weaknesses reduce the effectiveness of these controls in protecting and controlling physical access to assets at the facility. For example, guards did not always verify employees' identities as they entered the facility. Failure to check IRS photo identifications increases the risk that unauthorized individuals could gain access to the facility. In addition, IRS did not always maintain effective control over the issuance of master keys. The lack of accountability over master keys increases the likelihood that an unauthorized person could gain possession of a master key and use it to access sensitive areas. Controls that segregate duties are the policies, procedures, and organizational structure that prevent one individual from controlling key aspects of computer-related operations and thereby having the capability to conduct unauthorized actions or gain unauthorized access to assets or records without being promptly detected. Inadequately segregated duties increase the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, or computer resources damaged or destroyed. We identified instances in which duties were not adequately segregated to ensure that no individual had complete authority or system access, which could result in fraudulent activity. For example, developers were routinely granted production level access on the facility's mainframe processing environment by individuals other than those responsible for the security administration of the mainframe. A review of one month of audit logs showed that 24 users (including 5 contractors) who were only granted access to the development mainframe environment had their access privileges elevated to production--several of them on a daily basis. Although user access was being logged, MASS employees neither controlled the action that elevated the developers' access permissions nor routinely monitored audit logs. As a result, MASS employees did not detect that users' access had been elevated. Granting developers access to production systems creates the potential for those individuals to perform incompatible functions. Service continuity controls should be designed to ensure that when unexpected events occur, critical operations continue without interruption or are promptly resumed and that critical and sensitive data are protected. These controls include (1) environmental controls and procedures designed to protect information resources and minimize the risk of unplanned interruptions and (2) a well-tested plan to recover critical operations should interruptions occur. If service continuity controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete financial or management information. IRS has in place environmental controls designed to protect computing resources and personnel; it also has a program for periodic testing of disaster recovery plans. However, IRS's disaster recovery and business resumption plans for resuming operations following a disruption did not include procedures for Unix and Windows systems. In the event of a disaster, the facility may not be able to coordinate appropriate measures to restore critical Unix and Windows systems. The weaknesses described in this report are symptomatic of an agencywide information security program that is not fully implemented across IRS. Implementing an information security program is essential to ensuring that controls over information and information systems work effectively on a continuing basis, as described in our May 1998 study of security management best practices. We previously recommended to the IRS Commissioner that IRS complete its implementation of an effective agencywide information security program. Since our last review, IRS has made important progress toward improving information security management. For example, as part of activities required for certification and accreditation of all IRS general support systems, it established MASS, appointed a senior information security officer to manage the program, and established a task force for conducting risk assessments and security test and evaluations. However, the recurring and newly identified weaknesses discussed in this report, as well as the similarity of these weaknesses to those we have previously identified at other IRS facilities, are indicative of an information security program that is not fully implemented across the agency. FISMA, consistent with our security management best practices guide, requires key elements of an agency's information security program to strengthen information security and to adequately protect the information and systems that support its operations. These elements include policies and procedures that (1) are based on risk assessments, (2) cost-effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; security awareness training to inform personnel, including contractors and other users of information systems, of information security risks and their responsibilities in complying with agency policies and procedures; and at least annual testing and evaluation of the effectiveness of information security policies, procedures, and practices relating to the management, operational, and technical controls of every major information system that is identified in the agencies' inventories. A key element of an effective information security program is establishing and implementing appropriate policies, procedures, and technical standards to govern security over an agency's computing environment. Such policies and procedures should integrate all security aspects of an organization's interconnected environment, including local and wide area networks and interconnections to contractor and other federal agencies that support critical mission operations. In addition, technical security standards are needed to provide consistent implementing guidance for each computing environment. Establishing and documenting security policies is important because they are the primary mechanism by which management communicates its views and requirements; these policies also serve as the basis for adopting specific procedures and technical controls. In addition, agencies need to take the actions necessary to effectively implement or execute these procedures and controls. Otherwise, agency systems and information will not receive the protection that should be provided by the security policies and controls. Although IRS has established and documented policies and procedures for specific security areas, including password standards and disaster recovery planning, it frequently has not implemented them. We continue to report that the facility has not implemented policies and procedures contained in IRS's Law Enforcement Manual and Internal Revenue Manual pertaining to user accounts and passwords, access rights and permissions, network services and security, audit and monitoring, and other information system controls. Of the new weaknesses identified, 33 of 39 resulted from IRS not implementing its established security policies and procedures. As a result, IRS is at increased risk that sensitive financial, taxpayer, and Bank Secrecy Act data could be exposed to unauthorized access without detection. Another key element of an information security program involves promoting awareness and providing required training so that users understand the risks and their role in implementing related policies and controls to mitigate those risks. Computer intrusions and security breakdowns often occur because computer users fail to take appropriate security measures. For this reason, it is vital that employees who use computer resources in their day-to-day operations be made aware of the importance and sensitivity of the information they handle, as well as the business and legal reasons for maintaining its confidentiality, integrity, and availability. FISMA mandates that all federal employees and contractors involved in the use of agency information systems be provided periodic training in information security awareness and accepted information security practice. Further, FISMA requires agency heads to ensure employees with significant information security responsibilities are provided sufficient training. IRS has established information security awareness programs for its employees and contractors. These programs include distributing security awareness bulletins and brochures and creating information security poster boards. As reported by Treasury's OIG in its 2004 FISMA report, 100 percent of IRS employees received security awareness training; however, only 28 percent of IRS government and contractor employees with significant security responsibilities received specialized training. Security administration staff at the facility stated that they were largely self-taught in security software and that only one staff member in the past 2 years had received technical mainframe security training. Consequently, the staff was not knowledgeable about some of the more recent technical advances relating to the mainframe operating system and security software. Subsequent to the completion of our fieldwork, the Chief of MASS informed us that he formally assigned information system security officers for each of the IRS campuses and computing centers, and the IRS network and held specialized training for these officers. The final key element of an information security program is ongoing testing and evaluation to ensure that systems are in compliance with policies, and that policies and controls are both appropriate and effective. This type of oversight is a fundamental element because it demonstrates management's commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. Although control tests and evaluations may encourage compliance with security policies, the full benefits of such activities will not be achieved unless the results improve the security program. Analyzing the results of monitoring efforts--as well as security reviews performed by external audit organizations--provides security specialists and business managers with a means of identifying new problem areas, reassessing the appropriateness of existing controls, and identifying the need for new controls. IRS performs periodic testing and evaluation of its Unix, Windows, and Mainframe systems. Specifically, IRS uses software tools and monitoring reports to determine if its systems are in compliance with agency information security policies, procedures, and practices. However, output from these tools was not always reliable and accurate. Further, IRS did not effectively audit and monitor the facility's information security systems. Specifically, user activity on critical Unix systems were not being logged, full auditing of system user rights was not always occurring, audit logs on Windows servers were not always retained, and monitoring reports detailing security-related events on mainframe computers were not always complete. Until IRS fully implements an effective program, it will not be able to ensure the security of its highly interconnected computer environment, facilities, and resources. Moreover, IRS will not be able to ensure the confidentiality, integrity, or availability of the sensitive financial, taxpayer, and Bank Secrecy Act data that it processes, stores, and transmits. As a result, IRS's operations and assets remain vulnerable to unauthorized disclosure, manipulation, use, or destruction. Significant information security weaknesses exist at IRS that place sensitive financial, taxpayer, and Bank Secrecy Act data at risk of disclosure, modification, or loss, possibly without detection, and place IRS's operations at risk of disruption. Specifically, IRS has not consistently implemented effective electronic access controls, including user accounts and passwords, access rights and permissions, and network security, or fully implemented a program to audit and monitor access activity. In addition, weaknesses in physical security, segregation of duties, and service continuity increase the level of risk. Although IRS continues to make progress in mitigating previously reported information security weaknesses and implementing general controls over key financial and tax processing systems at the facility, it has not taken all the necessary steps to mitigate known information security control weaknesses and to ensure the confidentiality, integrity, and availability of taxpayer and Bank Secrecy Act data. Consequently, taxpayer and Bank Secrecy Act data may have been disclosed to unauthorized individuals. Ensuring that known weaknesses affecting IRS's computing resources are promptly mitigated and that general controls are effective to protect the facility's computing environment require top management support and leadership, disciplined processes, and consistent oversight. Until IRS takes steps to mitigate these weaknesses and fully implements its agencywide information security program, limited assurance exists that taxpayers' personal information and IRS-processed law enforcement information will be adequately safeguarded against unauthorized disclosure, modification, or destruction. To help fully implement IRS's information security program, we recommend that Secretary of the Treasury direct the IRS Commissioner to take the following three actions: Ensure that established security policies and procedures are consistently followed and implemented. Ensure that employees with significant information security responsibilities are provided the sufficient training and understand their role in implementing security related policies and controls. Implement an ongoing process of testing and evaluating IRS's information systems to ensure compliance with established policies and procedures. In addition, we recommend that the Secretary of the Treasury direct the IRS Commissioner to perform an assessment to determine whether taxpayer data has been disclosed to unauthorized individuals. Further, we recommend that the Secretary of the Treasury direct the FinCEN Director to perform an assessment to determine whether Bank Secrecy Act data have been disclosed to unauthorized individuals. We are also making recommendations in a separate report designated for "Limited Official Use Only." These recommendations address actions needed to correct the specific information security weaknesses related to electronic access controls and other information system controls at the facility. In providing written comments on a draft of this report (reprinted in app. I), the Acting Deputy Secretary of the Treasury generally concurred with our recommendations in both the public and Limited Official Use Only reports and identified specific corrective actions that IRS has taken or plans to take to address the recommendations. The Acting Deputy Secretary of the Treasury concurred with our recommendation to take several actions to fully implement an effective agencywide information security program. The Acting Deputy stated that IRS continues to make progress in addressing the computer security deficiencies throughout the agency, as noted in our public and Limited Official Use Only reports. The Acting Deputy stated that in mid-2004, IRS began an agencywide initiative to complete required security activities, such as the development of security plans and security testing by fiscal year 2005. The Acting Deputy's comments also addressed several completed corrective actions, including properly configuring access rights to the mainframe computing environment, auditing the activity of high-level user access on the mainframe environment, capturing and pursuing all security violations, designating Information Systems Security Officers at all IRS locations, and establishing the position of Director, Information Technology Security to ensure that the overall design of new applications and the operation of current systems adhere to security requirements. The Acting Deputy Secretary also concurred with our recommendation to direct the IRS Commissioner to perform an assessment to determine whether taxpayer data have been disclosed to unauthorized individuals. Regarding our recommendation to direct the FinCEN Director to perform an assessment to determine whether Bank Secrecy Act data have been disclosed to unauthorized individuals, the Acting Deputy stated that it is more appropriate to have IRS conduct this review because FinCEN does not have the legal authority to conduct such an assessment of IRS tax information. This alternative approach meets the intent of our recommendation as long as IRS reports the results of its assessment to the Director of FinCEN. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House Committee on Government Reform; House and Senate Committees on Appropriations; House and Senate Committees on Budget; Secretary of the Treasury; Commissioner of Internal Revenue; and Treasury's Director, Financial Crimes Enforcement Network. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your office have any questions about this report, please contact Gregory C. Wilshusen at (202) 512-3317 or Keith A. Rhodes at (202) 512- 6412; we can also be reached by e-mail at [email protected] or [email protected]. Other contacts and key contributors to this report are listed in appendix II. In addition to the individual named above, Gerald Barnes, Bruce Cain, Joseph Cruz, Joanne Fiorino, Denise Fitzpatrick, Ed Glagola, David Hayes, Myong Suk Kim, Harold Lewis, Mary Marshall, Duc Ngo, Ron Parker, Charles Roney, Eugene Stevens, and Henry Sutanto made key contributions to this report.

The Internal Revenue Service (IRS) relies extensively on computerized systems to support its financial and mission-related operations. In addition, IRS provides computer processing support to the Financial Crimes Enforcement Network (FinCEN)--another Treasury bureau. As part of IRS's fiscal year 2004 financial statements, GAO assessed (1) the status of IRS's actions to correct or mitigate previously reported weaknesses at one of its critical data processing facilities and (2) the effectiveness of IRS's information security controls in protecting the confidentiality, integrity, and availability of key financial and tax processing systems. IRS has made progress in correcting or mitigating previously reported information security weaknesses and in implementing controls over key financial and tax processing systems that are located at one of its critical data processing facilities. It has corrected or mitigated 32 of the 53 weaknesses that GAO reported as unresolved at the time of our prior review in 2002. However, in addition to the remaining 21 previously reported weaknesses for which IRS has not completed actions, 39 newly identified information security control weaknesses impair IRS's ability to ensure the confidentiality, integrity, and availability of its sensitive financial and taxpayer data and FinCEN's Bank Secrecy Act data. For example, IRS has not implemented effective electronic access controls over its mainframe computing environment to logically separate its taxpayer data from FinCEN's Bank Secrecy Act data--two types of data with different security requirements. In addition, IRS has not effectively implemented certain other information security controls relating to physical security, segregation of duties, and service continuity at the facility. Collectively, these weaknesses increase the risk that sensitive taxpayer and Bank Secrecy Act data will be inadequately protected from unauthorized disclosure, modification, use, or destruction. Moreover, weaknesses in service continuity and business resumption plans heighten the risk that assets will be inadequately protected and controlled to ensure the continuity of operations when unexpected interruptions occur. An underlying cause of these information security control weaknesses is that IRS has not fully implemented certain elements of its agencywide information security program. Until IRS fully implements a comprehensive agencywide information security program, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable.

Friendly fire is a serious problem confronting DOD and the military services. According to a report issued by the Office of Technology Assessment in 1993, about 24 percent of the fatalities experienced during Operation Desert Storm were the result of friendly fire--a rate that appeared very high compared to past conflicts. Sixty-one percent of these incidents involved ground-to-ground incidents, while air-to-ground and ground-to-air incidents accounted for 36 and 3 percent, respectively. A more recent notable incident is the 1994 friendly forces' shootdown of two Blackhawk helicopters over Iraq during Operation Provide Comfort. Such incidents may be caused by command and control failures, navigation failures, or target misidentification. A key aspect of DOD's effort to prevent friendly fire is the development of new combat identification systems. Some of these systems will "cooperate" to identify friendly targets through queries and answers. Others will identify targets as friendly or unknown with the help of data sources, such as radio emissions or acoustic signals. And others, known as situational awareness systems, will rely on periodic updates of position data to help users locate friendly forces. The cost of such systems is significant. For example, the Army's efforts to develop, field, and maintain cooperative combat identification systems alone are expected to cost more than $1 billion. Successfully developing and implementing these systems is a major challenge for DOD. The systems themselves will be developed and managed by many different entities within DOD and the military services. They will be involved in a wide range of military operations and installed on a broad array of equipment. At the same time, however, these systems will need to be compatible and interoperable. They will also need to fit in with DOD's long-term goals for achieving information superiority over the enemy. DOD defines this as "the capability to collect, process, and disseminate an uninterrupted flow of information while exploiting or denying an adversary's ability to do the same." Additionally, it is important that these systems be able to work with systems belonging to North Atlantic Treaty Organization (NATO) and other allies in order to help preclude friendly fire incidents during coalition operations. DOD does not yet have a complete enterprise architecture to guide its efforts to develop a family of combat identification systems and past attempts to establish an architecture were not comprehensive or adopted by the services. Without a "blueprint" to guide and constrain DOD's investments in combat identification systems, the military services and Defense agencies may well find themselves with combat identification systems that are duplicative, not interoperable, and unnecessarily costly to maintain and interface. An enterprise architecture systematically captures in useful models, diagrams, and narrative the full breadth and depth of the mission-based mode of operations for a given enterprise, which can be (1) a single organization or (2) a functional or mission area that transcends more than one organizational boundary (e.g., financial management, acquisition management, or combat identification). Further, such an architecture describes the enterprise's operations in both (1) logical terms, such as interrelated functions, information needs and flows, work locations, and system applications, and (2) technical terms, such as hardware, software, data, communications, and security attributes and performance standards. If defined properly, enterprise architectures can assist in optimizing interdependencies and interrelationships among an organization's operations and the underlying technology supporting these operations. Our experience with federal agencies has shown that attempting to define and build major systems without first completing an enterprise systems architecture often results in systems that are duplicative, not well integrated, unnecessarily costly to maintain and interface, and do not effectively optimize mission performance. The Office of Management and Budget (OMB) has recognized the importance of agency enterprise architectures. OMB has issued guidance that, among other things, requires agency information system investments to be consistent with agency architectures. More recently, the Chief Information Officers Council produced guidance for federal agencies in initiating, developing, using, and maintaining enterprise architectures. DOD has also issued architecture policy, including a framework defining an architecture's structure and content. Specifically, in February 1998,DOD directed its components and activities to use the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) Architecture Framework, Version 2.0. DOD's framework is comprised of three components: (1) an operational architecture--that is, the operational elements, activities, tasks, and information flows required to accomplish or support a mission, (2) a systems architecture--that is, the systems and interconnections supporting the functional mission, and (3) a technical architecture--that is, the minimum set of standards and rules governing the arrangement, interaction, and interdependence of systems applications and infrastructure. According to DOD, the C4ISR Architecture Framework is a critical tool for achieving its strategic direction and all DOD components and activities should use the framework for all functional areas and domains within the Department. The C4ISR Architecture Framework is recognized in the Federal Chief Information Officers Council's A Practical Guide to Federal Enterprise Architecture as a model architecture framework for developing enterprise architectures. Appendix I provides more detailed information on the C4ISR Architecture Framework. DOD has also recognized the importance of architectures in its recently revised acquisition guidance, DOD Directive 5000.1 and Instruction 5000.2. This guidance sets DOD policy for managing all acquisition programs. Among other things, it requires the use of architectures to characterize the interrelationships and interactions between U.S., allied, and coalition systems. DOD has initiated efforts to develop an architecture for combat identification, but they have not been comprehensive or adopted by the military services. The first effort began in 1994 with the creation of a Combat Identification Task Force. Among other things, such as identifying promising combat identification technologies for a planned demonstration, the Task Force sought to develop an overall architecture for combat identification through an architecture working group. However, this effort only focused on specific systems and how they would work together. It did not define the operational elements and activities required to support a future warfighting vision or technical standards. Both views are integral to an overall architecture. According to DOD, for example, the operational view is useful for facilitating a number of actions across DOD, such as defining operational requirements to be supported by physical resources and systems. The technical view enables interoperability and compatibility of systems, by providing the standards, criteria, and reference models upon which engineering specifications are based, common building blocks are established, and applications are developed. The work of the architecture working group also excluded elements integral to the battlefield, such as dismounted soldiers, ships, air defense sites, and air-to-ground missions other than close-air support. Additionally, the architecture developed only dealt with the need to identify forces as being either friendly or hostile. It did not address the need to further distinguish targeted systems by class (e.g., "tank" vs. "truck"), platform (e.g., MIG 29 vs. T-72 Main Battle Tank) or intent (e.g., a defecting vs. an attacking platform). More critically, the architecture was never adopted by the services. Subsequent work began in January 2000 when the Joint Chiefs of Staff's Combat Identification Assessment Division began planning draft guidance on an effort to analyze alternative current and evolving combat identification technologies to support development of an operational architecture. The analysis is expected to take over 2 years to complete at an estimated cost of $10 million. However, this effort is to focus on surface-to-surface and air-to-surface military operations and not to include air-to-air or surface-to-air operations. While the draft guidance for the analysis indicated that the Army should lead the effort with support from the other services, thus far, only the Air Force has budgeted funds-- $2 million--toward accomplishing this task. Similarly, in January 2001, the Assessment Division described efforts to develop the operational architecture itself. However, this effort is currently unfunded. According to DOD officials, the reasons for the current lack of funding include the difficulty of reflecting such efforts in DOD's budgets in a timely manner and addressing competing service funding priorities. Architectures enable organizations to know their portfolio of desired systems and to develop a clear understanding of how these systems will collectively support and carry out their objectives. Moreover, they help ensure that systems are interoperable, function together effectively, and are cost-effective over their life cycles. Our previous reviews at the Federal Aviation Administration, Customs Service, Department of Education, Internal Revenue Service, Bureau of Indian Affairs, and National Oceanic and Atmospheric Administration have shown that while the absence of a complete architecture does not guarantee the failure of system modernization efforts, it does greatly increase the risk that agencies will spend more money and time than necessary to ensure that systems are compatible and in line with business needs. Our previous work reviewing DOD's combat identification efforts has shown that DOD is confronting such risks. In 1993, we reported on the Army's ongoing efforts to develop its Battlefield Combat Identification System (see fig. 1)--a system designed to provide a ground-to-ground and potentially an air (helicopter)-to-ground cooperative identification capability. We found that the Army planned to spend up to $100 million on a near-term combat identification system even though the system might eventually be discarded if it could not be integrated into a long-term solution. We also reported that the Army planned to eventually buy 1,520 of the near-term systems to equip some forces even though that number would not be sufficient for a larger-scale operation. Additionally, absent the understanding provided by an enterprise architecture, the services risk being unable to effectively define and develop weapon system requirements (e.g., system characteristics, functions, and performance parameters). As mentioned earlier, developing an enterprise architecture provides further understanding of (1) the operational elements, activities, tasks, and information flows needed to accomplish a mission, (2) the systems needed and their interconnections to support that mission, and (3) the minimum set of standards and rules needed to govern their arrangement, interaction, and interdependence. As a result, systematically reviewing specific systems' requirements within the context of such an architecture can help ensure the development of cost-effective systems to provide needed capabilities. DOD has already identified some broader needs for combat identification. Specifically, in 1992 and again in 1998, DOD defined its overall mission needs for combat identification systems and it defined the capabilities it expected from these systems, including positive, timely, and reliable identification of friends, foes, and neutrals;classification of foes by platform, class/type, and nationality; and friend-from-friend discrimination. More recently, the U.S. Joint Forces Command developed a Capstone Requirements Document that defines overarching requirements for the combat identification family of systems. Lastly, without having a complete architecture for combat identification, DOD may not be able to ensure that its own operational, systems, and technical requirements are aligned with those of NATO allies. NATO is currently developing both an operational architecture and a systems architecture in all mission domains (air-to-air, surface-to-air, air-to-surface, and surface-to-surface). It plans to complete these architectures by the end of 2001 and the end of 2002, respectively. If DOD's efforts to develop an enterprise architecture for combat identification occur in a timely manner, they could be more closely aligned with NATO's efforts and possibly improve coalition interoperability. Moreover, DOD would be able to ensure that the long-term capabilities it envisions for combat identification are recognized. The effort to develop new systems for combat identification is challenging not only because the systems themselves span a number of entities within DOD but also because they may need to operate jointly and with systems belonging to allies and work in concert with DOD's long-term goals for information superiority. DOD's success, therefore, hinges on having effective management structures and processes--e.g. focal points, funding and development plans, schedule and resource estimates, performance measures, progress reporting requirements--to guide and manage systems development. DOD and the services have established focal points for coordinating combat identification efforts. For example, the Assistant Secretary of Defense for Command, Control, Communications and Intelligence is responsible for overseeing combat identification programs and the Joint Chiefs of Staff has ongoing efforts to improve combat identification capabilities. However, DOD currently lacks a formalized framework defining the procedures and controls that would facilitate these efforts. As a result, coordination and funding of development initiatives is not assured. Because the prevention of friendly fire is a DOD-wide effort involving the military services, other DOD components, and even U.S. allies, it must be approached as an enterprise endeavor with senior executive management sponsorship. This requires identifying an entity or individual with organizational authority, responsibility, and accountability for managing system development as an agencywide project and ensuring appropriate resources are provided to accomplish needed tasks and develop required systems. We have reported on the need for cohesive management in developing combat identification systems in the past. In 1995, we issued a report on Army and Navy-led efforts to develop cooperative identification systems. We found that the Army and Navy were pursuing development of systems without having developed a cohesive management plan and organizational structure and made recommendations to strengthen those efforts. Given the size and complexity of the project, it is important for DOD to have a plan that lays out the current combat identification capabilities, desired capabilities, and specific initiatives, programs, and projects intended to get DOD and the services to that vision. Such plans, or roadmaps, are often developed as part of an enterprise architecture. To facilitate the implementation of these plans, it is also necessary for DOD to define the organizational structure, responsibilities, and procedures for such things as defining system requirements, developing and procuring systems, and funding specific efforts. Together, these structures and processes can help ensure that combat identification projects are not duplicative or disparate and that they receive adequate priority and funding. Lastly, it is important that DOD define performance measures to assess the progress of combat identification improvements. The Government Performance and Results Act of 1993 requires federal agencies and activities to clearly define their missions, set goals, link activities and resources to goals, prepare annual performance plans, measure performance, and report on their accomplishments. Performance measures can be particularly helpful in ensuring that services and components are effectively coordinating their development efforts. For example, DOD could measure the progress associated with planning and successfully conducting joint, cross-service, and allied demonstrations of interoperable systems. Performance measures can also help ensure projects are adequately funded, for example, by measuring whether the services' budgets support efforts to develop an enterprise architecture for combat identification. DOD has recognized the benefit of formally defining management structures and processes in the past to guide combat identification efforts, but those efforts are no longer in use. First, in January 1993, the services signed a Memorandum of Agreement on Joint Management of Combat Identification to coordinate and provide oversight of their requirements, policies, procedures, development and procurement programs, and related technology efforts. The agreement stated that combat identification encompasses widely varying requirements, policies, platforms, mission areas, and technologies. Among other things, the agreement created a General Officer Steering Committee to serve as a primary focal point for all DOD combat identification activities; a Joint Combat Identification Officer under that committee to provide lower-level coordination on all DOD efforts and develop a master plan for combat identification efforts; three supporting committees; and two acquisition-related groups. Following the agreement, DOD published a joint master plan for its "cooperative identification" system development efforts (that is, systems that identify friendly or unknown through queries and answers). The plan defined management strategies and structures to plan and execute these technologies and it defined an acquisition strategy that called for such things as baselining existing capability, identifying and prioritizing deficiencies, coordinating advanced research and development activities, and integrating system architectures. However, the memorandum of agreement is no longer in use and only one of the entities created from the memorandum still exists--the Joint Chiefs of Staff's Combat Identification Assessment Division (formerly the Joint Combat Identification Office). Moreover, according to a DOD official, the Joint Master Plan for cooperative systems development is no longer in use because the services' efforts did not evolve into joint programs as originally envisioned. In 1996, the services developed another master plan that represented their strategic vision for developing, maintaining, and enhancing their combat identification capability. This plan went beyond the 1993 plan by including noncooperative and situational awareness system development efforts. The plan was to serve as the focal point for coordination of joint and service-unique initiatives during the budget process. However, it was updated only once in 1998 and that revision was never adopted by the department. Since then, the Joint Chiefs of Staff's Combat Identification Assessment Division has developed and updated an annual action plan. Many of the plan's tasks are designed to address known deficiencies that can be corrected in the near term. The plan does not define management structures and procedures for guiding system development. And, while it does call for a semiannual report on progress, it does not define specific measures to be used in assessing that progress. Moreover, the Assessment Division does not have authority to direct the services to implement its plan nor does it have funding authority of its own to carry out the plan's tasks. Rather, an Assessment Division official stated that the services' cooperation is essential to implement the plan. Without sufficient structures and processes to coordinate and guide systems development, some combat identification projects have not been sufficiently funded. For example, as mentioned earlier, the systems analysis DOD planned to support development of an operational architecture for combat identification has an estimated cost of $10 million. However, while the guidance for this analysis indicated that the Army should lead the effort with support from the other services, thus far only the Air Force has budgeted funds--$2 million--toward its accomplishment. In addition, the Combat Identification Assessment Division's planned operational architecture is also unfunded at this time. Similar problems are occurring at the service level. Based on a review of the Battlefield Combat Identification System program, the DOD Inspector General recently reported that the Army has obligated $132.4 million in research, development, test and evaluation, and procurement funds through fiscal year 2000 and plans to obligate another $86.5 million to complete development efforts and procure 1,169 low-rate initial production systems from fiscal year 2001 through fiscal year 2007 for the 4th Infantry Division. However, the Inspector General also reported that the Army has not provided $918.5 million of procurement and operations and maintenance funds for the program's procurement objective of 16,414 systems. The lack of a management framework also makes it difficult to coordinate projects among the services to ensure that they are not redundant or disparate. For example, the Army recently proposed a memorandum of agreement between the Army and the Marines for cooperation in battlefield identification activities. The memorandum was to describe the activities and intentions of the two services to promote and ensure joint operational interoperability and to encourage sharing of information and joint work on combat identification concepts, doctrine (tactics, techniques, and procedures), experimentation, operational analysis, and lessons learned. The proposed agreement was also to acknowledge that the Army was pursuing its Battlefield Combat Identification System for ground-to-ground identification and that the Marines' priority of effort would go toward air-to-ground identification. The Marines declined the Army's proposed agreement. A Marine Corps official told us that the recent approval of a NATO Standardization Agreement for battlefield identification systems mandating the use of the same technology employed in the Army's system and the development of the recently approved combat identification Capstone Requirements Document negate the need for a separate agreement to address interoperability between Army and similar Marine Corps systems. Complying with the NATO agreement and the Capstone Requirements Document may enable the Marines to build systems that can interact with those built to NATO's standards and that have the capabilities that DOD has envisioned. However, it reduces assurance that Marine systems will be fully interoperable with the Army's and it will not reduce the risk of inefficient redundancy of service efforts. Preventing friendly fire is a complex and challenging endeavor. It encompasses the development of new technologies as well as new training, tactics, and warfighting techniques. It involves a range of equipment and systems that have historically not been able to effectively interact as well as a variety of military operations. And it's a concern among each of the services as well as our allies. Clearly, it is essential to have a blueprint that ties together these elements and provides a comprehensive map for long-term improvements as well as a management framework that is strong enough to implement the blueprint. While DOD has taken some concrete steps toward both ends, it needs to strengthen these efforts and ensure that they are supported by the services. Without doing so, it may well continue to contend with problems leading to friendly fire incidents. To improve DOD's combat identification system development efforts, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, in collaboration with the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Joint Staff's Combat Identification Assessment Division; and the services; to Develop--in accordance with federal guidelines and relevant DOD policies and guidance--an enterprise architecture for combat identification that reflects the needs of its future warfighting vision. The architecture should define (1) the operational elements, activities, tasks, and information flows required to accomplish the combat identification mission, (2) the systems and interconnections supporting the mission, and (3) the minimum set of standards and rules governing the arrangement, interaction, and interdependence of systems applications and infrastructure. It should also encompass air-to-air, surface-to-air, surface-to-surface, and air-to-surface operations. Once the architecture is defined, we recommend that DOD review specific system requirements to determine whether they should be adjusted to address the needs reflected in those architectures or determine if gaps exist and new development efforts are needed. Develop and annually update a written, formalized management framework to guide the department's combat identification efforts. The framework should define the organizational structure and procedures to be used in managing those efforts including the structures and procedures to coordinate requirements' and systems' development and funding, and develop and enforce the enterprise architecture. Until an enterprise architecture is developed, the framework should contain interim procedures for the review of ongoing efforts and that allow continuation of only efforts deemed essential or for which risk mitigation mechanisms have been provided. The framework should also provide roadmaps to future developments and define time-phased measures of program performance. In addition, to enable accomplishment of overarching combat identification efforts, we recommend that the Secretary of Defense ensure that adequate funding is provided to implement these initiatives. In written comments on a draft of this report, DOD agreed with all three of our recommendations and cited ongoing and planned initiatives to address our concerns. We are encouraged by the department's initiatives. In concurring with our recommendation related to the development and use of an enterprise architecture, DOD stated that two of the three views forming that architecture--the operational and systems views--are to be developed in the near-term. The department added--as we recommended--that these views can then be used as a guide to review and adjust systems requirements and to determine if gaps exits that may require new development efforts. DOD also stated that development of the technical architecture view will be initiated once development of the other views has progressed to an appropriate point. DOD agreed with our recommendation that the department develop and annually update a written, formalized management framework to guide its combat identification efforts. DOD commented that it has a formalized framework to guide its combat identification efforts that is delineated in a draft Joint Staff Combat Identification Assessment Team charter, the Joint Staff Combat Identification Action Plan, and a Combat Identification Capstone Requirements Document. To complement the Joint Staff's efforts, DOD proposes the establishment of a combat identification integrated product team to assist in developing and enforcing the combat identification systems architecture and resolving combat identification system acquisition, integration, and synchronization issues. Also, the team is to produce roadmaps and time-phased measures of program performance for individual system's development efforts as required. DOD stated that it agreed with our recommendation regarding the need for adequate funding of overarching combat identification efforts. The department commented that it is committed to the identification of funding to support these efforts through its budgeting and requirements processes. DOD's comments are reprinted in appendix II. In addition, DOD also provided technical comments that we incorporated as appropriate. To determine whether the services are using an enterprise architecture to guide their combat identification efforts, we reviewed documents relating to services' prior, current, and planned combat identification efforts. We also discussed architecture-related issues with officials from the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Joint Chiefs of Staff Combat Identification Assessment Division; the NATO Identification System Coordination Office; and various service activities. Additionally, we reviewed DOD and Joint Chiefs of Staff guidance on requirements development and examined DOD's and the service's planned actions within the context of that guidance. We also discussed requirements issues with cognizant DOD and service officials. To determine whether DOD and the services have developed and are using cohesive management plans to assure inter-service and allied interoperability of cost-effective combat identification systems, we reviewed previous combat identification plans and discussed those plans with DOD representatives and the services. We also discussed general management issues with those officials and developed information on management problems that might be avoided by developing a cohesive management plan. Additionally, to gain a better understanding of DOD and allied interoperability requirements, we discussed combat identification issues with representatives of NATO and the United Kingdom's National Audit Office, Ministry of Defence, and Defence Evaluation and Research Agency. We conducted our work from September 2000 through June 2001 in accordance with generally accepted government auditing standards. This report contains recommendations to you. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement of the actions taken on our recommendations to the Senate Committee on Governmental Affairs and to the House Committee on Government Reform not later than 60 days from the date of this letter and to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to the appropriate congressional committees. We are also sending copies to the Honorable Thomas E. White, Secretary of the Army; the Honorable Gordon R. England, Secretary of the Navy; the Honorable James G. Roche, Secretary of the Air Force; General James L. Jones, Commandant of the Marine Corps; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. We will make copies available to others upon request. The report will also be available on our homepage at http://www.gao.gov. Please contact me at (202) 512-4841 if you have any questions concerning this report. Major contributors to this report were Charles F. Rey, Bruce H. Thomas, Thomas W. Hopp, Rahul Gupta, Hai Tran, Gary L. Middleton, Cristina Chaplain, and Randolph C. Hite. The Department of Defense (DOD) has published a framework for the development and presentation of architectures within DOD. The framework defines the type and content of architectural artifacts, as well as the relationships among artifacts, that are needed to produce a useful enterprise architecture. Briefly, the framework decomposes an enterprise architecture into three primary views (perspectives into how the enterprise operates): the operational, systems, and technical views, also referred to as architectures. According to DOD, the three interdependent views are needed to ensure that information technology systems are developed and implemented in an interoperable and cost-effective manner. Each of these views is summarized below. (Fig. 2 is a simplified diagram depicting the interrelationships among the views.) The operational architecture view defines the operational elements, activities and tasks, and information flows required to accomplish or support an organizational mission or business function. According to DOD, it is useful for facilitating a number of actions and assessments across DOD, such as examining business processes for reengineering or defining operational requirements to be supported by physical resources and systems. The systems architecture view defines the systems and their interconnections supporting the organizational or functional mission in context with the operational view, including how multiple systems link and interoperate, and may describe the internal construction and operations of particular systems. According to DOD, this view has many uses, such as helping managers to evaluate interoperability improvement and to make investment decisions concerning cost-effective ways to satisfy operational requirements. The technical architecture view defines a minimum set of standards and rules governing the arrangement, interaction, and interdependence of system applications and infrastructure. It provides the technical standards, criteria, and reference models upon which engineering specifications are based, common building blocks are established, and applications are developed.

Friendly fire incidents, or fratricide, accounted for about 24 percent of U.S. fatalities during Operation Desert Storm in 1991. Since then, the Department of Defense (DOD) and the military services have been working to find new ways to avoid friendly fire in joint and coalition operations. Preventing friendly fire is a complex and challenging endeavor. It encompasses the development of new technologies as well as new training, tactics, and warfighting techniques. It involves a range of equipment and systems that have historically not been able to effectively interact as well as various military operations. It is a concern among each of the services as well as U.S. allies. Clearly, it is essential to have a blueprint that ties together these elements and provides a comprehensive map for long-term improvements as well as a management framework that is strong enough to implement the blueprint. Although DOD has taken some concrete steps toward both ends, it needs to strengthen these efforts and ensure that they are supported by the services. Otherwise, it may continue to contend with problems leading to friendly fire incidents.

As part of our audit of the fiscal years 2016 and 2015 CFS, we considered the federal government's financial reporting procedures and related internal control. Also, we determined the status of corrective actions Treasury and OMB have taken to address open recommendations relating to their processes to prepare the CFS, detailed in our previous reports, that remained open at the beginning of our fiscal year 2016 audit. A full discussion of our scope and methodology is included in our January 2017 report on our audit of the fiscal years 2016 and 2015 CFS. We have communicated each of the control deficiencies discussed in this report to your staff. We performed our audit in accordance with U.S. generally accepted government auditing standards. We believe that our audit provides a reasonable basis for our findings and recommendations in this report. During our audit of the fiscal year 2016 CFS, we identified three new internal control deficiencies in Treasury's processes used to prepare the CFS. Specifically, we found that (1) Treasury did not have sufficient procedures and metrics for monitoring the federal government's year-to- year progress in resolving intragovernmental differences at the federal entity level, (2) Treasury did not have a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS, and (3) three of Treasury and OMB's corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. During our fiscal year 2016 CFS audit, we found that the federal government continued to be unable to adequately account for and reconcile intragovernmental activity and balances between federal entities. Treasury has taken significant action over the past few years to address control deficiencies in this area, including actions to improve reporting of intragovernmental differences to federal entities and to work actively with federal entities to encourage resolution of reported differences. However, Treasury did not have sufficient procedures and metrics for monitoring the federal government's year-to-year progress in resolving intragovernmental differences at the federal entity level. When preparing the CFS, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the CFS. Federal entities are responsible for properly accounting for and reporting their intragovernmental activity and balances in their entity financial statements and for effectively implementing related internal controls. This includes reconciling and resolving intragovernmental differences at the transaction level with their trading partners. To support this process, Treasury has established procedures for identifying whether intragovernmental activity and balances reported to Treasury by federal entities are properly reconciled and balanced. For example, Treasury calculates intragovernmental differences by reciprocal category and trading partner for each federal entity. Through these calculations, Treasury has identified certain recurring issues, such as significant differences related to specific entities, reciprocal categories, and trading partners. Treasury provides quarterly scorecards to the individual federal entities that are significant to the CFS to highlight intragovernmental differences requiring these entities' attention. Treasury also prepares a quarterly government-wide scorecard to communicate the total differences on a government-wide basis. The government-wide scorecard also identifies the 10 largest federal entity contributors to the total government-wide difference. While Treasury's scorecard process and other initiatives focus on identifying and communicating differences to federal entities, they do not include procedures for monitoring the federal government's year-to-year progress in resolving intragovernmental differences at the federal entity level. For example, the entity-level scorecards do not include metrics that could be used to gauge the federal government's year-to-year progress in resolving intragovernmental differences at the entity level by reciprocal category and trading partner. Although Treasury produces a government- wide scorecard, the chart included on the scorecard shows changes in the total intragovernmental differences for recent quarters but does not identify increases or decreases at the individual entity level by reciprocal category and trading partner. While the total of intragovernmental differences has declined in recent years as a result of the scorecard process and other Treasury initiatives, we continued to note that amounts reported by federal entities were not in agreement by hundreds of billions of dollars for fiscal year 2016. Standards for Internal Control in the Federal Government states that management should (1) design control activities to achieve objectives and respond to risks, such as establishing and reviewing performance measures and indicators, and (2) implement control activities, such as documenting responsibilities through policies and procedures. The standard also states that management should establish and operate monitoring activities to monitor the internal control system and evaluate the results and should remediate any identified internal control deficiencies on a timely basis. Without adequate procedures and metrics for effectively monitoring federal government progress in resolving intragovernmental differences at the entity level, Treasury cannot effectively identify areas where specific federal entities need further improvement and attention from year to year to resolve intragovernmental differences that result in errors in the CFS. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement procedures and metrics for monitoring the federal government's year-to-year progress in resolving intragovernmental differences for significant federal entities at the reciprocal category and trading partner levels. During our fiscal year 2016 CFS audit, we found that Treasury continued to record significant adjustments to data reported by federal entities for inclusion in the CFS. Treasury collects financial statement information from federal entities through its Governmentwide Treasury Account Symbol Adjusted Trial Balance System and Governmentwide Financial Report System. Auditors for entities significant to the CFS are responsible for providing opinions on these entities' closing package submissions to Treasury. Once federal entities have submitted data for inclusion in the CFS, Treasury performs procedures to determine the consistency of the submitted data to (1) federal entity audited financial statements and (2) government-wide financial reporting standards. Treasury also performs procedures to determine if adjustments are needed to resolve certain unreconciled differences in intragovernmental activity and balances. Through these processes, Treasury identified the need for tens of billions of dollars of adjustments to federal entity- submitted data and recorded these adjustments to the CFS. Treasury identified many of the adjustments needed as recurring because they related to the same line items and federal entities as in prior years. The adjustments were necessary often because of inaccurate or incomplete information that federal entities submitted for the CFS. Though Treasury had procedures for identifying adjustments needed to data that federal entities submitted at fiscal year-end as well as procedures for reviewing recurring intragovernmental adjustments, Treasury did not have a sufficient process for reviewing recurring non-intragovernmental adjustments. Specifically, Treasury did not have a process to work with federal entities to correctly report non-intragovernmental information in federal entities' closing packages prior to submission to Treasury, thereby reducing or resolving the need for Treasury to make significant adjustments to federal entity data. For adjustments related to intragovernmental differences, we found that Treasury's procedures did include steps for reviewing recurring intragovernmental adjustments and for working with federal entities to reduce or resolve the need for these intragovernmental adjustments. Statement of Federal Financial Accounting Concepts No. 4, Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government, states that the consolidated financial report should be a general purpose report that is aggregated from federal entity reports. The Treasury Financial Manual (TFM) provides guidance on how federal entities are to provide their financial data to Treasury for consolidation. In accordance with the TFM, significant component entities are required to submit their financial data to Treasury using a closing package. A significant component entity's chief financial officer must certify the accuracy of the data in the closing package and have it audited. Because the closing package process requires that significant component entities verify and validate the information in their closing packages compared with their audited department-level financial statements and receive audit opinions, Treasury is provided a level of assurance that it is compiling the CFS with reliable financial information. In addition, OMB Bulletin 15-02, Audit Requirements for Federal Financial Statements, establishes requirements for audits of federal financial statements, including audits of the closing packages. Also, Standards for Internal Control in the Federal Government states that management should design and implement control activities, such as procedures to help ensure that financial information is completely and accurately reported. Without a sufficient process aimed at reducing or resolving the need for significant adjustments to federal entity data submitted for the CFS, Treasury is unable to reasonably assure that it has reliable financial information for all federal entities, which is needed to achieve auditability of the CFS. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS. Three of Treasury and OMB's corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. Corrective action plans are the mechanism whereby management presents the actions the entity will take to resolve identified internal control deficiencies. Treasury, in coordination with OMB, compiled a collection of corrective action plans in a remediation plan focused on resolving material weaknesses related to the processes used to prepare the CFS. The corrective action plans contained in the remediation plan--which are intended to address control deficiencies related to (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliations of Net Operating Cost and Unified Budget Deficit and Statements of Changes in Cash Balance from Unified Budget and Other Activities (Reconciliation Statements)--did not include sufficient information to demonstrate that the plans, if properly implemented, will effectively resolve such deficiencies. Treasury and OMB did not include sufficient information in their corrective action plan to help ensure that major treaty and international agreement information is properly identified and reported in the CFS. We found that the corrective actions included steps and milestones for meeting with the Department of State, a key entity with respect to treaties and international agreements, but did not include specific actions and outcomes planned to analyze all treaties and international agreements to obtain reasonable assurance whether they are appropriately recognized and disclosed in the CFS. As a result of not having specific actions to analyze all treaties and international agreements, any treaties and international agreements that had been omitted from entity reporting would not be identified. Not having procedures for reasonably assuring that information on major treaties and other international agreements is reported in the CFS could result in incomplete recognition and disclosure of probable and reasonably possible losses of the U.S. government. Treasury and OMB's corrective action plan to make intragovernmental scorecards available directly to federal entity auditors was not sufficient to address the control deficiency related to not having a formalized process to require the performance of additional audit procedures focused on intragovernmental activity and balances. Billions of dollars of unreconciled intragovernmental differences continued to be reported in the fiscal year 2016 CFS based on the financial data submitted in federal entities' audited closing packages. Although making the scorecard information available to auditors is helpful, that action in and of itself does not establish a process requiring federal entity auditors to perform additional audit procedures specifically focused on intragovernmental activity and balances. A formalized process to require the performance of additional audit procedures would provide increased audit assurance over the reliability of the intragovernmental information and help address the significant unreconciled transactions at the government-wide level. Treasury and OMB's corrective action plans related to the Reconciliation Statements did not clearly demonstrate how, once implemented, the corrective actions will remediate the related control deficiencies. For example, the corrective actions did not include sufficient information to explain how they would achieve Treasury's objectives to (1) identify and report all necessary items in the Reconciliation Statements and (2) reasonably assure that the amounts are consistent with underlying audited financial data. Also, some outcome measures did not describe what and how progress related to specific actions taken would be measured. Not including sufficient information on actions and outcomes in the corrective action plan impairs management's ability to assess the progress made toward resolution. The Chief Financial Officers Council's Implementation Guide for OMB Circular A-123, Management's Responsibility for Internal Control - Appendix A, Internal Control over Financial Reporting (Implementation Guide) includes guidance for preparing well-defined corrective action plans. According to the Implementation Guide, key elements necessary for well-defined corrective action plans include 1. descriptions of the deficiency and the planned corrective actions in sufficient detail to facilitate a common understanding of the deficiency and the steps that must be performed to resolve it; 2. interim targeted milestones and completion dates, including subordinate indicators, statistics, or metrics used to gauge resolution progress; and 3. planned validation activities and outcome measures used for assessing the effectiveness of the corrective actions taken. Also, Standards for Internal Control in the Federal Government states that management should (1) remediate identified internal control deficiencies on a timely basis and (2) design control activities to achieve objectives and respond to risks. In addition, OMB Circular No. A-123, Management's Responsibility for Enterprise Risk Management and Internal Control, requires management to develop corrective action plans for material weaknesses and periodically assess and report on the progress of those plans. The Implementation Guide is widely viewed as a "best practices" methodology for executing the requirements of Appendix A of OMB Circular No. A-123. Corrective actions need to be designed and implemented effectively to allow timely remediation of the deficiencies. An effective corrective action plan facilitates accountability, monitoring, and communication and helps ensure that entity personnel responsible for completing the planned corrective actions and monitoring progress toward resolution have the information and resources they need to do so. Without well-defined, sufficiently descriptive corrective action plans in these three areas, it will be difficult for Treasury and OMB to reasonably assure that corrective action plans will effectively remediate the internal control deficiencies and monitor progress toward resolution. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to improve corrective action plans for (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliation Statements so that they include sufficient information to address the control deficiencies in these areas effectively. At the beginning of our fiscal year 2016 audit, 24 recommendations from our prior reports regarding control deficiencies in the processes used to prepare the CFS were open. Treasury implemented corrective actions during fiscal year 2016 that resolved certain of the control deficiencies addressed by our recommendations. For 7 recommendations, the corrective actions resolved the related control deficiencies, and we closed the recommendations. We also closed 1 additional recommendation, related to corrective action plans, by making a new recommendation that is better aligned with the remaining internal control deficiency in this area. While progress was made, 16 recommendations from our prior reports remained open as of January 4, 2017, the date of our report on the audit of the fiscal year 2016 CFS. Consequently, a total of 19 recommendations need to be addressed--16 remaining from prior reports and the 3 new recommendations we are making in this report. Appendix I summarizes the status as of January 4, 2017, of the 24 open recommendations from our prior years' reports according to Treasury and OMB as well as our own assessment and additional comments, where appropriate. Various efforts are under way to address these recommendations. We will continue to monitor Treasury's and OMB's progress in addressing our recommendations as part of our fiscal year 2017 CFS audit. In written comments, reprinted in appendix II, Treasury stated that it appreciates our perspective and will continue to focus its efforts on cost- beneficial solutions to sufficiently resolve the material conditions that preclude having an opinion rendered on the CFS. Although in its comments Treasury neither agreed nor disagreed with our recommendations, Treasury provided information on actions that it plans to take to address two of the recommendations and stated with regard to the third recommendation that its current corrective action plans were effective. For our first two recommendations related to monitoring intragovernmental differences and reducing significant adjustments to federal entity data submitted for the CFS, Treasury stated that it will continue to (1) evolve its processes as necessary to ensure that appropriate and effective metrics are deployed to measure and monitor agency performance and (2) work with agencies to facilitate improvement of processes, minimizing the need for Treasury adjustments to agency reporting. For our third recommendation aimed at improving corrective action plans for (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliation Statements, Treasury stated that its current remediation plan, including its various corrective action plans, is comprehensive, appropriate, and effective, with robust ongoing monitoring processes in place. Treasury also stated that corrective actions aimed at increasing the quality of intragovernmental data are proving effective and that it does not support encumbering agencies with the cost and burden associated with requiring additional audit procedures. In addition, Treasury stated that it will continue to collaborate with OMB and federal entities on existing corrective actions. However, we continue to believe that the corrective action plans in these three areas do not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. For example, as discussed in our report, Treasury and OMB did not have specific actions in their corrective action plan to analyze all treaties and international agreements to help ensure that major treaty and international agreement information is properly identified and reported in the CFS. Further, we believe that a formalized process for Treasury to require the performance of additional audit procedures focused on intragovernmental activity and balances would provide increased audit assurance over the reliability of intragovernmental information and help address the hundreds of billions of dollars of unreconciled intragovernmental differences at the government-wide level. Treasury also described various actions taken and planned to address long-standing material weaknesses, including improvements in accounting for and reporting on the General Fund of the U.S. Government activity and balances, strengthening internal controls in the preparation of the CFS, and validating material completeness of budgetary information included in the Financial Report of the United States Government. Treasury also indicated that it plans to work with GAO as it fulfills its commitment to improving federal financial reporting. OMB staff in the Office of Federal Financial Management stated in an e-mail that OMB generally agreed with the findings in the report and with Treasury's written response to the draft. The e-mail noted that the current administration is committed to continuing to work with Treasury and federal agencies to achieve sound financial management across the federal government. We are sending copies of this report to interested congressional committees, the Fiscal Assistant Secretary of the Treasury, and the Controller of the Office of Management and Budget's Office of Federal Financial Management. In addition, the report is available at no charge on the GAO website 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 at (202) 512-3406 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report include Carolyn M. Voltz (Assistant Director), Latasha L. Freeman, Maria M. Morton, Sean R. Willey, and J. Mark Yoder. Table 1 shows the status of GAO's prior year recommendations for preparing the CFS. The abbreviations used are defined in the legend at the end of the table.

Treasury, in coordination with OMB, prepares the Financial Report of the United States Government , which contains the CFS. Since GAO's first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of its work have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. As part of the fiscal year 2016 CFS audit, GAO identified material weaknesses and other control deficiencies in the processes used to prepare the CFS. The purpose of this report is to provide (1) details on new control deficiencies GAO identified related to the processes used to prepare the CFS, along with related recommendations, and (2) the status of corrective actions Treasury and OMB have taken to address GAO's prior recommendations relating to the processes used to prepare the CFS that remained open at the beginning of the fiscal year 2016 audit. During its audit of the fiscal year 2016 consolidated financial statements of the U.S. government (CFS), GAO identified control deficiencies in the Department of the Treasury's (Treasury) and the Office of Management and Budget's (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control that involve the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities; reasonably assure that the consolidated financial statements are (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in accordance with U.S. generally accepted accounting principles; and reasonably assure that the information in the (1) Reconciliations of Net Operating Cost and Unified Budget Deficit and (2) Statements of Changes in Cash Balance from Unified Budget and Other Activities is complete and consistent with the underlying information in the audited entities' financial statements and other financial data. During its audit of the fiscal year 2016 CFS, GAO identified three new internal control deficiencies. Treasury did not have sufficient procedures and metrics for monitoring the federal government's year-to-year progress in resolving intragovernmental differences at the federal entity level. Treasury did not have a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS. Three of Treasury and OMB's corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the processes used to prepare the CFS were resolved or continued to exist. For 7 of the 24 recommendations from GAO's prior reports regarding control deficiencies in the processes used to prepare the CFS, Treasury implemented corrective actions during fiscal year 2016 that resolved the related control deficiencies, and as a result, these recommendations were closed. GAO closed 1 additional recommendation that related to corrective action plans, by making a new recommendation that is better aligned with the remaining internal control deficiency in this area. While progress was made, 16 of the 24 recommendations remained open as of January 4, 2017, the date of GAO's report on its audit of the fiscal year 2016 CFS. GAO will continue to monitor the status of corrective actions taken to address the 3 new recommendations made in this report as well as the 16 open recommendations from prior years as part of its fiscal year 2017 CFS audit. GAO is making three new recommendations--two to Treasury and one to both Treasury and OMB--to address the control deficiencies identified during the fiscal year 2016 CFS audit. In commenting on GAO's draft report, although Treasury neither agreed nor disagreed with GAO's recommendations, Treasury provided information on actions that it plans to take to address two recommendations, but stated that its current corrective action plans were effective for the third recommendation. GAO continues to believe that actions for this recommendation are needed as discussed in the report. OMB generally agreed with the findings in the report.

ITAA, a trade association, issued a report entitled Help Wanted: The IT Workforce Gap at the Dawn of a New Century in February 1997 that focused on issues relating to the IT labor market. Responding to this report, the National Economic Council and the Departments of Commerce, Education, and Labor began to discuss the workforce requirements of the IT sector; subsequently, federal officials agreed to cosponsor a convocation on the IT worker issue. The convocation, cosponsored by the Departments of Commerce and Education, the University of California at Berkeley, and ITAA, was designed to bring together leaders from industry, academia, and government to develop new educational strategies and forge partnerships that would increase the quantity and quality of the American IT workforce. Federal officials noted that the convocation would support the administration's goals for lifelong learning. Commerce's Office of Technology Policy was assigned the lead federal role in working with ITAA on the IT worker issue. The Office of Technology Policy's mission is to work with the private sector to develop and advocate national policies that maximize technology's contribution to U.S. economic growth, the creation of high-wage jobs, and improvements in Americans' quality of life. In preparation for the January 12-13, 1998, convocation, the Department of Commerce issued its report, America's New Deficit: The Shortage of Information Technology Workers, examining the potential for shortages of IT workers. In its report, Commerce presented BLS projections that between 1994 and 2005 the United States would require slightly over 1 million additional IT workers. BLS projections, based on surveys conducted for the Occupational Employment Statistics program and on the Current Population Survey, estimate future occupational needs resulting from expected national growth and separations from employment over time. Although there is no single, universally accepted definition of the occupations that should be designated as IT occupations, Commerce based its analysis of demand on job growth projections for the three IT occupations used by BLS--computer programmers, systems analysts, and computer scientists and engineers. BLS projections for new IT workers over the 11 years from 1994 to 2005 include IT workers to fill newly created jobs (820,000) in the three occupational categories and to replace workers (227,000) who are leaving these fields as a result of retirement, change of profession, or other reasons. The report noted that, according to BLS, of the three IT occupations, the greatest job growth is predicted for systems analysts (92 percent). (See table 1.) The number of computer engineers and scientists is expected to grow by 90 percent, while the number of computer programmer positions is expected to grow at a much slower rate (12 percent). The projected job growth for all occupations between 1994 and 2005 is 14 percent. Since the report was issued, Commerce has issued an update with revised BLS projections showing an even stronger growth. Between 1996 and 2006, there will be over 1.3 million projected job openings as a result of growth and net replacements; about 1.1 million of these job openings will be due to growth alone. Commerce identifies the supply of potential IT workers as the number of students graduating with bachelor's degrees in computer and information sciences. The report presents data from the Department of Education showing that 24,553 students earned bachelor's degrees in computer and information sciences in 1994, a decline of more than 40 percent from 1986. While the Commerce report highlights the supply of IT workers as those with bachelor's degrees in computer and information sciences, Commerce does note that IT workers may also acquire needed skills through other training paths--master's degrees, associate degrees, or special certification programs. Commerce's report also includes information from BLS that indicates, in the case of computer professionals, there is no universally accepted way to prepare for such a career but that employers almost always seek college graduates. Commerce's analysis of the supply of IT workers, however, did not consider (1) the numerical data for degrees and certifications in computer and information sciences other than at the bachelor's level when they quantify the total available supply; (2) college graduates with degrees in other areas; and (3) workers who have been, or will be, retrained for these occupations. Regarding these other sources of workers, the report sometimes acknowledges their relevance to a definition of supply but does not include estimates of workers from those sources in its overall estimate of supply. For example, Commerce reported that in 1994, 15,187 degrees and awards were earned in computer and information science programs below the bachelor's level, but this number was not included in the supply number for IT workers when Commerce compared the IT worker demand with the available supply. Commerce also noted that, although employers almost always seek college graduates for computer professional positions, there is no universally accepted way to prepare for a career as a computer professional. According to the BLS Occupational Outlook Handbook, which defines qualifications for jobs and careers in terms of education and experience of IT workers with a bachelor's degree, some workers have a degree in computer science, mathematics, or information systems, while others have taken special courses in computer programming to supplement their study in other fields such as accounting or other business areas. According to the National Science Foundation, only about 25 percent of those employed in computer and information science jobs in 1993 actually had degrees in computer and information science. Other workers in these fields had degrees in such areas as business, social sciences, mathematics, engineering, psychology, economics, and education. The Commerce report did not take this information into account in any way in estimating the future supply of IT workers. The report also stated that IT workers acquire needed skills through various training paths, but it provided no analysis of the extent to which companies are training and retraining workers. The Commerce report cited four pieces of evidence that an inadequate supply of IT workers is emerging--rising salaries for IT workers, reports of unfilled vacancies for IT workers, offshore sourcing and recruiting, and the fact that the estimated supply of IT workers (based on students graduating with bachelor's degrees in computer and information sciences) is less than its estimate of the demand. However, the report fails to provide clear, complete, and compelling evidence for a shortage or a potential shortage of IT workers with the four sources of evidence presented. First, although some data show rising salaries for IT workers, other data indicate that those increases in earnings have been commensurate with the rising earnings of all professional specialty occupations. Second, the ITAA study gives some indication of a shortage of IT workers by providing information on unfilled IT jobs. However, in our view, ITAA's survey response rate of 14 percent is inadequate to form a basis for a nationwide estimate of unfilled IT jobs. Third, although the report cites instances of companies drawing upon talent pools outside the United States to meet their demands for workers, not enough information is provided about the magnitude of this phenomenon. Finally, while the report discusses various sources of potential supply of IT workers, it used only the number of students earning bachelor's degrees in computer and information sciences when it compared the potential supply of workers with the magnitude of IT worker demand. Commerce stated that upward movement in salaries is evidence of a short supply of IT workers and cited several surveys and newspaper articles illustrating salary increases. For example, the report cited a survey conducted by the Deloitte & Touche Consulting Group showing that salaries for computer network professionals rose an average of 7.4 percent from 1996 to 1997. The report also cited an annual survey by Computerworld, a weekly newspaper covering the computer industry and targeting IT workers and managers, showing that in 11 of 26 positions tracked, average salaries increased by more than 10 percent from 1996 to 1997. Increases in starting salaries were also reported in the Wall Street Journal and the Washington Post. These wage increases, however, may not be conclusive evidence of a long-term limited supply of IT workers, but may be an indication of a current tightening of labor market conditions for IT workers. According to BLS data, increases have been less substantial when viewed over a longer period of time. For example, the percentage changes in weekly earnings for workers in computer occupations over the 1983 through 1997 period were comparable to or slightly lower, in the case of computer systems analysts and scientists, than the percentage changes for all professional specialty occupations. Thus, salary increases for these occupations have been consistent with the salary increases for other skilled occupational categories over time. What is uncertain is whether the recent trend toward higher rates of increase will continue. Regarding unfilled jobs, Commerce cited the ITAA report, which concluded that about 190,000 U.S. IT jobs were unfilled in 1996 because of a shortage of qualified workers, and that these shortages were likely to worsen. According to the ITAA survey, 82 percent of the IT companies responding expected to increase their IT staffing in the coming year, while more than half of the non-IT companies planned IT staff increases. The Commerce report should have cautioned readers, however, that the ITAA survey has a major methodological weakness. While the ITAA study provides useful information on unfilled jobs among the firms responding to its survey, the findings cannot be generalized to the national level. ITAA surveyed a random sample of 2,000 large and midsize IT and non-IT companies about their IT labor needs and received a total of 271 responses--a response rate of about 14 percent. We consider a 14-percent response rate to be unacceptably low as a basis for any generalizations about the population being surveyed. In order to make sound generalizations, the effective response rate should usually be at least 75 percent for each variable measured--a goal used by many practitioners. Furthermore, ITAA's estimate of the number of unfilled IT jobs is based on reported vacancies, and adequate information about those vacancies is not provided, such as how long positions have been vacant, whether wages offered are sufficient to attract qualified applicants, and whether companies consider jobs filled by contractors as vacancies. These weaknesses tend to undermine the reliability of ITAA's survey findings. Commerce cited support for an emerging shortage in its observation that some companies are drawing upon talent pools outside the United States to meet their demands for IT workers. For example, the Commerce report stated that India has more than 200,000 programmers and, in conjunction with predominantly U.S. partners, has developed into one of the world's largest exporters of software; in 1996 and 1997, outsourced software development accounted for 41 percent of India's software exports. Commerce also cited a Business Week article, "Forget the Huddled Masses: Send Nerds," to illustrate that companies are searching for IT workers in foreign labor markets such as Russia, Eastern Europe, East Asia, and South Africa. However, the Commerce report stated that some professional engineering societies believe information regarding a short supply of IT workers in the United States is exaggerated and that it is not necessary to recruit foreign workers to fill IT jobs. Additional systematic information about the magnitude of the phenomenon of companies meeting their demands for IT workers outside of the United States would be useful. The report identified the decline in the number of computer science graduates as a factor contributing to an inadequate supply of IT workers. The introduction to the report stated that evidence suggests that job growth in information technology fields now exceeds the production of talent. Commerce reported that between 1994 and 2005, an annual average of 95,000 new systems analysts, computer scientists and engineers, and computer programmers will be required to satisfy the increasing demand for IT workers and that only 24,553 students earned bachelor's degrees in computer and information sciences in 1994. Because there is a disparity between these two numbers, Commerce concluded that it will be difficult to meet the demand for IT workers. Commerce did not adequately explain why the decline in conferred bachelor's degrees in computer science would reflect a short supply of IT workers. As stated in the section on supply, IT workers come from a variety of educational backgrounds and have a variety of educational credentials such as master's degrees, associate degrees, or special certifications. In addition, Commerce reported on the decline from 1986, although that year represents a peak in the number of computer science degrees conferred, which had risen steadily from the 1970s but has remained relatively stable in the 1990s. Commerce's conclusions about the IT workforce are inconsistently reported in separate segments of its report. First, the title of the report states that America's new deficit is a shortage of information technology workers. The introduction also states that there is substantial evidence that the United States is having trouble keeping up with the demand for new information technology workers. However, the report notes that current statistical frameworks and mechanisms for measuring labor supply do not allow for precise identification of IT worker shortages and, in its summary chapter, Commerce concludes that more information is needed to fully characterize the IT labor market. We agree with Commerce's conclusion that more information and data are needed about the current and future IT labor market. In commenting on a draft of this correspondence, the Department of Commerce's Acting Under Secretary for Technology said there were several inaccuracies that the Department believed should be corrected. First, he said that we had inaccurately treated the report as if it was intended to be a definitive, exhaustive analysis of the labor market for IT workers. Instead, Commerce presented the study as an initial effort to explore a potential shortage of IT workers. Second, the Acting Under Secretary said that we inaccurately characterized the report's portrayal of the supply of new IT workers as consisting only of students graduating with bachelor's degrees in computer and information sciences--overlooking people with degrees and certifications in computer and information sciences other than at the bachelor's level and college graduates with degrees in other areas. Third, he said that the report included evidence indicating a tightening labor market for IT workers in addition to the four indicators cited in our correspondence. Commerce also took issue with our characterization of the report title (America's New Deficit: The Shortage of Information Technology Workers) and statements in the introduction as reflecting Commerce's conclusion that there is a shortage of IT workers. The Acting Under Secretary said that the report does not conclude that a shortage of IT workers exists. Instead, he said that the report's only conclusions were those contained in the chapter entitled "Summary and Further Action." Commerce's comments on our draft are included in their entirety in the enclosure. We made no changes to this correspondence on the basis of Commerce's comments. Regarding Commerce's first point, our correspondence explains that the stated purpose of Commerce's report was to explore the possibility of a shortage of IT workers in the United States; we did not characterize the report as a definitive analysis of the labor market for IT workers. Regarding our characterization of the supply of IT workers, we acknowledged that the report contained other information on the supply of IT workers. Our point was that Commerce did not include this information when citing the imbalance between the demand and supply of IT workers. Instead, Commerce focused on the gap between the estimated annual demand for 95,000 new IT workers and the supply of 24,553 students earning bachelor's degrees in computer and information sciences, not including the 15,187 students who earned degrees and awards in computer and information sciences below the bachelor's degree in 1994. Regarding the third point, our analysis considered all of the factors Commerce reported as evidence that a potential shortage of IT workers may be emerging in the report's chapter entitled "Is There an Adequate Supply of IT Workers?" While the report contained other information indicating there was a tightening labor market for IT workers, that information was presented elsewhere in the report and only as anecdotal information reflecting the experiences of individual companies, not the industry as a whole. Finally, we believe the report's title and the statements about the magnitude of the IT worker supply and demand imbalance contained in the report's introduction could reasonably be interpreted as reflecting a conclusion that there is an IT worker shortage. We believe it is useful to now have Commerce's clarification that it does not believe its report demonstrated that a shortage of IT workers exists. As this correspondence states, the Commerce report appears to appropriately establish that the demand for IT workers is expected to grow, but it did not adequately describe the likely supply of IT workers. For that reason, we agreed with the Department's conclusion that more needs to be known about the demand and supply of IT workers. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this correspondence until 30 days from its issue date. At that time, we will send copies to the Chairmen of the Committee on Commerce and the Committee on Science. We will also make copies available to other interested parties upon request. If you have any questions about this correspondence, please contact me at (202) 512-7014. Major contributors to this correspondence include Sigurd R. Nilsen, Assistant Director; Betty S. Clark, Evaluator-in-Charge; and Gene G. Kuehneman, Jr., Senior Economist. 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 provided information on the Department of Commerce's analysis of the information technology (IT) labor market, focusing on: (1) Commerce's analysis of IT worker supply and demand; and (2) the basis for its conclusion that a shortage of IT workers exists in the United States. GAO noted that: (1) Commerce's report has serious analytical and methodological weaknesses that undermine the credibility of its conclusion that a shortage of IT workers exists; (2) however, the lack of support presented in this one report should not necessarily lead to a conclusion that there is no shortage; (3) instead, as the Commerce report states, additional information and data are needed to more accurately characterize the IT labor market now and in the future; (4) the report appears to appropriately establish that the demand for IT workers is expected to grow, but it does not adequately describe the likely supply of IT workers; (5) although Commerce reported that only 24,553 U.S. students earned bachelor's degrees in computer and information sciences in 1994, Commerce also stated that the Bureau of Labor Statistics projects increasing job growth--an annual average of 95,000 new computer programmers, systems analysts and computer scientists and engineers will be required to satisfy the increasing demand for IT workers between 1994 and 2005; (6) pointing to the disparity between these two numbers and referring to evidence from other sources, Commerce concludes in the report's title and introduction that there is a shortage of IT workers; (7) Commerce did not, however, consider other likely sources of workers, such as college graduates with degrees in other areas; and (8) as a result, rather than supporting its conclusion that a shortage of IT workers exists, the data and analysis support the report's observation that more needs to be known about the supply and demand for IT workers.

In late 2003, recognizing that the current approach to managing air transportation is becoming increasingly inefficient and operationally obsolete, Congress created JPDO to plan NGATS, a system intended to accommodate the threefold increase in air traffic demand expected by 2025. JPDO's scope is broader than that of traditional ATC modernization in that it is "airport curb to airport curb," encompassing such issues as security screening and environmental concerns. Additionally, JPDO's approach will require unprecedented collaboration and consensus among many stakeholders--federal and nonfederal--about necessary system capabilities, equipment, procedures, and regulations. Each of JPDO's partner agencies will play a role in the transformation to NGATS. For example, the Department of Defense has deployed "network centric" systems, originally developed for the battlefield, that are being considered as a conceptual framework to provide all users of the national airspace system--FAA and the Departments of Defense and Homeland Security-- with a common view of that system. Vision 100 required the Secretary of Transportation to establish JPDO within FAA to manage work related to NGATS. The Director of JPDO reports to the FAA Administrator and to the Chief Operating Officer within ATO. JPDO began operating in early 2004. JPDO has developed a framework for planning and coordination with its partner agencies and nonfederal stakeholders that is consistent with the requirements of Vision 100 and with several practices that our work has shown can facilitate federal interagency collaboration and enterprise architecture development. This framework includes an integrated plan, an organizational structure, and an enterprise architecture. Vision 100 calls for the development of an integrated plan for NGATS and annual updates on the progress of that plan. JPDO's partner agencies developed an integrated plan and submitted it to Congress on December 12, 2004. The plan includes a vision statement for meeting the predicted threefold increase in demand for air transportation by 2025 and eight strategies that broadly address the goals and objectives for NGATS. In March 2006, JPDO published its first report to Congress on the progress made in carrying out the integrated plan. The integrated plan is consistent with effective collaboration practices we have identified. According to our research on federal interagency collaborations, agencies must have a clear and compelling rationale for working together to overcome significant differences in their missions, cultures, and established ways of doing business. In working together to develop JPDO's integrated plan, the partner agencies agreed on a vision statement to transform the air transportation system and on broad statements of future system goals, performance characteristics, and operational concepts. Vision 100 includes requirements for JPDO to coordinate and consult with its partner agencies, private sector experts, and the public. Accordingly, JPDO established an organizational structure to involve federal and nonfederal stakeholders throughout the organization. This structure includes a federal interagency policy committee, an institute for nonfederal stakeholders, and integrated product teams (IPT) that bring together federal and nonfederal experts to plan for and coordinate the development of technologies that will address JPDO's eight broad strategies. JPDO's senior policy committee was formed and is headed by the Secretary of Transportation, as required in Vision 100. The committee includes senior-level officials from JPDO's partner agencies and has met three times since its inception. The NGATS 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 in private industry, state and local governments, and academia. The NGATS Institute Management Council, composed of top officials and representatives from the aviation community, oversees the policy and recommendations of the Institute and provides a means for advancing consensus positions on critical NGATS issues. In March 2006, the Institute held its first public meeting to solicit information from the public and other interested stakeholders who are not involved in the council or the IPTs. These types of meetings are designed to address the Vision 100 requirement that JPDO coordinate and consult with the public. The IPTs are headed by representatives of JPDO's partner agencies and include more than 190 stakeholders from over 70 organizations, whose participation was arranged through the Institute. Figure 1 shows JPDO's position within FAA and the JPDO structures that bring together federal and nonfederal stakeholders, including the Institute and the IPTs. JPDO's organizational structure incorporates some of the practices we have found effective for federal interagency collaborations. For example, our work has shown that mutually reinforcing or joint strategies can help align partner agencies' activities, core processes, and resources to accomplish a common outcome. Each of the eight IPTs is aligned with one of the eight strategies outlined in JPDO's integrated plan, and each is headed by a partner agency that has taken the lead on a specific strategy. Our research has also found that collaborating agencies should identify the resources needed to initiate or sustain their collaborative effort. To leverage human resources, JPDO has staffed the various levels of its organization--including JPDO's board, the IPTs, and technical divisions-- with partner agency employees, many of whom work part time for JPDO. Finally, our work has shown that involving stakeholders can, among other things, increase their support for a collaborative effort. The Institute provides for involving nonfederal stakeholders, including the public, in planning NGATS. Vision 100 requires JPDO to coordinate NGATS-related programs across the partner agencies. To address this requirement, JPDO conducted an initial interagency review of its partner agencies' research and development programs during July 2005 to identify work that could support NGATS. Through this process, JPDO identified early opportunities that could be pursued during fiscal year 2007 to coordinate and minimize the duplication of research programs across the partner agencies and produce tangible results for NGATS. For example, one identified opportunity is to align aviation weather research across FAA, NASA, and the Departments of Commerce and Defense; develop a common weather capability; and harmonize and incorporate into NGATS those agency programs designed to seamlessly integrate weather information and aircraft weather mitigation systems. In addition, the Automatic Dependent Surveillance-Broadcast (ADS-B) and System Wide Information System (SWIM) programs at FAA were identified as opportunities for accelerated funding to produce tangible results for NGATS. JPDO is currently working with the Office of Management and Budget to develop a systematic means of reviewing the partner agencies' budget requests so that the NGATS- related funding in each request can easily be identified. Such a process would help the Office of Management and Budget consider NGATS as a unified federal investment, rather than as disparate line items distributed across several agencies' budget requests. JPDO's effort to leverage its partner agencies' resources for NGATS demonstrates another practice important to sustaining collaborations. Our work on collaborations has found that collaborating agencies, by assessing their relative strengths and limitations, can identify opportunities for leveraging each others' resources and thus obtain benefits that would not be available if they were working separately. JPDO's first interagency review of its partner agencies' research and development programs has facilitated the leveraging of technological resources for NGATS. The budget process under development with OMB provides a further opportunity to leverage resources for NGATS. Vision 100 requires JPDO to create a multiagency research and development roadmap for the transition to NGATS. To comply with Vision 100, JPDO has been working on an enterprise architecture and expects to complete an early version of the architecture by September 2006. Many of JPDO's future activities will depend on the robustness and timeliness of this architecture development. The enterprise architecture will describe FAA's operation of the current national airspace system, JPDO's plans for NGATS, and the sequence of steps needed for the transformation to NGATS. 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 has taken several important steps to develop the enterprise architecture--one of the most critical planning documents in the NGATS effort. For example, JPDO has drafted a concept of operations--a document that describes the operational transformations needed to achieve the overall goals of NGATS. JPDO has used this document to identify key research and policy issues for NGATS. For example, the concept of operations identifies several issues associated with automating the ATC 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. As the concept of operations matures, it will be important for air traffic controllers and other affected stakeholders to provide their perspectives on this effort so that needed adjustments can be made in a timely manner. JPDO officials recognize the importance of obtaining stakeholders' comments on the concept of operations and are currently incorporating stakeholders' comments into the concept of operations. JPDO expects to release its initial concept of operations by the end of July. Another step that JPDO has taken to develop the enterprise architecture is to form an Evaluation and Analysis Division (EAD), composed of FAA and NASA employees and contractors. This division is assembling a suite of models to help JPDO refine its plans for NGATS and iteratively narrow the range of potential solutions. For example, EAD has used modeling to begin studying how possible changes in the duties of key personnel, such as air traffic controllers, could affect the workload and performance of others, such as airport ground personnel. According to JPDO officials, the change in the roles of pilots and controllers is the most important human factors issue involved in creating NGATS. JPDO officials noted that the Agile Airspace and Safety IPTs include human factors specialists and that JPDO's chief architect has a background in human factors. However, EAD has not yet begun to model the effect of the shift in roles on pilots' performance because, according to an EAD official, a suitable model has not yet been incorporated into the modeling tool suite. According to EAD, addressing this issue is necessary, but will be difficult because data on pilot behavior are not readily available for use in creating such models. Furthermore, EAD has not yet studied the training implications of various NGATS-proposed solutions because further definition of the concept of operations for these solutions is needed. As the concept of operations and enterprise architecture mature, EAD will be able to study the extent to which new air traffic controllers will have to be trained to operate both the old and the new equipment. To develop and refine the enterprise architecture for NGATS, JPDO is following an effective technology development practice that we identified and applied to enterprise architecture development. This phased, "build a little, test a little" approach is similar to a process we have advocated for FAA's major system acquisition programs. This phased approach will also allow JPDO to incorporate evolving market forces and technologies in its architecture and thus better manage change. Consequently, additional refinements are expected to be made to the enterprise architecture. Vision 100 requires JPDO to identify the anticipated expenditures for developing and deploying NGATS. To begin estimating these expenditures realistically, JPDO is holding a series of investment analysis workshops with stakeholders to obtain their input on potential NGATS costs. The first workshop, held in April 2006, was for commercial and business aviation, equipment manufacturers, and ATC systems developers. The second workshop is planned for August for operators of lower-performance aircraft used in both commercial and noncommercial operations. The third workshop, planned for early September, will focus on airports and other local, state, and regional planning bodies. Although these workshops will help JPDO develop a range of potential costs for NGATS, a mature enterprise architecture is needed to provide the foundation for developing NGATS costs. Several unknown factors will drive these costs. According to JPDO, one of these drivers is the technologies expected to be included in NGATS. Some of these technologies are more complex and thus more expensive to implement than others. A second driver is the sequence for replacing current technologies with NGATS technologies. A third driver is the length of time required for the transformation to NGATS, since a longer period would impose higher costs. JPDO's first draft of its enterprise architecture, expected in September 2006, could reduce some of these variables, thereby allowing improved, albeit still preliminary, estimates of NGATS' costs. Although the enterprise architecture for NGATS is not yet complete, both FAA and its Research, Engineering and Development Advisory Committee (REDAC) have developed preliminary cost estimates, which officials of both organizations have emphasized are not yet endorsed by any agency. FAA estimates that the facilities and equipment cost to maintain the ATC system and implement the transformation to NGATS will be about $66 billion, or about $50 billion in constant 2005 dollars. The annual cost would average $2.7 billion per year in constant 2005 dollars from fiscal year 2007 through fiscal year 2025, or about $200 million more each year than FAA's fiscal year 2006 facilities and equipment appropriation. REDAC's Financing NGATS Working Group has developed a $15 billion average annual cost estimate for NGATS that includes costs not only for facilities and equipment but also for operations; airport improvement; and research, engineering, and development--the remaining three components of FAA's appropriation. As table 1 indicates, the working group began with FAA's facilities and equipment estimate and went on to calculate the remaining costs for FAA to maintain the current ATC system and implement the transformation to NGATS. REDAC's estimate for NGATS's total cost averages about $1 billion more annually than FAA's total appropriations for fiscal year 2006. Besides being preliminary, these estimates are incomplete--FAA's more than REDAC's because FAA's does not include any costs other than those for facilities and equipment. An FAA official acknowledged that the agency would likely incur additional costs, such as for safety certifications or operational changes responding to new NGATS technologies. Additionally, FAA's facilities and equipment cost estimate assumes that the intermediate technology development work, performed to date by NASA, has been completed. As I will discuss shortly, it is currently unclear who will now perform this work, but if FAA assumes responsibility for the work, REDAC has estimated additional FAA funding needs of at least $100 million a year. Furthermore, neither FAA's nor REDAC's estimate includes the other partner agencies' costs to implement NGATS, such as those that the Department of Homeland Security might incur to develop and implement new security technologies. Finally, these estimates treat NGATS's development and implementation period as an isolated event. Consequently, the costs drop dramatically toward 2025. In reality, officials who developed these estimates acknowledge that planning for the subsequent "next generation" system will likely be underway as 2025 approaches and the actual modernization costs could therefore be higher in this time frame than these estimates indicate. JPDO faces several challenges in planning for NGATS, including addressing leadership vacancies, leveraging resources and expertise from its partner agencies, and convincing nonfederal stakeholders that the government is fully committed to NGATS. JPDO has not had a permanent director since January 2006 and, with the recent resignation of the Secretary of Transportation, the senior policy committee is without a permanent chairperson. Our work has shown that, to overcome barriers to interagency coordination, committed leadership by individuals at the top of all involved organizations is critical. Leadership will also be important to provide a "champion" for JPDO and to sustain the partner agencies' focus on and contributions to the transformation to NGATS. Moreover, without a chairperson of the senior policy committee, no one within JPDO is responsible for sustaining JPDO's collaboration and overseeing its work. These vacancies raise concerns about the continued progress of JPDO and NGATS. After ATO was authorized, we reported that without a chief operating officer, FAA was unable to move forward with the new air traffic organization--that is, to bring together the ATC system's acquisition and operating functions, as intended, into a viable performance-based organization (PBO). This PBO was designed to be part of the solution to the chronic schedule delays, cost overruns, and performance shortfalls in FAA's ATC modernization program. We believe that filling the two vacant positions is critical to ensure continued progress for JPDO and NGATS. JPDO officials view leveraging the partner agencies' resources and expertise as one of their most significant challenges. According to JPDO officials, leveraging efforts have worked well so far, but JPDO's need for resources and expertise will increase with the development of NGATS, and for at least two reasons, JPDO may have difficulty meeting this need. First, JPDO's partner agencies have a variety of missions and priorities in addition to NGATS, and their priorities may change. Recently, for example, NASA reduced its aeronautics budget and decided to focus on fundamental research, in part because the agency believes such research is more in keeping with its mission and unique capabilities. These changes occurred even though NASA's current reauthorization act requires the agency to align its aviation research projects to directly support NGATS goals. In light of the changes, it is unclear what fundamental research NASA will perform to support NGATS and who will perform the development steps for that research--that is, the validation and demonstration that must take place before a new technology can be transferred to industry and incorporated into a product. JPDO and FAA officials said that not enough is understood about NASA's plans to assess the impact of NASA's action on NGATS, but many experts told us that NASA's new focus on fundamental research creates a gap in the technology development continuum. Some believe that FAA has neither the research and development infrastructure nor the funding to do this work. As I previously mentioned, REDAC, in a draft report, estimated that FAA would need at least $100 million annually in increased funding to perform this research and development work. REDAC further estimated that establishing the necessary infrastructure within FAA could delay the implementation of NGATS by 5 years. Second, JPDO may have difficulty leveraging its partner agencies' resources and expertise because it does not yet have formal, long-term agreements with the agencies on their roles and responsibilities in creating NGATS. According to JPDO officials, they are working to establish memorandums of understanding (MOU) signed by the heads of the partner agencies that will broadly define the partner agencies' roles and responsibilities at a high level. JPDO is also developing more specific MOUs with individual partner agencies that lay out expectations for support on NGATS components, such as information sharing through network-centric operations. Obtaining the specialized expertise of some stakeholders poses an additional challenge for JPDO. Air traffic controllers, for example, will play a key role in NGATS, but their union is not participating in JPDO. Currently, the ATC system relies primarily on air traffic controllers to direct pilots to maintain safe separation between aircraft. Under NGATS, this premise could change and, accordingly, JPDO has recognized the need for human factors research on issues such as how tasks should be allocated between humans and automated systems and how the existing allocation of responsibilities between pilots and air traffic controllers might change. The input of current air traffic controllers who have recent experience controlling aircraft is important in considering human factors and safety issues because of the controllers' familiarity with existing operating conditions. The air traffic controllers' labor union, the National Air Traffic Controllers Association (NATCA), has not participated in NGATS since June 2005, when FAA terminated a labor liaison program that assigned air traffic controllers to major system acquisition program offices and to JPDO. FAA had determined that the benefits of the program were not great enough to justify its cost. The NGATS Institute Management Council includes a seat for the union, but a NATCA official told us that the union's head had been unable to attend the council's meetings. According to JPDO officials, the council has left a seat open in hopes that the controllers will participate in NGATS as the new labor-management agreement between NATCA and FAA is implemented. Convincing nonfederal stakeholders that the government is fully committed to NGATS poses a challenge because, in the past, the government has stopped some modernization efforts, including one in which an airline had already invested in supporting technologies. Specifically, FAA developed a datalink communications system that transmitted scripted e-mail-like messages between controllers and pilots. One airline equipped some of its aircraft with this new technology, but because of funding cuts, among other things, FAA canceled the program. Moreover, as we have reported, some aviation stakeholders have expressed concern that FAA may not follow through with its airspace redesign efforts and are hesitant to invest in equipment unless they are sure that FAA will remain committed to its efforts. One expert suggested that the government might mitigate this issue by making an initial investment in a specific technology before requesting that airlines or other industry stakeholders purchase equipment. Stakeholders' belief that the government is fully committed to NGATS will be important as efforts to implement NGATS technologies move forward. Achieving many of the benefits of NGATS will require users of the system--airlines and general aviation--to purchase NGATS-compatible technologies, such as ADS-B. This new air traffic surveillance system, which JPDO has identified as one of the early core technologies for NGATS, requires aircraft to be equipped with components that will be implemented in two phases. FAA anticipates significant cost savings from the implementation of the first phase, but the airlines do not expect to benefit until the second phase is complete. The technology should then allow pilots to fly more precise routes at night and in poor visual conditions. Another early core technology for NGATS, SWIM, is also intended to produce benefits for users, but again, it is not expected to do so for many years. Nonfederal stakeholders' support for these and other NGATS technologies will be important, and their support will depend, in part, on their assurance of the government's full commitment. FAA faces challenges in implementing NGATS, including institutionalizing recent improvements in its management and acquisition processes, acquiring expertise to implement highly complex systems, and achieving cost savings to help fund NGATS technologies. With the establishment of ATO and the appointment of a Chief Operating Officer (COO) for it, FAA put a new management structure in place and established more businesslike management and acquisition processes to address the cost, schedule, and performance shortfalls that have plagued ATC modernization over the years. Under the new structure, FAA is a flatter organization, with fewer management layers, and managers are in closer contact with the services they deliver. FAA has also taken some steps to break down the vertical lines of authority, or organizational stovepipes, that we found hindered communication and coordination across FAA. For example, the COO holds daily meetings with the managers of ATO's departments and holds the managers collectively responsible for the success of ATO through the performance management system. FAA has revised its management processes to increase accountability. For example, it has established a cost accounting system and made the units that deliver services within each department responsible for managing their own costs. Thus, each unit manager develops an operating budget and is held accountable for holding costs within specific targets. Managers track the costs of their unit's operations, facilities and equipment, and overhead and use this information to determine the costs of the services their unit provides. Managers are evaluated and rewarded according to how well they hold their costs within established targets. Our work has shown that it is important, when implementing organizational transformations, to use a performance management system to assure accountability for change. Finally, FAA is revising its acquisition processes, as we recommended, and taking steps to improve oversight, operational efficiency, and cost control. To ensure executive-level oversight of all key decisions, FAA has revised its Acquisition Management System to incorporate key decision points in a knowledge-based product development process. Moreover, as we have reported, an executive council now reviews major acquisitions before they are sent to FAA's Joint Resources Council. To better manage cost growth, this executive council also reviews breaches of 5 percent or more in a project's cost, schedule, or performance. FAA has issued guidance on how to develop and use pricing, including guidelines for disclosing the levels of uncertainty and imprecision that are inherent in cost estimates for major ATC systems. Additionally, FAA has begun to base funding decisions for system acquisitions on a system's expected contribution to controlling operating costs. Finally, FAA is creating a training framework for its acquisition workforce that mirrors effective human capital practices that we have identified, and the agency is taking steps to measure the effectiveness of its training. Since 2004, FAA has met its acquisitions performance goal--to have 80 percent of its system acquisitions on schedule and within 10 percent of budget. To sustain this record, FAA will need to institutionalize its reforms--that is, provide for their duration beyond the current administration at FAA and ATO by ensuring that the reforms are fully integrated into the agency's structure and processes at all levels and have become part of its organizational culture. Our work has shown that successfully institutionalizing change in large public and private organizations can take 5 to 7 years or more. In the past, a lack of expertise contributed to shortfalls in FAA's management of ATC modernization projects. Although the personnel flexibilities that Congress authorized in 1995 allowed FAA to establish criteria for outstanding performance and match industry pay scales for needed expertise, industry experts have questioned whether FAA will have the technical expertise needed to implement NGATS--a task of unprecedented complexity, according to JPDO, FAA, and other aviation experts. In 2004, we found that FAA could not ensure that its own best practices were consistently used in managing acquisitions and, as a result, its major acquisitions were still at risk of cost overruns, schedule slippages, or performance shortfalls. These findings are consistent with concerns about the expertise of acquisition managers governmentwide. According to a 2005 study by the Merit Systems Protection Board, at least 50 percent of the government personnel who currently manage technical contracts reported needing training in areas such as contract law, developing requirements, requesting bids, developing bid selection criteria and price determinations, and monitoring contractor performance. Recognizing the complexity of the NGATS implementation effort and the possibility that FAA may not have the in-house expertise to manage it without assistance, we have identified potential approaches for supplementing FAA's capabilities. One of these approaches is for FAA to contract with a lead systems integrator (LSI). Generally, an LSI is a prime contractor that would help to ensure that the discrete systems used in NGATS will operate together and whose responsibilities may include designing system solutions, developing requirements, and selecting major system and subsystem contractors. The government has used LSIs before for programs that require the integration of multiple complex systems. Our research indicates that although LSIs have certain advantages, such as the knowledge, understanding, skills, and ability to integrate functions across various systems, their use also entails certain risks. For example, because an LSI may have significantly more responsibility than a prime contractor usually does, careful oversight is necessary to ensure that the government's interests are protected and that conflicts of interest are avoided. Consequently, selecting, assigning responsibilities to, and managing an LSI could pose significant challenges for JPDO and FAA. Another approach that we have identified involves obtaining technical advice from federally funded research and development corporations to help the agency oversee and manage prime contractors. These nonprofit corporations are chartered to provide long-term technical advice to government agencies in accordance with various statutory and regulatory rules to ensure independence and prevent conflicts of interest. FAA officials indicated that they are considering at least these two approaches to help address any possible gaps the agency may have in its technical expertise. Given the complexity of implementing NGATS, we believe that FAA's consideration of these approaches to filling any gaps in its technical expertise is appropriate. We believe that either of these approaches could reduce the risks associated with implementing NGATS. The cost of operating and maintaining the current ATC system while implementing NGATS will be another important challenge in transitioning to NGATS--a system that, as noted, is broader in scope than the current ATC system and will require funding for security technologies and environmental activities as well as ATC technologies. Although additional funding for the current ATC system and for NGATS may come from increased congressional appropriations, some industry analysts expect that most of the funds for implementing NGATS will have to come from savings in operating and maintaining the current ATC system. FAA is currently seeking to reduce costs by introducing infrastructure and operational efficiencies and expects to use the savings from these efforts to help fund the implementation of NGATS. For example, FAA has begun to decommission ground-based navigational aids, such as compass locators, outer markers, and nondirectional radio beacons, as it begins to move toward a satellite-based navigation system. In fiscal year 2005, FAA decommissioned 177 navigational aids, claiming savings of $2.9 million. According to one expert, FAA could additionally generate revenue from these sites by leasing them for warehouses or cell phone towers. FAA also expects to reduce costs by streamlining its operations. For example, it is consolidating its administrative activities, currently decentralized across its nine regions, into three regions, and anticipates an annual savings of up to $460 million over the next 10 years. Our work analyzing international air navigation service providers has shown that additional cost savings may be possible by further consolidating ATC facilities such as terminal radar approach control (TRACON) facilities and ATC centers. According to one estimate of potential FAA savings, consolidating the existing 21 air route traffic control centers into 6 centers could save approximately $600 million per year. Finally, FAA expects to save costs through outsourcing. For example, it outsourced its automated flight service stations to a private contractor and expects to achieve savings of $1.7 billion over 10 years. In addition, it expects savings of $0.5 billion from 400 staffing reductions that occurred between the time the outsourcing began and the time the new contract was actually implemented. The agency expects to receive $66 million--the first installment of these cost savings--in fiscal year 2007. Until FAA has completed its estimates of both NGATS costs and the cost savings it will be able to achieve between now and 2025, it will not be able to determine how far these cost savings will go toward financing NGATS. Nonetheless, one analyst has preliminarily estimated that FAA's expected savings through infrastructure and operational efficiencies will fall far short of the amount needed to finance NGATS. While more information is needed to estimate the amount of any shortfall with greater confidence, these preliminary and incomplete estimates signal the extent of the resource challenge. Mr. Chairman, this concludes my statement. We would be pleased to answer any questions that you and Members of the Subcommittee may have. For further information on this testimony, please contact Gerald Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this statement include Kevin Egan, Elizabeth Eisenstadt, David Hooper, Heather Krause, Elizabeth Marchak, Edmond Menoche, Faye Morrison, Taylor Reeves, 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 health of our nation's air transportation system is critical to our citizens and economy. However, the current approach to managing air transportation is becoming increasingly inefficient and operationally obsolete. In 2003, Congress created the Joint Planning and Development Office (JPDO) to plan for and coordinate, with federal and nonfederal stakeholders, a transformation from the current air traffic control (ATC) system to the "next generation air transportation system" (NGATS). Housed within the Federal Aviation Administration (FAA), JPDO has seven partner agencies that make up JPDO's senior policy committee: the Departments of Transportation, Commerce, Defense, and Homeland Security; FAA; the National Aeronautics and Space Administration (NASA); and the White House Office of Science and Technology Policy. This testimony, which provides preliminary results from GAO's ongoing work on JPDO, provides information on (1) the status of JPDO's efforts to plan for NGATS, (2) the key challenges facing JPDO as it moves forward with its planning efforts, and (3) the key challenges facing FAA as it implements the transformation while continuing its current operations. The statement is based on GAO's analysis of JPDO documents, interviews, and the views of a panel of experts, as well as on past GAO work. JPDO has developed a framework for planning and coordination with its federal partner agencies and nonfederal stakeholders that is consistent with the requirements of its authorizing legislation--Vision 100--and with several practices that our previous work has shown can facilitate federal interagency collaboration and the development of an enterprise architecture (i.e., system blueprint). JPDO's framework includes an integrated plan that provides a vision for NGATS, an organizational structure and processes for leveraging the resources and expertise of federal and nonfederal stakeholders, and an enterprise architecture that defines the specific requirements for NGATS. As JPDO moves forward, it will face leadership, leveraging, and commitment challenges. Currently, JPDO lacks a permanent director and a permanent chairperson of its senior policy committee to provide the leadership needed to overcome barriers to interagency coordination. In addition, despite early successes, JPDO may have difficulty continuing to leverage its partner agencies' resources and expertise for NGATS because these agencies have missions and priorities in addition to NGATS and JPDO does not yet have signed, long-term agreements with the partner agencies on their respective roles and responsibilities. Finally, JPDO faces the challenge of convincing nonfederal stakeholders that the government is fully committed to implementing NGATS, given that, in some instances, it has discontinued work on new technologies for the national airspace system. FAA faces challenges in institutionalizing recent improvements in its management and acquisition processes, as well as in obtaining the expertise and resources necessary to implement NGATS. First, institutionalizing FAA's process improvements is critical to successfully implementing NGATS. Second, FAA may lack the expertise needed to manage the NGATS effort. GAO has identified two potential approaches for FAA to supplement its capabilities that FAA is considering. Third, achieving cost savings is critical to funding the implementation of NGATS.

The results of research on the prevention and treatment of AIDS--a disease first identified in the United States in 1981--have only recently begun to accrue. Over the past 11 years, a number of therapies have been developed to fight both HIV and its associated infections and cancers. The Food and Drug Administration (FDA) has approved several dozen drugs for treating HIV infection or AIDS-related conditions, many of which have only been made available during the last 2 to 3 years. In December 1995, FDA approved the first protease inhibitor, saquinavir (Invirase). Following this, the agency approved three other protease inhibitors: ritonavir (Norvir), indinavir (Crixivan), and nelfinavir (Viracept). In November 1997, FDA approved a new formulation of saquinavir, Fortovase. Most recently, in September 1998, FDA approved efavirenz (Sustiva), a drug that requires less frequent dosing and has milder side effects than other drugs. Because HIV can develop a resistance to these and other AIDS treatment drugs, several drugs are often combined. Combination therapy is likely to include three to five drugs, including reverse transcriptase inhibitors combined with protease inhibitors. For many patients, combining protease inhibitors with other drugs greatly reduces the amount of HIV. Before it was possible to readily measure the amount of virus in patients, most drug therapies were targeted to patients whose infection had progressed, as evidenced by a decline in their immune system function or by the onset of clinical signs and symptoms of HIV. Of the 650,000 to 900,000 people with HIV infection in the United States, the CDC estimates that about 500,000 of those people know their HIV status; and for almost 240,000 of these individuals, HIV has progressed to AIDS. In June 1997, the National Institutes of Health (NIH) released standards of clinical care for HIV and AIDS combination drug therapy. The standards recommend that therapy be initiated as early as possible and that HIV and AIDS drugs be used in combination rather than individually. Under the treatment guidelines, all patients with HIV infection are considered to be candidates for the combination drug therapy, greatly expanding the group requiring treatment. New combination therapy standards also call for continuity of therapy and optimum dosages to suppress HIV replication. According to NIH, underdosing and lapses in a patient's therapy regimen greatly increases the risk of the patient's developing drug-resistant HIV variants. Optimum regimens and dosing are under study and continually changing. Combination therapies of as many as five drugs currently are prescribed. Aggressive regimens such as these must be coupled with, and are driven by, results of frequent blood testing to monitor immune system status and levels of HIV. This focus on early and aggressive treatment, coupled with NIH's call for frequent monitoring of HIV-positive individuals, is expected to result in greater numbers of people seeking combination drug therapy and possibly more complex and costly drug treatment regimens, and more treatment-associated costs such as laboratory testing. The cost of combination therapy--taking into account all federal drug discount pricing--is estimated to be about $10,000 per patient annually. While some people with HIV or AIDS are covered by private medical insurance, many others are either uninsured or have limited prescription drug coverage and must rely on one or a combination of federal and state programs and assistance programs offered by manufacturers of HIV and AIDS treatment drugs. The majority of federal assistance for AIDS patients is provided through Medicaid and programs funded under the CARE Act, which was enacted in 1990 to help alleviate the burdens placed on a public health system generally unprepared for the AIDS epidemic. In 1998, Medicaid is estimated to cover 55 percent of adult AIDS patients and about 90 percent of pediatric AIDS cases. Applying those percentages to the current number of AIDS cases, we estimate that at least 108,000 individuals with AIDS are covered by Medicaid in 1998. The CARE Act provides funding for states' ADAPs, which rely on federal, state, and local partnerships to provide drug therapy on an outpatient basis. ADAPs are designed to provide assistance to those HIV-positive individuals who have no, or limited, private third-party prescription drug coverage; cannot afford to pay for drugs themselves; and are ineligible for Medicaid or have limits on the prescription drug benefit offered by Medicaid. In calendar year 1996, ADAPs served a total of about 80,000 clients nationwide. Funding for HIV and AIDS drug therapy as well as other treatments is also provided by other federal sources, including the Departments of Defense (DOD) and Veterans Affairs (VA). DOD programs currently treat about 5,000 active duty service personnel with HIV or AIDS. In 1996, VA treated more than 12,000 eligible veterans. While the total number of individuals served in these programs is much smaller than the number served through Medicaid and programs funded under the CARE Act, VA is the nation's largest provider of direct care for people with HIV and AIDS. In addition, VA clients could be eligible for care from more than one program. The remainder (less than half) of the individuals with AIDS rely on sources other than ADAPs, VA, DOD, or Medicaid to finance their drug therapy. Some have private health insurance and others are uninsured and rely on personal resources and charitable organizations. Uninsured and underinsured individuals with AIDS tend to rely on a combination of public and private funding sources. For example, pharmaceutical companies that manufacture HIV and AIDS drugs have programs to provide limited temporary assistance to individuals who are financially disadvantaged and ineligible or waiting for other sources of prescription coverage. Medicaid enrollees have access to the new drug therapies if prescription drugs are offered by their state Medicaid program and these drugs are deemed the appropriate therapy. Medicaid provides health coverage for certain low-income families, the elderly, and disabled persons. States vary in their Medicaid eligibility requirements (see app. I). States have discretion regarding the quantities and duration of use for prescription drugs, although all FDA-approved drugs must be offered. Historically, program eligibility has been linked to receipt of cash assistance under a welfare program, such as Aid to Families With Dependent Children (AFDC) or the Supplemental Security Income (SSI) program. In recent years, the program has been expanded to provide health coverage for low-income children and pregnant women with no ties to welfare. An individual with AIDS or HIV infection could qualify for Medicaid on the basis of eligibility for a cash assistance program or alternative eligibility criteria. Most adults with AIDS or HIV infection become eligible for Medicaid by meeting the disability criteria of the federal SSI program, usually not until they have developed AIDS and have become too disabled by their disease to work. Patients who do not qualify for Medicaid may seek assistance from ADAPs, which are primarily designed to fill gaps in prescription drug coverage. To qualify for ADAP benefits, they must have a medical need and an income below a certain amount, which is generally higher than that permitted for Medicaid. Unlike Medicaid, ADAPs do not require disability as a criterion for eligibility of HIV-positive adults and thus can cover those who have not developed AIDS. (For more detail on each state's financial criteria for Medicaid and ADAP eligibility, see app. I.) The care of HIV and AIDS patients for all types of treatment, including drugs, involves a variety of programs funded by the federal government, states, and private payers, but the largest share of federal funding is through the Medicaid program. Within these programs, expenditures for drugs have increased rapidly in recent years and account for most of the growth in the CARE Act programs. The federal government, states, and private payers all help to finance the care of HIV and AIDS patients for all types of treatment, including drugs. The federal portion of Medicaid is the largest share of federal funding; however, most states match federal Medicaid funds on nearly a one-to-one ratio. Other programs also provide supportive services for low-income individuals with HIV or AIDS. For example, in fiscal year 1997, about $133 million was allocated by formula to 53 metropolitan areas and to 27 states for areas outside qualifying cities under the Department of Housing and Urban Development's (HUD) Housing Opportunities for People With AIDS program. In fiscal year 1997, total federal spending on medical care, including inpatient and outpatient services and prescription drugs, for individuals with AIDS or HIV was estimated at $4.8 billion. This amount includes federal matching payments that HCFA estimates at $1.8 billion for fiscal year 1997. Total federal spending for HIV and AIDS medical care in fiscal year 1998 is estimated by HHS at $5 billion; the precise amount of Medicaid spending for HIV- and AIDS-related treatment is not yet known. We estimate that a substantial proportion of federal spending for AIDS or HIV medical care--at least one-sixth--is for prescription drugs, primarily through Medicaid and the ADAPs. Between 1995 and 1997, the combined expenditures in the Medicaid and ADAP programs for HIV- and AIDS-related drugs more than doubled, rising from $606 million to $1.3 billion. Spending on drug therapies represented about one-fourth of federal and state Medicaid spending on HIV- and AIDS-related drugs and exceeded $950 million in calendar year 1997, up $449 million (or 90 percent) since 1995. Similarly, spending through ADAPs is estimated at $359 million for fiscal year 1997, up $254 million (or 242 percent) since 1995. (See table 1.) Much of this increase can be attributed to an increase in the percentage of people with HIV and AIDS seeking combination drug therapy and the increased expense of combining drugs as opposed to a single medication. Over the past several years, overall federal funding for the CARE Act has increased more than 50 percent, from about $760 million in 1996 to about $1.2 billion in 1998. However, in this 3-year period, increases in funding for CARE Act services other than ADAPs have been minimal, while ADAP funding has more than quintupled. (See table 2.) States also provide considerable resources to fund ADAPs through the CARE Act. The fiscal year 1997 state contributions of $98 million represented almost a doubling of state dollars from fiscal year 1996. However, between fiscal years 1995 and 1997, the portion of ADAP funding from state dollars dropped from 31 percent to 25 percent because federal funding grew even more quickly than state funding. (See app. II for state contributions.) Certain metropolitan areas that are disproportionately affected by the AIDS epidemic are eligible to receive funding under title I of the CARE Act for the delivery of comprehensive HIV and AIDS medical care and support services. Some of these title I programs make eligible metropolitan area (EMA) contributions to the state ADAP programs. Between 1995 and 1997, when direct federal funding for ADAPs under title II increased dramatically, title I contributions to ADAPs remained flat. EMA contributions totaled $20.8 million in fiscal year 1995, $25.9 million in fiscal year 1996, and $24.2 million in fiscal year 1997. There is no requirement that contributions be made from title I programs to ADAP. (See app. III for a list of title I EMA contributions to ADAPs, by state.) In addition, title I pays for HIV/AIDS drugs exclusive of the ADAPs. In general, EMAs report that these expenditures have risen during this time frame. In several cases, the expenditures rose significantly after 1996, which could reflect the introduction of the protease inhibitors and other new therapies. However, detailed information on these expenditures is not available. At least half the people infected with HIV were estimated to have been on combination therapy in 1997, increasing to over 60 percent of patients in 1998. Developing such estimates by insurance coverage or payer source is difficult. It is possible to estimate the number of Medicaid beneficiaries with AIDS who are likely receiving combination therapy. However, given the lack of data on the number of Medicaid beneficiaries with HIV that has not yet progressed to AIDS, it is not possible to develop estimates of the number of these individuals who will seek combination therapies. It likewise is difficult to estimate the number of individuals who will ultimately seek ADAP coverage for combination drug therapy because of the lack of good data on the characteristics of those served. However, recent experiences show a steadily increasing demand for ADAP services. ADAPs have taken a number of steps to stretch their limited resources, including cross-checking program enrollment with Medicaid and obtaining discounts for drug purchases. Although there are a number of FDA-approved drugs for the treatment of HIV, at least half of the people with AIDS in the United States are estimated to be receiving therapies that combine a protease inhibitor with other drugs. These drugs are also available for individuals who are HIV positive but do not have AIDS, but data on this population are of insufficient quality to pinpoint the number of HIV cases receiving combination drug therapy. Only 30 of the states report HIV status, and the comprehensiveness of the reporting varies by state. Some of the states without HIV reporting have a large number of AIDS cases, such as New York and California, suggesting that many HIV cases are not reported. On the basis of their clinical experience and research, two AIDS researchers developed formulas to determine the number of people who might seek combination drug therapy in 1997 and 1998. They estimated that of the total number of people in the United States with AIDS or who are HIV positive, 50 percent would be on combination therapy in 1997 and 60 to 65 percent in 1998. They assumed that about 20 percent of people who try combination therapy will not be able to tolerate the side effects and will therefore discontinue it. They also assumed that some patients will choose not to (or cannot because of their lifestyle) take the medication and that some HIV-positive individuals will be unaware of the infection and thus will not seek treatment. We developed estimates of the number of Medicaid beneficiaries with AIDS who will likely seek combination drug therapy in 1997 and 1998. In 1998, Medicaid covered an estimated 55 percent of all adult AIDS cases and 90 percent of all pediatric AIDS cases, while in 1997 these percentages were estimated to be 54 percent for adult cases and 90 percent for pediatric cases. Medicaid currently covers at least 108,000 AIDS patients and covered at least 104,000 AIDS patients in 1997. Therefore, using the AIDS researchers' formulas, we estimate that for the Medicaid beneficiaries with AIDS, at least 52,000 (50 percent of 104,000) would have been on combination therapy in 1997 and at least 67,500 (62.5 percent of 108,000) are on therapy in 1998. Given the lack of data on the number of Medicaid beneficiaries with HIV that has not yet progressed to AIDS, it is not possible to develop estimates of the number of these individuals who will seek combination therapies. However, the gender and age distribution of HIV-positive individuals who do not have AIDS will likely differ from the gender and age distribution of beneficiaries with AIDS who have qualified for Medicaid on the basis of disability. This HIV-positive group includes pregnant women, women and their dependent children, and children in low-income families who qualified for Medicaid because they met federal and state income and categorical eligibility requirements. Although they may be asymptomatic, they could qualify for Medicaid--and thus for coverage of their HIV-related care--for an extended period of time, depending on their income and other qualifying characteristics. HCFA has estimated that there may be as many as 50,000 such HIV-infected individuals covered by Medicaid. It is difficult to estimate the number of individuals who will ultimately seek ADAP coverage for combination drug therapy. However, recent experiences show a steadily increasing demand for ADAP services. Unlike estimates of the number of people seeking coverage through Medicaid, estimates of the number of individuals who qualify for combination therapy under the ADAPs cannot be made. This is because, in addition to AIDS patients, ADAPs' clients include people who are HIV positive but do not yet have AIDS. It is this latter group for whom limitations on data make it impossible to estimate the total candidate population for the therapy. In addition, states have varying financial and medical standards individuals must meet to qualify for ADAP services, so this subset of candidate patients cannot be computed. Furthermore, because these individuals finance their care through multiple funding sources, some individuals only qualify for ADAP benefits for part of the year. The only information that is available for predicting the likely future demand for ADAP coverage is the recent experience of the ADAP programs. Since 1992, the number of people seeking funding for AIDS therapies through ADAPs has increased rapidly. In calendar year 1996, ADAPs served a total of about 80,000 clients nationwide, compared with about 50,000 in 1994. Comparing states' ADAP caseloads for July 1996 and July 1997--the most recent data available--shows that per-month client use of ADAPs increased 39 percent overall, from about 31,000 to more than 43,000. A survey by the National Alliance of State and Territorial AIDS Directors shows the number of patients served by ADAPs increasing at a rate of 1,000 per month. Per-month expenditures increased 78 percent overall, from nearly $15 million to more than $27 million. (For a state-by-state profile of ADAPs, see app. IV.) HHS has reported that as early as mid-1996 some ADAPs had 80 percent or more of their clients receiving combination drug therapy. The ADAP Working Group has made projections for expected ADAP enrollment and drug utilization through the year 2000. It projects that the rate of ADAP clients receiving combination drug therapy over the next 2 years will be 90 percent. The higher proportion of ADAP clients receiving combination therapy, compared with expected rates for Medicaid patients, likely reflects the somewhat different patient population who may seek coverage by the ADAP precisely because they have been prescribed high-cost drug treatment. ADAPs have implemented a number of measures in an effort to stretch their limited resources. These measures include cross-checking program enrollment with Medicaid, discount drug pricing, and emergency measures such as establishing waiting lists. Yet even with these cost containment efforts, the National Alliance of State and Territorial AIDS Directors found that more than one-fifth of the programs expect budget shortfalls for 1998. To ensure that program dollars are spent wisely, a number of ADAPs have taken steps to help identify the most appropriate source of assistance for clients and individuals seeking prescription drug benefits. Many individuals seeking ADAP coverage may not be aware that they are eligible for assistance through other sources, such as Medicaid. Additionally, some may be eligible for prescription drug benefits under more than one program. In our contacts with officials from the 10 largest ADAPs--which collectively account for about 70 percent of total federal ADAP funding--we found that most cross-check Medicaid eligibility and verification files at initial enrollment and on an ongoing basis, although the frequency with which they updated Medicaid eligibility status varied significantly. For example, New York updates the information weekly, while others do so monthly or less often. Most of these ADAPs are linked to the Medicaid files via computer for both initial screening and cross-checks. States also use other means to verify eligibility. For example, Virginia requires all ADAP clients to apply to Medicaid within 90 days of enrollment. In Puerto Rico, in lieu of computer linkages to Medicaid, case managers work with clients to check for Medicaid or ADAP coverage. (See table 3.) A recent study of all ADAPs similarly found that 39 states require their ADAPs to cross-check client eligibility for Medicaid, mostly through direct access to Medicaid data or through screening by case managers. The study points out that 19 of the 23 states with limited Medicaid coverage have restricted ADAP access. This suggests that the expansiveness of a state's Medicaid program may directly affect the demand for ADAP services. For example, the Medicaid programs in Mississippi, Oklahoma, and Texas are among 11 state programs that have placed limits on the number of prescriptions available each month; at the same time, the ADAPs in these states have not been able to meet the demand and have had to develop waiting lists. Figure 1 shows the restrictiveness of the Medicaid and ADAP programs in the various states. Most ADAPs have reduced their expenditures on HIV and AIDS drugs through several discount pricing methods. For example, under the Veterans' Health Care Act of 1992 (which enacted section 340B of the Public Health Service Act), ADAPs--as well as state Medicaid programs--can obtain drugs at a minimum 15.1-percent discount below the average manufacturer price. ADAPs that cannot obtain up-front drug discounts may negotiate voluntary manufacturer rebates of certain drugs. Some ADAPs seek discounts from retail pharmacies, receive third-party partial insurance reimbursements (when available), collect copayments for drugs from clients, or obtain reimbursement coverage from Medicaid if a client becomes eligible for that program. However, not all ADAPs have obtained the lowest prices available in purchasing drugs. According to a recent HHS Inspector General's report, only 19 of the 53 ADAPs participated in the 340B drug pricing program in fiscal year 1996. Many of the nonparticipating programs cited the list of administrative burdens as a disincentive. However, a recent HHS policy change will allow ADAPs to participate more readily in this program by the use of a rebate mechanism. For the sample of nonparticipating ADAPs that it examined, the Inspector General estimated that they could have purchased an additional 8 percent of drug therapies if they had participated in the 340B program. Regardless of these efforts, with the increase in the number of people seeking assistance, many states have found it difficult to adequately fund their ADAPs. Some states have cut costs by restricting patient access to ADAPs and implementing other emergency measures. According to a study published by the National Alliance of State and Territorial AIDS Directors, in fiscal year 1997, 22 states implemented emergency measures to contain costs. These problems have occurred most frequently near the end of the time period for which the title II funding grant is provided. Twelve states moved funds from other CARE Act budget categories, such as home health care, and other sources; 10 states capped program enrollment; and 9 states restricted access to protease inhibitors. Thirteen states noted that they would likely exhaust their funds before more funding would be made available. Nine states reported that they maintained waiting lists for ADAP enrollment, while seven states maintained waiting lists for current clients to obtain protease inhibitors. As of July 1998, 19 ADAPs had some type of restrictions on their services. As shown in table 4, these limitations included capping enrollment and expenditures and maintaining waiting lists. As discussed, it is not possible to accurately project the number of patients who will be on combination drug therapy in the future. It is therefore difficult to assess the likely impact of the new therapies on public programs. Many factors--such as the long-term effectiveness of current therapies, evolving standards of care, and new research developments--influence future demand and cost. Regardless of the overall effect of the new therapies on public programs, the impacts are likely to be different for the Medicaid program and for health care funded through the CARE Act. Rapid advances in HIV and AIDS treatment have occurred in the last 2 years. Researchers are identifying optimal standards of care, which are now a part of federal treatment guidelines. Such information--as well as ongoing research and discoveries--will likely influence the demand for these new drugs and therapies and their effect on public programs. The long-term effectiveness of protease inhibitors and combination drug therapies is largely unknown. Patient outcomes will likely influence the number of individuals who seek combination therapy in the future. For example, patients responding well to drug therapy may be removed from the therapy after a few years to determine whether the virus has been eliminated. Patients whose conditions cannot be stabilized may also be removed from the therapy or they may continue to receive therapy because they still benefit from the drugs. Other patients may over time develop a resistance to drugs that initially succeeded in stabilizing or reducing their viral load. Some patients may not be able to tolerate the drugs because of side effects and would thus be removed from the therapy after a brief period. Standards of care will also likely influence the demand for combination drug therapy treatment and the associated costs. Just as the recently released NIH standards of clinical care for HIV and AIDS have greatly expanded the candidate population who qualify for treatment, changes in these standards could alter the number of individuals seeking the therapy. Other new drugs and therapies would also likely have an effect on demand and cost. The National Institute of Allergy and Infectious Diseases is currently supporting research on the development of HIV vaccines, and a number of new drugs for HIV infection and AIDS-associated opportunistic infections are either being developed or tested. At the same time, investigations into exactly how HIV damages the immune system is suggesting new and more effective methods of treatment. Researchers do not yet know how many years people with HIV or AIDS might maintain a combination therapy regimen or how long their lives might be extended. If the new drugs and therapies slow or halt HIV's progression to AIDS, other costs associated with the care of people with AIDS--such as hospitalizations, support services, and long-term care--may be effectively delayed. Some evidence already suggests that the new combination therapies have noticeably lowered the current utilization of inpatient hospital services. For example, at the 4th Conference on Retroviruses and Opportunistic Infections held in January 1997, state and hospital officials demonstrated reduced hospitalization rates, suggesting new HIV and AIDS drugs as a possible cause. A recent study by VA attributes a 37-percent decrease in the number of hospitalizations and a 41-percent decrease in the number of hospital days at 173 VA medical centers to the combination therapies. This study cites an $18 million net cost savings in 1997 in contrast with 1996.Public health officials in New York City also announced a 50-percent drop in AIDS deaths from the last quarter of 1995 to the same quarter in 1996, citing as a partial reason the new HIV and AIDS drugs. Researchers at Johns Hopkins University pointed out that if a person with AIDS avoided a single hospitalization--which averages $7,000 per stay--in 1 year, the costs associated with combination drug therapy for the same individual could be completely offset. However, if the drugs extended the life of a person with HIV or AIDS, it is possible that at some point the cost of the drugs would exceed the amount that would have been spent on hospitalizations and other treatments. Finally, hospitalization costs might simply be delayed. Another analysis by the Johns Hopkins University AIDS researchers sought to examine the cost-effectiveness of combination therapy. The model used in this study projected an incremental cost-effectiveness for triple therapy of $10,000 to $18,000 per life-year gained. They compared the cost per life-year saved of triple-drug therapy with the cost per life-year saved for accepted treatments for other medical conditions and found that it is within the range of other treatments for other diseases and conditions. (See table 5.) Although drug treatment costs per person would essentially be the same for individuals receiving assistance from Medicaid and from ADAPs, the effect on these two programs would likely be different. For Medicaid, reductions in hospitalizations could, in the short-term, offset the costs associated with HIV and AIDS combination drug therapy. However, in the longer term, program costs may not be offset if hospitalizations are merely delayed. For ADAPs, increases in the number of people who seek assistance for combination drug therapies would not be offset by fewer hospitalizations, because ADAPs only cover the cost of prescription drugs, not hospitalizations. However, delaying the onset of AIDS, its symptoms, and associated diseases and conditions could, in the short term, reduce the need for other services funded under the CARE Act. For example, under title I, the CARE Act provides 49 metropolitan areas disproportionately affected by the AIDS epidemic with funding for mental health treatment, case management, support services, and substance abuse programs for HIV and AIDS patients. Arguably, if the new HIV and AIDS drugs successfully delayed the onset of AIDS, the demand for a number of these services might be postponed, at least for the period of time the drugs are effective. On the other hand, the success of drug therapies might increase the amount of time that clients are enrolled and the use of related support and diagnostic services. Moreover, it is not clear that clients served under other titles of the CARE Act are the same as those served under ADAP. In light of NIH's recently published standards of care, people with HIV who are asymptomatic may seek combination therapies in greater numbers. The development of new drugs and therapies, such as quadruple therapy, would likely add to the prescription drug demand. Although insurance coverage for the estimated 410,000 to 660,000 individuals who are HIV positive but have not developed AIDS is unknown, ADAPs are the most likely to see increases in the number of individuals who are uninsured or underinsured and seeking funding for combination drug therapy in 1998. HHS officials anticipate that welfare reform efforts will likely cause ADAP enrollment to increase. As individuals transition from Medicaid and obtain employment, they will more likely become qualified for ADAP benefits. And if treatment fails, individuals will still need care provided through other services funded through CARE Act programs. We obtained comments on a draft of this report from HHS and from two expert reviewers. HHS and the expert reviewers made technical comments, which we incorporated where appropriate. In particular, HHS was concerned that we had not accounted for the different characteristics and service needs of clients served by the ADAPs and other programs funded by the CARE Act. We added information to the report to take these complexities into account. In addition, HHS provided projections of the number of people with AIDS covered by Medicaid in 1998 that HCFA actuaries believed were more precise than those in our draft. We modified our report to reflect the HCFA estimate. We will make copies of this report available to interested parties upon request. Please call me at (202) 512-7119 or Marcia Crosse, Assistant Director, at (202) 512-3407 if you have any questions about this report. Other contributors to this report include Lawrence S. Solomon, Project Manager; Nila Garces-Osorio, Social Science Analyst; and Karen Sloan, Communications Analyst. Within broad federal guidelines, states have flexibility in developing their Medicaid programs, including requirements for eligibility and prescription drug benefits. Medicaid covers all prescribed HIV and AIDS drugs approved by the Food and Drug Administration (FDA) consistent with the requirements of 1927(d) of the Social Security Act. The Health Care Financing Administration (HCFA) surveyed state Medicaid programs and found that all states were covering protease inhibitors, as required. Because of prescription limits, however, combination therapy, with its dependence on multiple drugs, can rapidly exceed these limits (for example, 11 states limit the number of allowable drugs to as few as three per month). Thirty-one programs require nominal copayments for the drugs. Generally, state AIDS Drug Assistance Programs (ADAP) cover many FDA-approved HIV and AIDS drugs, but not all drugs are covered by each program. To assess financial eligibility for ADAP enrollment, most states use federal poverty guidelines; income limits are often expressed as a percentage of the federal poverty level (FPL). The financial requirements range from 100 percent of FPL in one state to 558 percent of FPL in another state. Some states list the requirement in terms of absolute income levels: for example, as long as liquid assets total less than $25,000, New York requires a household of one to earn no more than $44,000; a household of two, less than $59,200; and three or more, less than $74,400. Other states also use specific income levels unrelated to the federal poverty guidelines. Some programs consider out-of-pocket medical expenses when determining income. Ten of the programs restrict financial assets. (See table I.1.) States have both financial and medical requirements for ADAP enrollment. For example, a person must have an income or assets below a certain dollar amount or demonstrate financial hardship. At a minimum, a person must be diagnosed as having HIV infection. Almost half of the states have only these basic requirements. Other states also require that a client have CD4 counts less than a certain level (CD4 is a measure of the immune system level). For example, six states require a CD4 level of less than 500. Twelve states require a doctor's prescription for the HIV and AIDS drugs. Some states also test the HIV viral load in order to determine medical eligibility. Income at or below 300% of FPL; will assist with spend-down (continued) Income at or below 300% of FPL (income limit may be adjusted on basis of medical expenses incurred) Income at or below 281% of FPL, currently less than $1,410 per month after taxes (additional allowance for dependents) Income at or below 150% of FPL (out-of-pocket drug costs can spend-down) (continued) Income at or below 200% of FPL (residents of northern Virginia may have incomes up to $17,428) Income at or below 300% of FPL (Table notes on next page) In fiscal year 1997, a total of 34 states (plus the District of Columbia and Puerto Rico) provided funds to their ADAPs in addition to the funds provided by the federal government. The state contributions have increased from a total of $28.7 million in 1995 to $98.1 million in 1997 (see table II.1). State % of total funding (-100) (-100) (-4) (-59) (-67) (-79) (-61) (-10) (-52) (-78) (-9) (-15) (continued) State % of total funding (-100) (-100) (-62) (-80) (-43) (-44) (-35) (-80) (-72) (-13) (-80) (-5) (-73) $28,720,457 $50,378,650 $98,108,000 (-19) Not available. Percentage change cannot be calculated. State had no ADAP that year. Currently, 49 communities in 21 states, the District of Columbia, and Puerto Rico have been designated under title I of the CARE Act as EMAs disproportionately affected by the AIDS epidemic. In 1997, these EMAs contributed some $24 million to the ADAP programs. The level of these contributions has been generally flat over the past few years, increasing from 1995 to 1996, and then declining slightly in 1997 (see table III.1). Table III.1: Title I EMA Contributions to ADAPs and Percentage Change, Fiscal Years 1995, 1996, and 1997 (-36,675) (-100) (-1,547,339) (-9%) (-1,013,827) (-100) Percentage change cannot be calculated. From January 1997 to July 1997, 39 states' ADAPs experienced growth in the number of clients served; 42 experienced increases in monthly expenditures for the same period. Six states experienced a 50-percent or greater increase in clients served. For example, clients served through Delaware's ADAP increased 327 percent--the greatest increase experienced by a state; conversely, Mississippi saw a 56-percent decrease in clients served. Only five states experienced minimal change (a less than 5-percent increase or decrease). (See table IV.1.) Percentage change, July 96- July 97 (-3%) (-15) (-32) (-43) (-1) (-20) (-1) (-38) (continued) Percentage change, July 96- July 97 (-22) (-21) (-20) (-41) (-32) (-4) Not available. Percentage change cannot be calculated. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO provided information on the potential implications for federal and state budgets from the increased use of combination drug therapies for patients with human immunodeficiency virus (HIV) and acquired immunedeficiency syndrome (AIDS), focusing on: (1) federal and state spending on HIV and AIDS drug treatment, by major programs, over the last several years; (2) the estimated number of people with AIDS and HIV on combination drug therapy who are covered by Medicaid or other publicly funded programs, and measures that have been taken to stretch the resources in the Ryan White Comprehensive AIDS Resources Emergency (CARE) Act; and (3) the potential impacts of new drug therapies on federal and state government outlays. GAO noted that: (1) while state governments and private payers share in the financing of medical care for people with HIV and AIDS, the federal government currently funds more than half the cost of such care; (2) for fiscal year (FY) 1998, estimated federal spending on treatment for individuals with AIDS or HIV is expected to total over $5 billion, an increase of about 5 percent over FY 1997; (3) GAO estimates that a substantial portion of federal spending for AIDS or HIV medical care--at least one-sixth--is for prescription drugs, primarily through Medicaid and funding under title II of the CARE Act for states' AIDS Drug Assistance Programs (ADAP); (4) with recent research developments in HIV and AIDS treatment, the demand for federal and state funding for HIV and AIDS treatment is expected to increase; (5) more than half of the 240,000 people with AIDS in the United States are estimated to be receiving combination drug therapies that include a protease inhibitor and other drugs; (6) of the AIDS patients on Medicaid, GAO estimates that at least 67,500 are receiving combination drug therapy in 1998; (7) data on the number of individuals who are HIV positive but do not have AIDS are insufficient, so it is difficult to develop reliable estimates of the total number of Medicaid- and ADAP-eligible individuals who would likely qualify for and seek combination drug therapy; (8) however, some ADAPs report that a great majority of their clients will receive combination therapy in 1998; (9) ADAPs have taken several steps to stretch available funds and thereby maximize the number of clients they are able to serve; (10) other factors--such as evolving standards of care, the long-term effectiveness of current therapies, and new research developments--also influence projections of the impact of new drug therapies on federal and state government programs; (11) although the effect of the demand for the new combination therapies is difficult to estimate, ADAPs will likely experience greater financial pressure than Medicaid in caring for individuals with AIDS or HIV who seek assistance; (12) this is in part because Medicaid primarily provides coverage for those individuals whose HIV infection has progressed to AIDS, and there are some indications that Medicaid costs for drug therapy might be offset by reductions in hospitalizations; (13) in contrast, ADAPs cover drug costs for both AIDS and others who are HIV positive, and who have fixed incomes; and (14) since ADAPs only cover drugs, cost offsets are not as likely to occur.

On the basis of interviews with individuals involved with the Lake Research subcontract and reviews of available files at FCS, Global Exchange, and Lake Research, we have put together the following chronology. In mid-February 1995, the Under Secretary for Food, Nutrition and Consumer Services presented the idea for this work during a private dinner meeting with the president of Lake Research, Inc. As stated in the firm's promotional information, the president of Lake Research is one of the Democratic party's leading strategists and pollsters. According to the president of Lake Research, she and the Under Secretary discussed conducting focus group research on food stamp reform for a price of $25,000. The following day, the president of Lake Research spoke with the Under Secretary's Executive Assistant to further discuss the specifics of the work. According to the Executive Assistant's notes from that discussion, she talked with Lake Research about holding four focus groups, each one costing $5,000, three of which would be with "swing voters." Two of these focus groups were to be held in Topeka, Kansas. The location for the other two focus groups was to be determined later. The president of Lake Research confirmed this characterization of the discussion and said that, with $5,000 in travel expenses, the total cost of the work would be $25,000. On February 27, 1995, following discussions with the Under Secretary and her Executive Assistant, the Administrator of FCS held a meeting with several of his top managers to discuss the Under Secretary's desire to conduct focus group research and her desire to use Lake Research to do this work. According to the Administrator, one of the purposes of this meeting was to discuss how this work could be legally accomplished. The decision was made that conducting the work as a task order under the Global Exchange contract was the best vehicle for accomplishing the Under Secretary's objective. This way, Lake Research could be used as a subcontractor and the work could be performed as expeditiously as possible, as desired by the Under Secretary. FCS officials concluded that a separate procurement action would have taken too long. Also, according to the president of Lake Research, this approach had the advantage to USDA of not drawing as much attention to the work because using Lake Research as a subcontractor to Global Exchange appeared to distance USDA from Lake Research. On March 2, 1995, FCS' Acting Director of the Office of Analysis and Evaluation (OAE) signed a procurement request authorizing the use of food stamp research and evaluation money to fund this work. That same day, FCS officials informed Global Exchange of its desire to have Lake Research perform this work and asked whether Global Exchange would agree to having Lake Research serve as a subcontractor. Global Exchange agreed. For its work, Global Exchange was authorized a fee of $8,000. On March 7, 1995, USDA added the focus group work to its prime contract with Global Exchange, through an additional task order to its contract. That same day, Lake Research signed a subcontract agreement with Global Exchange. According to representatives of Global Exchange, they were not involved in the selection of Lake Research as a subcontractor and, prior to their discussions with FCS officials, had never heard of Lake Research. According to representatives from Global Exchange, they were not invited to attend several key meetings between USDA and Lake Research. On March 10, 1995, the Under Secretary met with Lake Research, Global Exchange, and FCS' top management to provide Lake Research with guidance on the specific direction of the work to be performed. The contracting officer's representative--the FCS official responsible for providing technical oversight of the contract--said she went to the Under Secretary's office to attend the meeting but, upon arriving, was asked not to attend. On March 28, 1995, the Under Secretary and her Executive Assistant, without participation by Global Exchange or FCS contracting officials, met with Lake Research to discuss the questions that would be used in the focus groups. According to representatives of Lake Research, the Under Secretary and her Executive Assistant reviewed the questions in detail during this meeting and approved their use. Over the next 2 days, Lake Research used the USDA-approved questions during its focus group sessions in Topeka, Kansas, and Indianapolis, Indiana. On April 20, 1995, Lake Research presented its findings in a memorandum to the Under Secretary and in an accompanying presentation to the Under Secretary, her Executive Assistant, and FCS' top managers. During this presentation, USDA officials told us that they did not raise questions about the methodology underlying the work by Lake Research or the way the results were presented, despite the fact that the memo used terms such as "voters," "our side," and "the opposition." On May 1, 1995, Lake Research delivered a draft report to USDA, detailing the findings of the focus groups. During its review of the draft, USDA officials again did not question the methodology of the work underlying the report. However, they did ask Lake Research to delete terms such as "voters," "our side," and "the opposition," which had also been included in the April 20, 1995, memo. On May 23, 1995, Lake Research delivered five copies of its final report to FCS' Office of Analysis and Evaluation. From there, the report had only limited distribution: Two copies were sent to the Under Secretary, the remaining three copies were retained in FCS' OAE. Although the purpose of the work--as set forth in the statement of work--was to support the mission of the food stamp program, and USDA used food stamp research and evaluation money to fund this work, no copies of Lake Research's report were provided to the Deputy Administrator of the Food Stamp Program. USDA's subcontract with Lake Research was handled outside normal contracting practices. According to the President of Lake Research and the notes of the Executive Assistant to the Under Secretary, the idea of using Lake Research to conduct this work, the nature of the work to be performed, and the price to be paid were worked out between the office of the Under Secretary and the president of Lake Research prior to any official contract negotiations and without any involvement of FCS' contracting office. Likewise, the conduct of the work, once contracted for, was managed in an unusual fashion. Federal statute and decisional law requires that when an agency wishes to acquire, by contract, services that are outside the scope of an existing contract, it should conduct a separate procurement action. FCS did not obtain this focus group work through a separate procurement. Instead, the agency issued a task order under an existing support services contract with Global Exchange, which in turn subcontracted the work to Lake Research. As discussed earlier, the arrangement with Global Exchange was made to ensure that the work was done expeditiously and to distance USDA from Lake Research. In our opinion, however, the work performed by Lake Research was outside the scope of the Global Exchange contract and therefore should have been the subject of a separate procurement action. The Global Exchange contract was to provide support services to assist FCS in conducting a national nutrition campaign, including the planning and development of educational materials and communication efforts. Among the overall objectives to be served by the Global Exchange contract were "marketing research, strategic planning, and development of current and future nutrition education marketing efforts." By contrast, the statement of work for Lake Research's subcontract was to conduct focus group research to assess the reactions of the general public and food stamp recipients to USDA's proposals to change the food stamp program. Therefore, in our opinion, the work conducted under Lake Research's subcontract was materially different from the scope of work described in Global Exchange's contract and therefore should have been the subject of a separate procurement action. This $25,000 procurement should have been competitively conducted under the simplified procedures for small purchases authorized by the Federal Property and Administrative Services Act of 1949, as amended, and set forth in the Federal Acquisition Regulation. For procurements of this size, these procedures generally require federal agencies to promote competition to the maximum extent practicable by soliciting quotations from at least three sources. Such a procedure would have enabled USDA to obtain these services in an expeditious manner, as desired by the Under Secretary. We also believe that USDA failed to comply with the federal requirement governing the conduct of focus groups and other public opinion surveys, as set forth in the Paperwork Reduction Act. That act requires agencies planning to collect information from 10 or more persons to obtain the review and approval of the Office of Management and Budget (OMB) before the effort is undertaken. Under FCS' own internal guidance, as well as OMB's regulation, one condition of this approval is that the proposed information collection effort be necessary for the performance of the agency's functions. FCS did not seek or obtain OMB's clearance. Its failure to do so deprived USDA and OMB clearance officials of the opportunity to independently review the need for and the propriety of the focus group work. The approach and methodology used in conducting this focus group research were inconsistent with achieving the desired purpose of the work as set forth in the contract documents--obtaining the general public's and food stamp recipients' perceptions of USDA's reform initiatives for the Food Stamp Program. As is necessary in conducting any focus group research, USDA and Lake Research (1) established where the focus groups would be held, (2) identified who would be included in the discussions, (3) prepared the questions that would be asked, and (4) determined how the results would be reported. In each of these areas, though, USDA and Lake Research used methodological approaches that severely limited the work's value in capturing the general public's and food stamp recipients' perceptions of USDA's reform initiatives. With respect to the issue of site selection, the focus groups were limited to two locations that were chosen for reasons unrelated to the purpose of the subcontract. Lake Research held four focus groups in March 1995--two in Topeka, Kansas, and two in Indianapolis, Indiana. According to the President of Lake Research, these were not sites that her firm had recommended or--at least in the case of Topeka--had ever done work in. She said that the sites were selected by USDA--not for any methodological reasons--but because they were in states with farm constituencies and were the home states of key Members of the House and Senate Agriculture Committees. Likewise, in identifying participants to include in the focus groups, USDA and Lake Research did not seek individuals who were typical of the general public or food stamp recipients. Instead, Lake Research used a telephone screener questionnaire to select individuals with very specific profiles. Three of the four focus groups were with individuals who were not food stamp recipients. For these three focus groups, Lake Research sought to select individuals who were (1) white, (2) registered to vote and who had voted in the last presidential election, (3) neither strong Democrats nor strong Republicans, (4) without personal or familial connections to state or local government, and (5) between the ages of 30 and 65. According to the notes of the Under Secretary's Executive Assistant, the intention of this screener was to ensure that the participants represented "swing voters." The fourth focus group was with food stamp recipients. These individuals were to be (1) white, (2) between the ages of 30 and 65, (3) without personal or familial connections to state and local government, (4) neither strong Democrats nor strong Republicans, and (5) responsible for at least some of their household food shopping. In the implementation of the telephone screener, as well as the focus group sessions themselves, no mention was made that USDA was sponsoring this research. In conducting these focus groups, USDA and Lake Research prepared a structured set of questions that, in some cases, had little to do with reforming the Food Stamp Program. For example, the focus group moderator asked questions about "the way things are going in the country these days" and whether "things are better or worse today than they were 5 years ago." Furthermore, some questions seemed inherently biased. For example, the moderator asked, "What if I told you that consumer watchdog groups like Public Voice have endorsed these [USDA's] reforms which they say ensure nutritious food for America's hungry families, but cut down on fraud. How does that make you feel?" In addition, USDA and Lake Research sought reactions to the Congress's proposed plans for reform. A number of these questions discussed the Republican leadership's proposals for food stamp reform. For example, one set of questions asked: "What do you think would happen if all USDA food and nutrition assistance programs were turned over to the states to administer? The Republican leadership in Congress calls this part of the Contract with America the Personal Responsibility Act. How do you feel about that? Do you think it will pass?" Some of these questions also seemed to attempt to elicit a negative response toward the proposals: "What if I told you that if the Personal Responsibility Act passed, federal funding for food and nutrition assistance would fall by more than $3 billion in 1996 and by nearly $27 billion over 5 years? What do you think? Who would this affect? Can that much be cut from administration and not hurt the participants of the program?" "What if I also told you that by reducing federal support for food assistance, the Personal Responsibility Act would lower retail food sales, reduce farm income and increase unemployment? What do you think? Do you believe it?" "What if I told you that if the programs were given to the states to run, then all food and nutrition assistance would be forced to compete for limited funds? States' ability to deliver nutrition benefits would be subject to changing annual appropriation priorities. What do you think?" "What if I told you that there is a proposal in Congress to put a ceiling or a cap on how many people can be on the program at once? How do you feel about that?" "Now that you know a little more about the House plan, what do you think? Would you support this plan? What do you think life would be like for food stamp recipients if this passed?" Lake Research presented its findings in a meeting on April 20, 1995, to the Under Secretary, her Executive Assistant, and FCS' top management. A Lake Research memo addressed to the Under Secretary, outlining the focus group findings, was also distributed during that meeting. This memo presented the focus group participants' perceptions of USDA's suggested reforms and their views on proposed name changes to the food stamp program. The memo also provided strategies on how USDA could promote its ideas to the public. Among other things, this memo contained the following statements: "We need to translate the popularity of WIC [The Special Supplemental Food Program for Women, Infants, and Children] and school lunch to the food stamp program and make people associate children with food stamps." "Our side has a powerful message in protecting children from hunger. Voters truly believe that no child in America should go hungry." "This is still a tough fight, particularly when the opposition combines food stamps with welfare. Voters have a very developed critique of welfare and adamantly want it reformed." This same language appeared in Lake Research's draft report, which was delivered to USDA on May 1, 1995. Following objections raised by FCS managers, terms such as "voters" and several politically oriented references were removed from the final report. Lake Research delivered its final report to USDA on May 23, 1995. As of April 30, 1996, the Deputy Administrator of the Food Stamp Program had not received a copy of this report. Given her responsibilities for administering the Food Stamp Program, we would have expected this report to have been provided to her. In closing, Mr. Chairman, we found that USDA did not comply with the Federal Acquisition Regulation and the Paperwork Reduction Act and used a flawed methodology that would not allow the contract's stated purpose to be achieved. On the basis of these problems, we believe that USDA exercised questionable judgment in conducting virtually every aspect of this work. I would have concerns if--on the basis of the results of this research--USDA made changes to a program that affects millions of American citizens. Mr. Chairman, this completes 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.

GAO discussed contracting problems involving a Department of Agriculture (USDA) subcontract for surveying the general public's and food stamp recipients' views of food stamp reform initiatives. GAO noted that: (1) USDA did not use normal contracting practices in procuring the subcontracted services; (2) USDA conducted price and scope of work negotiations prior to official contract negotiations and bypassed the appropriate contracting office; (3) USDA should have conducted a separate competitive procurement for the services, since the work done by the subcontractor was outside the scope of work of the original contract; (4) USDA failed to obtain required approval from the Office of Management and Budget before conducting its survey; (5) the approach and methodology used in conducting the survey were inconsistent with achieving the desired purpose of the work; and (6) the subcontractor appeared to target areas and groups of political significance and asked leading questions to produce biased results.

Prior to the passage of ATSA in November 2001, only limited screening of checked baggage for explosives occurred. When this screening took place, air carriers had operational responsibility for conducting the screening, while the Federal Aviation Administration (FAA) maintained oversight responsibility. With the passage of ATSA, TSA assumed responsibility for ensuring that all checked baggage is properly screened for explosives at airports in the United States where screening is required, and for the procurement, installation, and maintenance of explosive detection systems used to screen checked baggage for explosives. Airport operators and air carriers continued to be responsible for processing and transporting passenger checked baggage from the check-in counter to the airplane. Explosive detection systems used to screen checked baggage include EDS and ETD machines. EDS machines, which cost between about $300,000 and $1.2 million each, use computer-aided tomography X-rays adapted from the medical field to examine the objects inside baggage to automatically recognize the characteristic signatures of threat explosives. TSA has certified, procured, and deployed EDS machines made by three manufacturers. ETD machines, which cost approximately $40,000 to $50,000 each, work by detecting vapors and residues of explosives. Because human operators collect samples by rubbing bags with swabs, which are then chemically analyzed in the ETD machines to identify any traces of explosive materials, the use of ETD is more labor-intensive and subject to more human error than the automated process of using EDS machines. ETD is used for both primary, or the initial, screening of checked baggage, and secondary screening, which resolves alarms from EDS machines that indicate the possible presence of explosives inside a bag. As we reported in March 2005, to initially deploy EDS and ETD equipment to screen 100 percent of checked baggage for explosives, TSA implemented interim airport lobby solutions and in-line EDS baggage screening systems. The interim lobby solutions involved placing stand- alone EDS and ETD machines in the nation's airports, most often in airport lobbies or baggage makeup areas where baggage is sorted for loading onto aircraft. For EDS in a stand-alone mode (not integrated with an airport's or air carrier's baggage conveyor system) and ETD, TSA TSOs are responsible for obtaining the passengers' checked baggage from either the passenger or the air carrier, lifting the bags onto and off of EDS machines or ETD tables, using TSA protocols to appropriately screen the bags, and returning the cleared bags to the air carriers to be loaded onto departing aircraft. In addition to installing stand-alone EDS and ETD machines in airport lobbies and baggage makeup areas, TSA collaborated with some airport operators and air carriers to install integrated in-line EDS baggage screening systems within their baggage conveyor systems. In March 2005, we reported that TSA used most of its fiscal year 2002 through 2004 checked baggage screening program funding to design, develop, and deploy interim lobby screening solutions rather than install more permanent in-line EDS baggage screening systems. We also reported that during our site visits to 22 category X, I, and II airports, we observed that in most cases, TSA used stand-alone EDS machines and ETD machines as the primary method for screening checked baggage. Generally, this equipment was located in airport lobbies and in baggage makeup areas. In addition, in our survey of 155 federal security directors, we asked the directors to estimate, for the 263 airports included in the survey, the approximate percentage of checked baggage that was screened on or around February 29, 2004, using EDS, ETD, or other approved alternatives for screening baggage such as screening with explosives detection canines, and physical bag searches. As shown in table 1, the directors reported that for 130 large to medium-sized airports in our survey (21, 60, and 49 category X, I, and II airports, respectively), most of the checked baggage was screened using stand-alone EDS or ETD machines. On average, the percentage of checked baggage reported as screened using EDS machines at airports with partial or full in-line EDS capability ranged from 4 percent for category II airports to 11 percent for category X airports. In addition, the directors reported that ETD machines were used to screen checked baggage 93 to 99 percent of the time at category III and IV airports, respectively. Since its inception in November 2001 through June 22, 2006, TSA has procured and installed about 1,600 EDS machines and about 7,200 ETD machines to screen checked baggage for explosives at over 400 commercial airports. For the most part, TSA deployed EDS machines at larger airports and ETD machines at smaller airports, resulting in primary screening being conducted solely with ETD machines at over 300 airports. TSA installed ETD machines instead of EDS for primary screening at these airports because of the configuration of screening stations, the costs associated with procuring EDS, and the low passenger volume at smaller airports. Table 2 summarizes the location of EDS and ETD equipment at the nation's airports by airport category as of June 22, 2006. Stand-alone EDS and ETD machines are both labor- and time-intensive to operate since each bag must be physically carried to an EDS or ETD machine for screening and then moved back to the baggage conveyor system prior to being loaded onto an aircraft. With an in-line EDS system, checked baggage is screened within an airport's baggage conveyor system, eliminating the need for a TSO or other personnel to physically transport the baggage from the check-in point to the EDS machine for screening and then to the airport baggage conveyor system. Further, according to TSA officials, ETD machines and stand-alone EDS machines are less efficient in the number of checked bags that can be screened per hour per machine than are EDS machines that are integrated in-line with the airport baggage conveyor systems. According to TSA estimates, the number of checked bags screened per hour can more than double when EDS machines are placed in-line versus being used in a stand-alone mode. Table 3 identifies TSA's estimates for bags screened per hour by EDS machines in stand- alone and in-line configurations and ETD machines. TSA has reported that in-line systems create significant efficiency benefits. In January 2004, TSA, in support of its planning, budgeting, and acquisition of security screening equipment, reported to the Office of Management and Budget (OMB) that the efficiency benefits of in-line rather than stand- alone EDS were significant, particularly with regard to bags per hour screened and the number of TSOs required to operate the equipment. According to TSA officials, at that time, a typical lobby-based screening unit consisting of a stand-alone EDS machine with three ETD machines had a baggage throughput (bags screened per hour) of 376 bags per hour with a staffing requirement of 19 TSOs. In contrast, TSA estimated that approximately 425 bags per hour could be screened by an in-line EDS machine with a staffing requirement of 4.25 TSOs. In order to achieve the higher throughput rates and reduce the number of TSOs needed to operate in-line baggage screening systems, TSA (1) uses a screening procedure known as on-screen alarm resolution and (2) networks multiple in-line EDS machines together, referred to as multiplexing, so that the computer-generated images of bags from these machines are sent to a central location where TSOs can monitor the images of suspect bags centrally from several machines using the on- screen alarm resolution procedure. A TSA official estimated that the on- screen alarm resolution procedure with in-line EDS baggage screening systems would enable TSA to reduce the number of bags requiring the more labor-intensive secondary screening using ETD machines by 40 to 60 percent. In estimating the potential savings in staffing requirements, TSA officials stated that they expect to achieve a 20 to 25 percent savings because of reductions in the number of staff needed to screen bags using ETD to resolve alarms from in-line EDS machines. According to TSA officials, as of June 22, 2006, all airports with EDS equipment use on- screen alarm resolution protocols and 16 airports had networked in-line systems. In May 2004, TSA conducted a limited, retrospective cost-benefit analysis at the nine airports that signed letter of intent (LOI) agreements and found that significant savings and other benefits could be achieved through the installation of these systems. This analysis was conducted to estimate potential future cost savings and other benefits that could be achieved from installing in-line systems instead of using stand-alone EDS systems. We reported in March 2005 that, according to TSA's analysis, in-line EDS would reduce by 78 percent the number of TSA TSOs and supervisors required to screen checked baggage at these nine airports, from 6,645 to 1,477 TSOs and supervisors. The actual number of TSOs and supervisor positions that could be eliminated would be dependent on the individual design and operating conditions at each airport. TSA estimated that in-line baggage screening systems at these airports would save the federal government about $1.3 billion compared with stand-alone EDS systems and that TSA would recover its initial investment in a little over 1 year. According to TSA's analysis of the nine LOI airports, in-line cost savings critically depend on how much an airport's facilities have to be modified to accommodate the in-line configuration. Savings also depend on TSA's costs to buy, install, and network the EDS machines; subsequent maintenance costs; and the number of screeners needed to operate the machines in-line instead of using stand-alone EDS systems. In its analysis, TSA also found that a key factor driving many of these costs is throughput--how many bags an in-line EDS system can screen per hour compared with the rate for a stand-alone system. TSA's analysis also provided data to estimate the cost savings resulting from installing in-line EDS checked baggage screening systems for each airport over the 7-year period. According to TSA's data, federal cost savings varied from about $50 million to over $250 million at eight of the nine airports, while at one airport, there was an estimated $90 million loss. In February 2006, TSA reported that a saving of approximately $4.7 billion could be realized over a period of 20 years by installing optimal checked baggage screening systems at the 250 airports with the highest checked baggage volumes. This savings represents the difference between TSA's compliance only strategy--which assumes minimum capital expenditures and no additional investment in in-line systems in order to comply with the mandate to screen all checked baggage using explosive detection systems--and its preferred strategy, which is based on using optimal checked baggage screening systems, including in-line EDS systems, for the 250 airports. TSA estimated that the compliance only strategy would cost $27.05 billion and the preferred strategy would cost $22.39 billion over 20 years, creating a saving of $4.66 billion. TSA reported that many of the initial in-line systems have produced a level of TSO labor savings insufficient to offset up-front capital costs of constructing the systems. According to TSA, the facility and baggage handling system modification costs have been higher than expected, with the nine airports with LOIs having incurred or projecting to incur up to $6 million or more in infrastructure costs for every EDS machine required. TSA stated that the keys to reducing future costs are establishing guidelines outlining best practices and a set of efficient design choices, and using newer EDS technology that best matches each optimally scaled design solution. In February 2006, TSA reported that recent improvements in the design of the in-line EDS checked baggage screening systems and the EDS screening technology now offer the opportunity for higher- performance and lower-cost screening systems. A safety benefit of in-line EDS systems is the potential to reduce on-the job injuries. TSA reported that because procedures for using stand-alone EDS and ETD machines require TSOs to lift heavy baggage onto and off of the machines, the interim lobby screening solutions used by TSA led to significant numbers of on-the-job injuries. Additionally, in responding to our survey about 263 airports, numerous federal security directors reported that on-the-job injuries related to lifting heavy baggage onto or off the EDS and ETD machines were a significant concern at the airports for which they were responsible. Specifically, these federal security directors reported that on-the-job injuries caused by lifting heavy bags onto and off of EDS machines were a significant concern at 65 airports, and were a significant concern with the use of ETD machines at 110 airports. To reduce on-the-job injuries, TSA has provided training to TSOs on proper lifting procedures. However, according to TSA officials, in-line EDS screening systems would significantly reduce the need for TSOs to handle baggage, thus further reducing the number of on-the-job injuries being experienced by TSA TSOs. Use of in-line EDS systems can also provide security benefits at airports where they are installed by reducing congestion in airport lobbies and reducing the need for TSA to use alternative screening procedures at airports. During our site visits to 22 large and medium-sized airports, several TSA, airport, and airline officials expressed concern regarding the security risks caused by overcrowding due to ETD and stand-alone EDS machines located in airport lobbies. The location of the equipment resulted in less space available to accommodate passenger movement and caused congestion due to passengers waiting in lines in public areas to have their checked baggage screened. TSA headquarters officials reported that large groups of people congregating in crowded airport lobbies increases security risks by creating a potential target for terrorists. TSA also reported that airports favor replacing stand-alone EDS machines with in-line systems to mitigate the negative effects of increased congestion and passenger processing times. TSA further reported that in-line systems are more secure than stand-alone EDS machines because the baggage screening is performed away from passengers who otherwise could tamper with the baggage. Another potential security benefit of in-line EDS systems is the reduction of the need for TSA to use alternative screening procedures. In addition to screening with standard procedures using EDS and ETD, which TSA had determined to provide the most effective detection of explosives, TSA also allows alternative screening procedures to be used when volumes of baggage awaiting screening pose security vulnerabilities or when TSA officials determine that there is a security risk associated with large concentrations of passengers in an area. These alternative screening procedures include the use of EDS and ETD machines in nonstandard ways, and also include three procedures that do not use EDS or ETD-- screening with explosives detection canines, physical bag searches, and matching baggage to passenger manifests to confirm that the passenger and his or her baggage are on the same plane. TSA's use of alternative screening procedures has involved trade-offs in security effectiveness. However, the extent of the security trade-offs is not fully known because TSA has not tested the effectiveness of alternative screening procedures in an operational environment. As part of our ongoing work on TSA's use of alternative screening procedures to screen checked baggage, we found that the superior efficiency of screening with in-line EDS compared to screening with stand- alone EDS may have been a factor in reducing the need to use alternative screening procedures at airports where in-line systems were installed. After in-line EDS systems are installed and staffing reductions are achieved, redistributing the screening positions to other airports with staffing shortages may reduce airports' need to use alternative screening procedures. In addition to deploying more efficient checked baggage screening systems, TSA is pursuing other mitigating actions to reduce the need to use alternative screening procedures. These factors include strengthening its coordination with groups such as tour operators, deploying "optimization teams" to airports that were frequently using alternative screening procedures to determine why the procedures were being used so often and to suggest remedies; and deploying additional EDS machines. Although TSA officials have estimated that a low percentage of checked baggage is currently screened using alternative screening procedures, in February 2006 TSA reported that the use of alternative screening procedures will increase at some airports because of rising passenger traffic. TSA has projected that the number of originating domestic and international passengers will rise by about 127 million passengers over current levels by 2010. If TSA's current estimate of an average of 0.76 checked bags per passenger were to remain constant through 2010, TSA would be screening about 96 million more bags that it now screens. This could increase airports' need to rely on alternative screening procedures in the future in the absence of additional or more efficient EDS machines, including in-line EDS systems. TSA has made progress in its efforts to systematically plan for the optimal deployment of checked baggage screening systems, but resources have not been made available to fund these systems on a large-scale basis. In March 2005, we reported that while TSA has made progress in deploying EDS and ETD machines, it had not conducted a systematic, prospective analysis of the optimal deployment of these machines to achieve long-term savings and enhanced efficiencies and security. We recommended that TSA assess the feasibility, expected benefits, and cost to replace ETD machines with stand-alone EDS machines for the primary screening of checked baggage at those airports where in-line EDS systems would not be either economically justified or justified for other reasons. In February 2006, in response to our recommendation and a legislative requirement to submit a schedule for expediting the installation and use of in-line systems and replacement of ETD equipment with EDS machines, TSA completed its strategic planning framework for its checked baggage screening program. This framework introduces a strategy intended to increase security through deploying in-line and stand-alone EDS to as many airports as practicable, lower life-cycle costs for the program, minimize impacts to TSA and airport/airline operations, and provide a flexible security infrastructure for accommodating growing airline traffic and potential new threats. The framework is an initial step in addressing the following areas: Optimized checked baggage screening solutions--finding the ideal mix of higher-performance and lower-cost alternative screening solutions for the 250 airports with the highest checked baggage volumes; Funding prioritization schedule by airport--identifying the top 25 airports that should first receive federal funding for projects related to the installation of explosive detection systems based on quantitative modeling of security, economic, and other factors; Deployment strategy--developing a plan for the acquisition of next- generation EDS systems, the redeployment of existing EDS assets, and investment in life-cycle extension programs; EDS Life-Cycle Management Plan--structuring guidelines for EDS research and development investment, procurement specifications for next-generation EDS systems, and the redeployment of existing EDS assets and investment in life-cycle extension programs that minimize the cost of ownership of the EDS systems; and Stakeholder collaboration plan--working with airport operators and other key stakeholders to develop airport-specific screening solutions, refine the nationwide EDS deployment strategy, and investigate alternative funding programs that may allow for innovative as well as non-federal sources of funding or financing, including formulas for sharing costs among different government entities and the private sector. TSA said it is continuing its efforts in these areas as it works toward completing a comprehensive strategic plan for its checked baggage screening program. TSA expects to complete the strategic plan in early fall 2006. While TSA has begun to conduct a systematic prospective analysis to determine at which airports it could achieve long-term savings and enhanced efficiencies and security by installing in-line systems or by making greater use of stand-alone EDS machines in lieu of ETD machines, resources have not been made available on a large-scale basis to fund these systems. In-line baggage screening systems are capital-intensive because they often require significant airport modifications, including terminal reconfigurations, new conveyor belt systems, and electrical upgrades. According to TSA, lessons learned from the first airports where in-line systems were built identified that facilities and infrastructure modifications accounted for up to 50 percent of the total cost of in-line screening systems, and modifications and upgrades to the baggage handing system typically accounted for another 25 percent of the total cost. In February 2006, TSA estimated that the total cost of installing and operating the optimal checked baggage screening systems, including in- line EDS machines, at the 250 airports is approximately $22.4 billion over 20 years, of which about $6 billion is for installation, life-cycle replacement, existing committed funding, and equipment maintenance costs. According to TSA officials, the estimated costs to install in-line baggage screening systems would vary greatly from airport to airport depending on the size of the airport and the extent of airport modifications that would be required to install the system. In March 2005 we reported that while we did not independently verify the estimates, officials from the Airports Council International-North America and American Association of Airport Executives estimated that project costs for in-line systems could range from about $2 million for a category III airport to $250 million for a category X airport. TSA's February 2006 strategic planning framework identified that because many of the EDS and ETD machines were deployed in 2002 and 2003 to comply with ATSA and subsequent deadlines for achieving the 100 percent checked baggage screening mandate, a large share of the EDS machines will incur life-cycle replacement obligations during the 2013 to 2014 time period. Although TSA has not completed its efforts to develop a life-cycle cost model, TSA's February 2006 strategic planning framework identified that a substantial funding requirement for EDS equipment life-cycle replacement will compete with funding requirements for new in-line systems in approximately 8 to 9 years. Further, in June 2006, as discussed in the framework, TSA officials reported that if the top 25 airports do not receive in-line checked baggage screening systems, they will require additional screening equipment to be placed in airport lobbies and additional TSO staffing in order to remain in compliance with the mandate for screening all checked baggage using explosive detection systems. In March 2005, we reported that TSA and airport operators were relying on several sources of funding to construct in-line checked baggage screening systems. One source of funding airport operators used was FAA's Airport Improvement Program, which traditionally funds grants to maintain safe and efficient airports. In fiscal years 2002 and 2003, 28 of the 53 airport officials we interviewed reported that their airports either had constructed or were planning to construct in-line systems relying on the Airport Improvement Program as their sole source of federal funding. With Airport Improvement Program funds no longer available after fiscal year 2003 for this purpose, airports turned to other sources of federal funding to construct in-line systems. The fiscal year 2003 Consolidated Appropriations Resolution approved the use of LOIs as a vehicle to leverage federal government and industry funding to support facility modification costs for installing in-line EDS baggage screening systems. Between June 2003 and February 2004, TSA issued eight LOIs to reimburse nine airports for the installation of in-line EDS baggage screening systems for a total cost of $957.1 million to the federal government over 4 years. That cost represents 75 percent of the facility modification costs, with the airport funding the remaining costs. TSA also uses other transaction agreements as an administrative vehicle to directly fund, with no long-term commitments, airport operators for smaller in-line airport modification Under these agreements, as implemented by TSA, the airport projects.operator also provides a portion of the funding required for the modification. As of June 2006, TSA reported that about $140 million had been obligated for other transaction agreements for in-line EDS systems. To fund the procurement and installation of explosive detection systems in-line, TSA also uses annual appropriations and the $250 million mandatory appropriation of the Aviation Security Capital Fund. For example, in fiscal years 2005 and 2006, TSA received appropriations of $175 million and $180 million, respectively, for the procurement of explosive detection systems and received $45 million each year for the installation of explosive detection systems. For fiscal year 2007, DHS requested $91 million for the procurement of explosive detection systems and $94 million for the installation of such systems. Of the $250 million available through the Aviation Security Capital Fund, $125 million is designated as priority funding for LOIs. The remaining $125 million is to be allocated in accordance with a formula based upon the size of the airport and risks to aviation security. Congress also authorized an additional appropriation of $400 million per year through fiscal year 2007 for airport security improvement projects that relate to the use of in-line EDS systems. However, appropriations have not been made under this authorization. In July 2004, as part of this subcommittee's hearing on TSA's progress in deploying in-line systems, TSA reported that there were nine in-line systems in place and an additional nine were due to be completed by 2006. In March 2005, we reported that 12 airports had operational in-line systems airportwide or at a particular terminal or terminals. As of June 2006, 25 airports had operational in-line EDS systems and an additional 24 airports had in-line systems under development. Additionally, TSA reported that it has received requests from an additional 50 airports either seeking funding to construct in-line EDS systems or reimbursement for already completed in-line systems. Table 4 provides information on the status of in-line system deployment as of February 2006. In a May 2006 meeting of the Aviation Security Advisory Committee, TSA reported that under current investment levels, installation of optimal checked baggage screening systems would not be completed until approximately 2024. TSA further reported that unless investment is accelerated, substantial investment will be needed to replace EDS and ETD machines at the end of their life cycles and to refurbish suboptimal systems. TSA is currently collaborating with airport operators, airlines, and other key stakeholders to develop a cost-sharing study that identifies funding and cost-sharing strategies for the installation of in-line baggage screening systems. TSA plans to use the results of this study to finalize its checked baggage screening program strategic plan, which TSA expects to complete by early fall 2006. In its May 2006 report to the Aviation Security Advisory Committee, TSA outlined financing options including leasing equipment, sharing savings from in-line systems with airports, and enhancing eligibility for the Passenger Facility Charge, LOIs, and tax credit bonds. In this meeting, TSA reported that tax credit bonds had the most potential support among stakeholders. As TSA moves forward with planning for the deployment of checked baggage screening systems and identifying funding and financing options, it is also important for TSA to engage in planning to focus its research and development efforts. To enhance checked baggage screening, TSA is developing and testing next-generation EDS machines. According to TSA, manufacturers have only marginally improved false alarm rates and throughput capabilities of the equipment since the large-scale deployment of EDS machines in 2002 and 2003. The maximum number of bags an EDS machine can screen per hour is 500, which can be achieved only when the machines are integrated in-line with the baggage conveyor system. New EDS equipment was certified in 2005, including a smaller EDS machine designed to replace ETD machines used for primary screening and an upgraded large EDS machine. In September 2005, TSA entered into a $24.8 million contract to purchase 72 smaller EDS machines to be installed at 24 airports. The President's fiscal year 2007 budget request for TSA includes funding to support research and development for in-line EDS machines that can operate at up to 900 bags per hour and employ new threat detection concepts. In its February 2006 strategic framework for checked baggage screening, TSA identified the development of high- throughput in-line EDS machines and lowering of EDS false alarm rates as key areas for improving investment management of next-generation technologies. TSA reported that these performance gains would be feasible and available in the near term. TSA also reported that given that the planning, design, and construction cycle for an in-line system can be 2 to 3 years, and these high-throughput and lower false alarm rate technologies are anticipated to be deployable by about 2008, the agency is recommending that all in-line planning and design efforts consider these new technologies. We reported in September 2004 that the Department of Homeland Security (DHS) and TSA have made some progress in managing their transportation security research and development programs according to applicable laws and R&D best practices. However, we found that their efforts were incomplete in several areas, including preparing strategic plans for R&D efforts that contain measurable objectives, preparing and using risk assessments to select and prioritize R&D projects, and coordinating with stakeholders--a condition that increases the risk that their R&D resources will not be effectively leveraged. We also found that TSA and DHS delayed several key R&D projects and lacked both estimated deployment dates for the vast majority of their R&D projects and adequate databases to effectively manage their R&D portfolios. We recommended that DHS and TSA (1) conduct some basic research in the transportation security area; (2) complete their strategic planning and risk assessment efforts; (3) develop a management information system that will provide accurate, complete, current, and readily accessible project information for monitoring and managing their R&D portfolios; and (4) develop a process with the Department of Transportation to coordinate transportation security R&D efforts and share this information with transportation stakeholders. In June 2006, DHS reported several actions that it had taken to address these recommendations, including coordinating with other federal agencies to leverage their basic research, issuing a Science and Technology Directorate Strategic Plan, implementing a program and project management system to monitor program and project funding and milestones, and establishing a memorandum of agreement that resulted in the formation of a Mass Transit Technology Working Group to coordinate efforts across agencies and to optimize resources. DHS also reported that basic research has been limited because the majority of R&D funds have been appropriated for countermeasures for specific threat areas. We will examine these efforts to implement our recommendations as part of our ongoing review of DHS's and TSA's airport checkpoint R&D program. TSA has made progress in installing EDS and ETD systems at the nation's airports--mainly as part of interim lobby screening solutions--to provide the capability to screen all checked baggage for explosives as mandated by Congress. With the objective of initially fielding this equipment largely accomplished, TSA has shifted its focus from equipping airports with interim screening solutions to systematically planning for the more optimal deployment of checked baggage screening systems. TSA's February 2006 strategic planning framework for the checked baggage screening program is a positive step forward in systematically planning for the more optimal deployment of checked baggage screening systems. The completion of a strategic plan for checked baggage screening by early fall 2006 should help TSA more fully determine whether expected reduced staffing costs, higher baggage throughput, and increased safety and security will in fact justify the significant up-front investment required to install in-line baggage screening systems. TSA's retrospective analysis on nine airports installing in-line baggage screening systems with LOI funds, while limited, estimated that cost savings could be achieved through reduced staffing requirements for TSOs and increased baggage throughput. Specifically, the analysis identified that using in-line systems instead of stand-alone systems at these nine airports could save the federal government about $1.3 billion over 7 years and that TSA's initial investment would be recovered in a little over 1 year. TSA also recently estimated that a saving of approximately $4.7 billion could be realized over a period of 20 years by installing optimal checked baggage screening systems at the 250 airports with the highest checked baggage volumes. However, TSA's strategic planning framework identified that many of the initial in-line systems have produced a level of savings insufficient to offset up-front capital costs of acquiring and installing the systems. Nevertheless, TSA reported that recent improvements in the design of the systems and EDS screening technology now offer the opportunity for higher performance and lower-cost screening systems. In-line EDS baggage screening systems have efficiency, safety, and security benefits that have been reported on extensively by Congress, GAO, TSA, and aviation industry representatives. As part of its strategic planning efforts, TSA has identified the top 25 airports that should first receive federal funding for projects related to the installation of explosive detection systems and also identified the ideal mix of higher-performance and lower-cost alternative screening solutions for the 250 airports with the highest checked baggage volumes. With this initial planning now completed, a critical question that remains is how to fund and finance these screening systems and who should pay for them. TSA is currently working with airport and air carrier stakeholders to identify funding and financing options, an effort that is due to be completed by early fall 2006. As TSA works toward identifying funding and financing options, it will also be important for the agency to sustain its R&D efforts and further strengthen its R&D management and planning efforts. Researching and developing technologies, such as higher-throughput EDS machines with lower false alarm rates, should help TSA to improve the security and efficiency of checked baggage screening. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the subcommittee have. For further information on this testimony, please contact Cathleen A. Berrick at (202) 512-3404 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contact named above, Kevin Copping, Katherine Davis, Michele Fejfar, Thomas Lombardi, Allison Sands, and Maria Strudwick made key contributions to this testimony. Aviation Security: Enhancements Made in Passenger and Checked Baggage Screening, but Challenges Remain. GAO-06-371T. Washington, D.C.: April 4, 2006. Aviation Security: Progress Made to Set Up Program Using Private- Sector Airport Screeners, but More Work Remains. GAO-06-166. Washington, D.C.: March 31, 2006. Aviation Security: TSA Management of Checked Baggage Screening Procedures Could Be Improved. GAO-06-291SU. Washington, D.C.: February 28, 2006. Transportation Security Administration: More Clarity on the Authority of Federal Security Directors Is Needed. GAO-05-935. Washington, D.C.: September 23, 2005. Aviation Security: Better Planning Needed to Optimize Deployment of Checked Baggage Screening Systems. GAO-05-896T. Washington, D.C.: July 13, 2005. Aviation Security: Screener Training and Performance Measurement Strengthened, but More Work Remains. GAO-05-457. Washington, D.C.: May 2, 2005. Aviation Security: Systematic Planning Needed to Optimize the Deployment of Checked Baggage Screening Systems. GAO-05-365. Washington, D.C.: March 15, 2005. Transportation Security: Systematic Planning Needed to Optimize Resources. GAO-05-357T. Washington, D.C.: February 15, 2005. Aviation Security: Preliminary Observations on TSA's Progress to Allow Airports to Use Private Passenger and Baggage Screening Services. GAO-05-126. Washington, D.C.: November 19, 2004. Aviation Security: Private Screening Contractors Have Little Flexibility to Implement Innovative Approaches. GAO-04-505T. Washington, D.C.: April 22, 2004. Aviation Security: Improvement Still Needed in Federal Aviation Security Efforts. GAO-04-592T. Washington, D.C.: March 30, 2004. Aviation Security: Challenges Exist in Stabilizing and Enhancing Passenger and Baggage Screening Operations. GAO-04-440T. Washington, D.C.: February 12, 2004. Aviation Security: Efforts to Measure Effectiveness and Strengthen Security Programs. GAO-04-285T. Washington, D.C.: November 20, 2003. Aviation Security: Efforts to Measure Effectiveness and Address Challenges. GAO-04-232T. Washington, D.C.: November 5, 2003.

The Transportation Security Administration (TSA) has deployed two types of baggage screening equipment: explosive detection systems (EDS), which use X-rays to scan bags for explosives, and explosive trace detection systems (ETD), in which bags are swabbed to test for chemical traces of explosives. TSA considers screening with EDS to be superior to screening with ETD because EDS machines process more bags per hour and automatically detect explosives without direct human involvement. In March 2005, GAO reported that while TSA had made progress in deploying EDS and ETD machines, it had not conducted a systematic, prospective analysis of the optimal deployment of these machines to achieve long-term savings and enhanced efficiencies and security. GAO's testimony today updates our previous report and discusses TSA's (1) deployment of EDS and ETD systems and the identified benefits of in-line systems, and (2) planning for the optimal deployment of checked baggage screening systems and efforts to identify funding and financing options. Since its inception in November 2001 through June 2006, TSA has procured and installed about 1,600 EDS machines and 7,200 ETD machines to screen checked baggage for explosives at over 400 airports. However, initial deployment of EDS machines in a stand-alone mode--usually in airport lobbies--and ETD machines resulted in operational inefficiencies and security risks as compared with using EDS machines integrated in-line with airport baggage conveyor systems. For example, TSA's use of stand-alone EDS and ETD machines required a greater number of screeners and resulted in screening fewer bags for explosives each hour. In March 2005, we reported that at nine airports where TSA has agreed to help fund the installation of in-line EDS systems, TSA estimated that screening with in-line EDS machines could save the federal government about $1.3 billion over 7 years. In February 2006, TSA reported that many of the initial in-line EDS systems did not achieve the anticipated savings. However, recent improvements in the design of the in-line EDS systems and EDS screening technology now offer the opportunity for higher-performance and lower-cost screening systems. Finally, screening with in-line EDS systems may result in security benefits by reducing the need for TSA to use alternative screening procedures, such as screening with explosives detection canines and physical bag searches, which involve trade-offs in security effectiveness. TSA has begun to systematically plan for the optimal deployment of checked baggage screening systems, but resources have not been made available to fund the installation of in-line EDS systems on a large-scale basis. In February 2006, TSA released its strategic planning framework for checked baggage screening aimed at increasing security through deploying more EDS machines, lowering program life-cycle costs, minimizing impacts to TSA and airport and airline operations, and providing a flexible security infrastructure. As part of this effort, TSA identified the 25 airports that should first receive federal funding for the installation of in-line EDS systems, and the optimal checked baggage screening solutions for the 250 airports with the highest checked baggage volumes. In February 2006, TSA estimated that installing and operating the optimal checked baggage screening systems will cost about $22.4 billion over 20 years and reported that under current investment levels, installation of optimal baggage screening systems would not be completed until approximately 2024. TSA is collaborating with airport operators, airlines, and other key stakeholders to identify funding and cost sharing strategies and is focusing its research and development efforts on the next generation of EDS technology.

Federal contracting began declining in the late 1980s as the Cold War drew to a close and defense spending decreased. This decline in federal contracting continued for most of the 1990s, reaching a low of about $187 billion in fiscal year 1999. Spending subsequently increased to about $204 billion in fiscal year 2000. As figure 1 shows, between fiscal year 1990 and fiscal year 2000, purchases of supplies and equipment fell by about $25 billion, while purchases of services increased by $17 billion, or about 24 percent. Consequently, purchases for services now account for about 43 percent of federal contracting expenses--the largest single spending category. The growth in services has largely been driven by the government's increased purchases of two types of services: information technology services, which increased from $3.7 billion in fiscal year 1990 to about $13.4 billion in fiscal year 2000; and professional, administrative, and management support services, which rose from $12.3 billion in fiscal year 1990 to $21.1 billion in fiscal year 2000. The increase in the use of service contracts coincided with a 21-percent decrease in the federal workforce, which fell from about 2.25 million employees as of September 1990 to 1.78 million employees as of September 2000. As federal spending and employment patterns were changing, changes were also occurring in the way that federal agencies buy services. Specifically, there has been a trend toward agencies purchasing professional services using contracts awarded and managed by other agencies. For example, in 1996, the General Services Administration (GSA) began offering information technology services under its Federal Supply Schedule program, and it now offers services ranging from professional engineering to laboratory testing and analysis to temporary clerical and professional support services. The use of the schedule program to acquire services has increased significantly over the past several years. Other governmentwide contracts have also come into use in recent years. The Federal Acquisition Streamlining Act of 1994 authorized federal agencies to enter into multiple award, task- and delivery-order contracts for goods and services. These contracts provide agencies with a great deal of flexibility in buying goods or services while minimizing the burden on government contracting personnel to negotiate and administer contracts. The Clinger-Cohen Act of 1996 authorized the use of multiagency contracts and what have become known as governmentwide agency contracts to facilitate purchases of information technology-related products and services such as network maintenance and technical support, systems engineering, and integration services. While we have seen the environment change considerably, what we have not seen is a significant improvement in federal agencies' management of service contracts. Put simply, the poor management of service contracts undermines the government's ability to obtain good value for the money spent. This contributed to our decision to designate contract management a high-risk area for the Departments of Defense and Energy, the two largest purchasers within the federal government. Improving contract management is also among the management challenges faced by other agencies. Compounding these problems are the agencies' past inattention to strategic human capital management. As you may know, in January 2001, we designated strategic human capital management a governmentwide high-risk area. Our work, as well as work by other oversight agencies, continues to identify examples of long-standing problems in service contracting, including poor planning, inadequately defined requirements, insufficient price evaluation, and lax oversight of contractor performance. For example, We found that the Department of Defense's (DOD) broadly defined work descriptions for information technology services orders placed against several governmentwide contracts prevented establishing firm prices for the work. Work descriptions defined services broadly because the orders covered several years of effort, and officials were uncertain what support they would need in future years. The 22 orders we reviewed--with a total value of $553 million--typically provided for reimbursing the contractors' costs, leaving the government bearing most of the risk of cost growth. Further, although competition helps agencies ensure they obtain the best value under contracts, a majority of these orders were awarded without competing proposals having been received. The DOD Inspector General found problems with each of the more than 100 contract actions--with a total value of $6.7 billion--for professional, administrative, and management support services it reviewed. For example, contracting officials typically did not use experience from prior acquisitions of the same services to help define requirements more clearly. In one case, officials continued to award cost reimbursement contracts-- and accepted the risk of cost overruns--despite 39 years of experience purchasing the same services from the same contractor. Further, officials typically did not prepare well-supported independent cost estimates to help them assess whether the costs contractors proposed were reasonable. Finally, the Inspector General found that oversight of contractor performance was inadequate in a majority of cases, and in some cases DOD officials could not show that they had actually reviewed the contractors' work. We found that DOD personnel sought competing quotes from multiple contractors on only a handful of orders for information technology services placed against GSA's federal supply schedule contracts. On 17 orders--valued at $60.5 million--contracting officers generally compared the labor rates offered by their preferred contractor with labor rates of various other contractors' supply schedule contracts instead of seeking competing quotes. This limited analysis did not provide a meaningful basis for assessing whether a contractor would provide high-quality, cost- effective services because it did not evaluate the proposed number of labor hours and mix of labor skill categories. Therefore, contracting officers' ability to ensure that DOD got the best services at the best prices was significantly undermined. The Inspector General at the Department of Transportation found that on an $875-million contract for technical support services, the Federal Aviation Administration did not develop reliable cost estimates or use these estimates to assess whether costs the contractor proposed were reasonable. Further, the agency generally did not gather data to evaluate the quality of contractor performance nor ensure that contractor personnel had the education and experience required for the jobs they were being paid to perform. The Inspector General at the Department of Energy reported on a $218-million contract for security services at its Oak Ridge operations.This contract was intended to consolidate security services under a single contractor and to reduce costs by reducing staffing and eliminating duplicative management structures. Oak Ridge officials, however, did not define what security-related work the new contractor would perform and did not analyze staffing levels or propose cost reduction measures to promote efficient contractor performance. Consequently, the number of security personnel actually increased from 640 prior to the consolidation to 744 afterwards, while Oak Ridge incurred an estimated $7.5 million in avoidable costs instead of achieving an anticipated $5 million in savings. While these examples highlight the need for federal agencies to improve their management of service contracts, their capacity to do so is at risk because of past inattention to strategic human capital management. We are concerned that federal agencies' human capital problems are eroding the ability of many agencies--and threaten the ability of others--to perform their missions economically, efficiently, and effectively. For example, we found that the initial rounds of downsizing were set in motion without considering the longer term effects on agencies' performance capacity. Additionally, a number of individual agencies drastically reduced or froze their hiring efforts for extended periods. Consequently, following a decade of downsizing and curtailed investments in human capital, federal agencies currently face skills, knowledge, and experience imbalances that, without corrective action, could worsen given the number of current federal civilian workers that are eligible to retire through 2005. I would like to use DOD's experience to illustrate this problem. As we recently testified, DOD's approach to civilian workforce reduction was not oriented toward shaping the makeup of the force. Rather, DOD relied primarily on voluntary turnover and retirements, freezes on hiring authority, and its authority to offer early retirements and "buy-outs" to achieve reductions. As a result, DOD's current workforce is not balanced and therefore risks the orderly transfer of institutional knowledge. According to DOD's Acquisition 2005 Task Force, 11 consecutive years of downsizing produced serious imbalances in the skills and experience of the highly talented and specialized civilian acquisition workforce, putting DOD on the verge of a retirement-driven talent drain. DOD's leadership had anticipated that using streamlined acquisition procedures would improve the efficiency of contracting operations and help offset the effects of workforce downsizing. However, the DOD Inspector General reported that the efficiency gains from using streamlined procedures had not kept pace with acquisition workforce reductions. The Inspector General reported that while the workforce had been reduced by half, DOD's contracting workload had increased by about 12 percent and that senior personnel at 14 acquisition organizations believed that workforce reductions led to problems such as less contractor oversight. While I have discussed DOD's problems at length, we believe our concerns are equally valid regarding the broader civilian agency contracting community. For example, our analysis of personnel data maintained by the Office of Personnel Management (OPM) shows that while DOD downsized its workforce to a greater extent than the civilian agencies during the 1990s, both DOD and the civilian agencies will have about 27 percent of their current contracting officers eligible to retire through the end of fiscal year 2005. Consequently, without appropriate workforce planning, federal agencies could lose a significant portion of their contracting knowledge base. Congress and the administration are taking steps to address some of these contract management and human capital challenges, in particular by emphasizing the increased use of performance-based service contracts and by stressing the importance of integrating strategic human capital management into agency planning. Performance-based contracts describe desired outcomes rather than direct work processes. According to the Office of Federal Procurement Policy, the use of performance-based contracts should result in lower prices and improved performance, among other benefits. To encourage their use, in April 2000, the Procurement Executives Council--a senior level coordinating body comprised of officials from more than 20 federal departments and agencies--established a goal that 50 percent of service contracts will be performance-based by fiscal year 2005. The goal of increasing the use of performance-based contracts was reaffirmed in a March 9, 2001, memorandum issued by the Office of Management and Budget (OMB). Further, as required by last year's defense authorization act, the Federal Acquisition Regulation was revised on May 2, 2001, to establish a preference for using performance-based contracting when acquiring services. While we support the use of performance-based approaches, it should be recognized that performance-based contracting is not a new concept. The Office of Federal Procurement Policy issued a policy letter in April 1991 that directed using performance-based contracting to the maximum extent practicable. However, this approach was not widely adopted by federal agencies, and the Procurement Executives Council's interim goal of having 10 percent of service contracts awarded in fiscal year 2001 be performance-based is indicative of the current level of performance-based contracting in the government. Consequently, the extent to which agencies provide the necessary training, guidance, and tools to their workforce, and establish metrics to monitor the results of the contracts awarded using performance-based approaches, will affect whether this effort achieves its intended results. With regard to human capital management, it is clear that both OPM and OMB have substantial roles to play. OPM has begun stressing to agencies the importance of integrating strategic human capital management into agency planning and has focused more attention on developing tools to help agencies. For example, it has developed a workforce planning model and has launched a website to facilitate information sharing about workforce planning issues. OMB has played a more limited role; however, OMB's role in setting governmentwide management priorities and defining resource allocations will be critical to inducing agencies to integrate strategic human capital into their core business processes. Toward that end, OMB's current guidance to agencies on preparing their strategic and annual performance plans states that the plans should set goals in such areas as recruitment, retention, and training, among others. Earlier this month, OMB instructed agencies to submit a workforce analysis to it by June 29, 2001. The analysis is to include summary information on the demographics of the agencies' permanent, seasonal, and temporary workforce; projected attrition and retirements; an evaluation of workforce skills; expected changes in the agency's work; recruitment, training, and retention strategies being implemented; and barriers to maintaining a high- quality and diverse workforce. The information developed may prove useful in identifying human capital areas needing greater attention. Over the past decade, federal spending patterns changed, the federal workforce declined, and new contracting vehicles and techniques were introduced. Consequently, the current environment in which the government acquires services is significantly different than the one it operated under in 1990. However, the government's long-standing difficulties with managing service contracts have not changed, and it is clear that agencies are not doing all they can to ensure that they are acquiring services that meet their needs in a cost-effective manner. The increasing significance of contracting for services has prompted--and rightfully so--a renewed emphasis by Congress and the executive agencies to resolve long-standing problems with service contracts. To do so, the government must face the twin challenges of improving its acquisition of services while simultaneously addressing human capital issues. One cannot be done without the other. Expanding the use of performance-based contracting approaches and emphasizing strategic human capital planning are welcomed and positive steps, but sustained leadership and commitment will be required to ensure that these efforts mitigate the risks the government currently faces when contracting for services. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to any questions you or other Members of the Subcommittee may have. For further information, please contact David E. Cooper at (202) 512-4841. Individuals making key contributions to this testimony included Don Bumgardner, Ralph Dawn, Tim DiNapoli, Julia Kennon, Gordon Lusby, Monty Peters, Ron Schwenn, and John Van Schaik.

Federal agencies spend billions of tax dollars each year to buy services--from clerical support to information technology assistance to the management of national laboratories. The federal government spent more than $87 billion in services--a 24 percent increase in real terms from fiscal year 1990. Some service procurements are not being done efficiently, putting taxpayer dollars at risk. In particular, agencies are not clearly defining their requirements, fully considering alternative solutions, performing vigorous price analyses, and adequately overseeing contractor performance. This testimony (1) describes service contracting trends and the changing acquisition environment, (2) discusses the challenges confronting the government in acquiring services, and (3) highlights some efforts underway to address these challenges. GAO found that purchases of services now account for about 43 percent of federal contracting expenses--the largest single spending category. The growth of services has been driven largely by the government's increased purchases of information technology services and professional, administrative, and management support services. Poor contract management has undermined the government's ability to obtain good value for the money and continues to be a major problem for the two biggest service purchasers-the Departments of Defense and Energy. Performance-based service contracts and the integration of strategic human capital management into agency planning are two ways to address some of the contract management and human capital challenges.

Our assessment identified differences in both Hepatitis C activities that were included in VA's original fiscal year 2000 budget: screening and antiviral drug therapy. VA budgeted $195 million for these activities, but only spent $50 million, a $145 million difference. However, VA's briefing paper shows only a $95 million difference because VA's reported expenditures include $50 million for activities not specifically budgeted, such as treatment of conditions related to Hepatitis C. (See table 1.) We believe that management decisions could have contributed to lower than expected screening and treatment expenditures, in addition to the factors VA cited. VA expended $14 million for Hepatitis C screening--one-third less than the amount budgeted for fiscal year 2000. VA's budget assumed that almost 985,000 veterans would be screened for Hepatitis C exposure at an average cost of $21 per veteran. However, VHA estimates that only 478,000 veterans were screened at a cost of $30 per veteran--a shortfall of over 50 percent. VA's briefing paper reported that two factors caused this workload difference. First, VA points out that the budget estimate may have been unrealistically high because it was based on "untested assumptions" concerning the number of veterans who use the VA health care system who would need to be screened for Hepatitis C. Second, VA noted that the number screened may be underreported due to inadequate data systems. While VA's reasons are valid, management decisions also could have contributed to the lower than expected number of veterans who were screened, causing the screening workload assumption to appear unrealistically high. For example, VHA decided to include Hepatitis C funds as part of its general medical care resource distribution process, without clearly communicating how much was available for screening and treatment of the Hepatitis C virus. As a result, network and medical facility staff we interviewed were generally unaware that they had received $21 million in funding that VA had requested for increased Hepatitis C screening. Network budget officers, medical center managers, and clinical staff told us that they thought VHA did not receive additional funding to support increased Hepatitis C activities. Those who thought funds were available were unsure of the amount. Such perceived funding inadequacies appear to have caused some local managers to adopt a cautious approach regarding who to screen and when. At the sites we visited, we noted that while some facility directors instructed providers to screen all users, others limited screening to selected clinics or left it to individual providers to decide who should be screened. Our review of medical records at these sites confirmed that some facilities had limited screening to certain clinics and that some providers had screened few veterans for Hepatitis C. In addition, such situations may have occurred because headquarters managers failed to establish performance targets for networks, which could be used to monitor Hepatitis C screening and treatment workloads. Although VHA promised in its fiscal year 2001 budget request to establish such performance targets, none have yet been adopted. VA's briefing paper states that meaningful and measurable indicators will be identified and incorporated into performance goals for its 2003 budget request. Also, VHA's efforts to evaluate or track performance were further hampered by a lack of basic data on the numbers of veterans screened. Notably, after VHA introduced a system to track screening at medical facilities late in fiscal year 2000, the reported number of veterans screened increased dramatically at many facilities we visited. Providers told us the tracking system was a powerful incentive to increase the number of veterans screened. For antiviral treatment, VA spent $36 million--one-fifth of the amount budgeted for fiscal year 2000. VA's budget assumed that nearly 17,000 veterans would be treated and that 70 percent would complete a 12-month antiviral drug therapy regimen. VA reported, however, that 4,455 veterans received antiviral drug therapy and that most dropped out of treatment before 6 months. VA's briefing paper characterized its budget estimate as being unrealistically high. VA explained that fewer patients received antiviral therapy because of the high number of patients who reject or defer therapy, or who do not qualify as candidates under treatment guidelines. In addition, treatment expenditures were lower because larger than expected numbers of patients were unable to tolerate the frequent side effects of antiviral drugs, such as anemia, respiratory symptoms, or depression and, therefore, ended treatment prematurely. VA's reasons seem valid. However, implementation problems relating to VHA's decision to distribute Hepatitis C funding through its general allocation system without alerting networks to the portion budgeted for Hepatitis C activities could also be a major contributing factor. As previously discussed, staff at local facilities we visited perceived that little or no funds had been appropriated to implement VA's Hepatitis C initiative. Providers at some of these facilities told us that this perceived funding shortage was a factor that ultimately could explain the unexpectedly low number of veterans treated. Because of the slowly evolving nature of liver disease caused by the Hepatitis C virus, treatment can frequently be postponed, however, without adversely affecting a patient's health or recovery prospects. VHA's budget officials told us that when the budget plan for fiscal year 2000 was originally prepared and submitted to the Congress, Hepatitis C funds were expected to be used solely for screening veterans and providing antiviral therapy. Subsequently, VHA decided to report expenditures for treatment of conditions related to the Hepatitis C virus. Of VA's reported expenditures, $50 million was used for those purposes. Our assessment of VHA's records indicates that most of this $50 million in expenditures involved inpatient care and pharmaceuticals. (See table 2.) To gain an understanding of these activities, we reviewed medical records at one medical center in consultation with that facility's Director of Hepatology. This review indicated that inpatient expenditures frequently involved treatment of secondary problems relating to advanced Hepatitis C--including fluid retention in the abdomen, internal bleeding, neurological impairment, and liver cancer. Treatments varied from stabilizing patients' conditions to liver transplants. Our review of medical records indicates that outpatient expenditures frequently involved treatment of conditions that could preclude the use of antiviral drug therapy. For example, because excessive alcohol consumption reduces the effectiveness of antiviral therapy, VHA may provide alcohol use counseling and treatment in order to provide veterans with the best opportunity to benefit from antiviral treatment. Veterans who are intravenous drug users also need counseling and drug treatment before starting antiviral therapy. VA's briefing paper reported that expenditures for such related medical conditions were probably undercounted for many veterans. To be counted, VHA requires providers to include a Hepatitis C code in its computerized records system when veterans receive inpatient or outpatient services for liver-related conditions, such as cancer; such coding signifies that Hepatitis C was a co-morbid condition. Officials at one network we visited were aggressively trying to improve coding accuracy. Their efforts suggest that more than half of their Hepatitis C-infected veterans received treatments for Hepatitis C-related conditions that were not coded as such. This problem persists systemwide, despite VHA's efforts over the past 2 years to encourage--through training and other educational aids-- accurate coding by providers. VA officials told us that the fiscal year 2002 budget estimate for Hepatitis C of $171 million includes funding for all these activities: screening, antiviral therapy, and treatment of Hepatitis C-related conditions. This estimate, they said, was developed using the same estimating model that was used to identify the Hepatitis C expenditures reported for fiscal year 2000, rather than the model used to develop fiscal year 2000 and 2001 budget estimates. Also, VA's briefing paper reported that its budget planning process for fiscal year 2003 will include a more comprehensive revision of its Hepatitis C model. In this regard, VHA proposes the creation of a registry for its patients with Hepatitis C infection. This registry will document important demographic and clinical data, including all inpatient and outpatient care regardless of diagnostic coding of individual episodes of care. VA plans to develop a new software system to interface with existing electronic medical records, which VHA estimates could become operational by the fourth quarter of fiscal year 2002. Distributions to 22 networks appear adequate, given that funding levels could support significant expansion of screening and treatment workloads. VA included $340 million to screen and provide antiviral drug therapy to veterans in its fiscal year 2001 budget request. In November 2000, VHA distributed these funds to the 22 networks as part of their overall patient care funding using its Veterans Equitable Resource Allocation model. At our request, VA identified amounts that each network received as result of the $340 million being included in its distribution. These amounts ranged from $5.7 million to $28.3 million. Our assessment shows that amounts distributed to the 22 networks for fiscal year 2001 should allow each network to provide Hepatitis C screenings for all previously unscreened veterans when they visit VA medical facilities for care during fiscal year 2001. Potential screening workloads for each of the 22 networks range between an estimated 70,000 veterans and 298,000 veterans. Networks could spend an estimated $128 million to screen such potential workloads, leaving $212 million available to provide antiviral therapy. This remaining $212 million appears sufficient to support antiviral therapy workloads for each network at a significantly higher level than fiscal year 2000. Networks, for example, provided a total of 22,275 months of antiviral therapy to 4,455 patients in fiscal year 2000. This workload is the equivalent of 1,856 patient years of care. For fiscal year 2001, networks could double their workloads at a total cost of about $82 million, leaving $130 million for further expansion of antiviral treatment workloads or increased treatments for conditions related to Hepatitis C, such as alcohol or drug treatment. VA recently has reported that its Hepatitis C-related spending estimate for fiscal year 2001 was reduced to $151 million, which represents VA's best estimate of how much networks are likely to spend for Hepatitis C screening and treatment. VHA budget officials told us, however, that the entire $340 million originally requested remains available to the 22 networks for Hepatitis C use, should networks' workloads warrant. These funds, however, are not limited to Hepatitis C use. At this time, VA appears unable to develop a budget estimate that can reliably forecast Hepatitis C funding needs. This situation is troublesome, because over the past 30 months, VA has spent over $145 million previously requested for Hepatitis C activities, but has limited experiential data that can be used to estimate Hepatitis C patients' clinical needs--one of the most critical elements for budget development. VHA, however, appears to be taking reasonable steps to improve future budget estimates and thereby minimize the potential for large differences. Most notably, VHA's proposed Hepatitis C patient registry could provide critical data needed to improve budgetary estimates, as well as overall program management. VHA, however, estimates that it could take 15 months before this registry becomes operational, which suggests that it may not provide budgetary information in time to help formulate VA's fiscal year 2004 budget. In the meantime, VHA's ongoing efforts to upgrade its data collection systems should help improve budget estimates for fiscal year 2003. These efforts, however, have provided only minimal help in the development of VA's fiscal year 2002 budget for Hepatitis C spending. As a result, it is not possible to conclude with certainty whether VA's $171 million spending estimate for fiscal year 2002 is appropriate. VA's budget forecasting uncertainties do not appear to have adversely affected the availability of fiscal year 2001 Hepatitis C funds for the 22 networks. Our assessment shows that, for fiscal year 2001, each network will receive an adequate portion of the $340 million requested to significantly expand Hepatitis C screening and treatment workloads.

The Department of Veterans Affairs (VA) requested and received $195 million for Hepatitis C screening and treatment in fiscal year 2000. VA's budget documentation showed that it had spent $100 million on Hepatitis C screening and treatment, leaving a difference of $95 million between its estimated and actual expenditures. However, GAO's review revealed that the difference was actually much larger--$145 million. VA's documentation showed that only $50 million was used for budgeted activities and $50 million was used for an activity not included in its original budget--treatment of conditions related to Hepatitis C. It appears that VA is unable to develop a budget estimate that can reliably forecast its Hepatitis C funding needs at this time. However, VA's Veterans Health Administration (VHA) appears to be taking reasonable steps to improve future budget estimates and thereby minimize the potential for large differences. Such steps include developing a Hepatitis C patient registry that could provide the critical data needed to improve budgetary estimates. However, this registry could take as long as 15 months to become operational, which suggests that it may not provide budgetary data in time to formulate the 2004 budget. In the meantime, VHA's ongoing efforts to upgrade its data collection systems should help improve budget estimates for fiscal year 2002. These efforts, however, have provided only minimal help in the development of VA's 2002 budget for Hepatitis C spending. As a result, it is not possible to conclude with certainty whether VA's fiscal year 2002 spending estimate of $171 million is appropriate.

Without accurate and timely accounting, financial reporting, and auditing, it is impossible to know how well or poorly IRS has performed in certain facets of its operations such as tax collections. In addition, IRS' management and the Congress' ability to make informed decisions that are "fact based" is substantially hindered when the underlying information that provides the basis for decisions is called into question or when fundamental information is lacking. Our efforts to audit IRS accounting records have resulted in disclaimers of opinion each year. This means that we were unable to determine whether the amounts reported by IRS in its financial statements were right or wrong. Financial reporting at this level and auditable financial statements, as required by the CFO Act, are fundamental tenets of effective financial management. Our disclaimer of opinion means that you do not know whether IRS correctly reported the amount of tax it collected in total, how much money IRS has collected by type of tax and on accounts receivables, the cost of its operations including tax systems modernization (TSM), or any other meaningful measure of IRS' financial performance. In essence, poor accounting and financial reporting, especially when combined with the absence of an audit, obscures facts. As a result, users of information reported or taken from the underlying accounting systems, risk making errant decisions--whether for budget purposes or operationally--because they relied on questionable information in making decisions. Four of the more significant reasons IRS needs good financial management are to provide for its day to day operations basic accounting that meets the minimal financial management goals of the CFO Act for financial reporting, implement effective internal control procedures--including safeguarding of assets, and ensure IRS' compliance with pertinent laws and regulations--for example, the Anti-deficiency Act and others related to budget integrity; ensure accurate accounting for and reporting of revenue collections in compliance with the law and help the Congress and others assess the impacts of various tax policies on the budget and to offer accountability to the American taxpayer; better assess and improve IRS' operating performance; and improve its image as a fair tax collector that holds itself to the same or higher standards than it applies to the taxpaying public. Over the 4 years that we have performed financial statement audits at IRS, IRS has moved from an agency that did not and could not reconcile its fund accounts (Fund Balance With Treasury), akin to a taxpayer's bank account, to an agency that now attempts to reconcile its accounts regularly even though some unresolved amounts still exist and an agency that could not support the propriety of amounts recorded in its accounting records or that they were recorded in the right accounting period to an agency that has developed and is implementing a strategy that if properly carried out, should be able to accomplish both. If IRS does not achieve and sustain the capacity to perform day to day accounting on its over $7 billion in annual appropriations and the more than $1.4 trillion in taxes it collects, it will not be able to credibly report on the cost and effectiveness of its operations. Furthermore, like any other business or individual that may have similar problems, IRS can assert that no money is missing and that it is in compliance with the Anti-Deficiency Act and other laws; however, if these problems persist, it cannot and does not know if its assertion is true. The following example shows the implications of poor accounting and financial reporting for IRS' day to day operations. In recent years, IRS has reported the costs of TSM along with projected future costs. However, IRS does not know what its TSM costs have been in total or by specific project. Its efforts to achieve cost accounting for TSM obscure the nature and amount of actual costs of TSM projects through grouping large amounts of costs into generic codes as opposed to tracking these costs on a project specific basis. In addition, no separate records were maintained on TSM costs incurred before 1994. Also, IRS cannot readily link costs projected to be incurred in IRS' investment strategy with costs that are recorded in its accounting records. To do so would require substantial analysis that would likely require using estimating techniques for which results could not be validated. Thus, no credible records exist to make cost-benefit analysis of the overall project or to assess each project segment as it moves through various stages. In addition to day to day accounting and reporting, IRS' ability to accurately account for and report tax collections is critical to the Congress, the federal government as a whole, and the American taxpayer. IRS' inability to account for tax collections in total and by type of tax collected reduces the Congress' and others' ability to (1) fully assess the effectiveness of tax policies to achieve their intended goals, (2) know the amount the general revenue fund is subsidizing the Social Security Trust Fund, (3) determine whether excise taxes are being collected and distributed in accordance with legislation, and (4) assess IRS' collection efforts on unpaid taxes. While IRS is making interim efforts to increase its capability to account for tax collections, longer term solutions will be needed before IRS will be able to provide this information in an accurate and timely manner. The following example shows the implications of poor accounting and reporting for tax collections. In recent years, IRS has reported collections against accounts receivables of about $25 billion annually. However, IRS cannot reliably report cash collections on accounts receivable, and the amounts reported are estimates. IRS' financial management system does not include a detailed record of debtors who owe taxes (a subsidiary accounts receivable record) that tracks these accounts and their related activity from one reporting period to the next. As a result, IRS has to employ sampling techniques to project estimated collections on accounts receivable. The lack of a detailed subsidiary record also severely hampers the ability to readily and reliably assess the performance of IRS' various collection efforts because reliable information on accounts receivable activity from one period to the next is not readily available. The ability to account for day to day operations and tax collections accurately is the foundation for any efforts to assess and improve IRS' operational performance. Even though IRS reports that it collects over $1.4 trillion in taxes and processes billions of documents including tax returns, refunds, correspondence, and the manifold other things it does as part of its tax administration mandate, this reporting does not tell you how well it did it or the cost effectiveness of operations. Good financial management would include developing a cost accounting system that accurately tracks the costs of each part of IRS' operations. In addition, the related outcomes from operational improvement efforts, including additional revenue collected and other qualitative performance indicators, would be accounted for and linked to the respective operational costs associated with accomplishing the outcomes. Right now, IRS does not have the capacity to account for its costs and outcomes in a manner consistent with good financial management. The following example shows the implications of not having good financial management accounting and reporting in place. IRS reported, as part of its compliance initiative budget requests, that it would achieve certain levels of return in collecting unpaid taxes with the additional funding. These requests typically showed past performance from compliance initiatives and projected future collections expected from the proposed compliance initiative. They also typically showed that a substantial return on investment had been and would be achieved from compliance initiatives. IRS' financial management systems, however, cannot reliably provide information that links cash collected on tax accounts with its respective programs used to collect unpaid taxes and the program's related costs, including those supported by its compliance initiatives. As a result, the information provided as IRS' performance from compliance initiatives was prepared using estimates, selective analysis of information, and unvalidated criteria. We found that the reported incremental collections and the associated costs were not verifiable. IRS currently has a system under development (called the Enforcement Revenue Information System) that will attempt to track and correlate this information. Finally, IRS needs to have good financial management to show that it does not have a double standard for financial management--one that taxpayers must adhere to and another that applies to itself. If IRS had to prepare its own tax return, with the many problems we have found during our financial statement audits of IRS, it would not pass the scrutiny of an IRS audit. Many of its expenses would be disallowed because they were unsupported or reported in the wrong year, and the amounts and nature of its revenue would be questioned. As much as any federal agency and more than most, IRS routinely interacts with taxpayers. Taxpayers' views of the government and on the fairness of tax administration are shaped in a big way by their perception of IRS. For IRS to demand the kind of recordkeeping it requires for taxpayers to support tax returns (a form of financial reporting) and to not be able to sustain a comparable or better set of records to support its own financial reporting does not bode well. These concerns and views have been conveyed in many published articles on the state of financial management at IRS, and these articles clearly show taxpayers' expectation for IRS to be able to meet the standards that it expects others to meet. The financial management problems I have discussed today are but a few of the challenges that IRS must confront. These, though, must be overcome for IRS to be able to credibly report the results from its operations whether through annually required financial statements or ad hoc reports provided to the Congress and other users on the various aspects of its operations. It is crucial that IRS maintain its capacity to process the billions of documents and handle the multitude of other tax administration challenges that it is responsible for managing. However, as evidenced in the examples I have highlighted for you today, it is comparably crucial that IRS address its many financial management problems so that decisionmakers can make "fact based," informed decisions on IRS' staffing levels, tax policies, and other matters based on the verifiable reported results from IRS' operations. We issued disclaimers of opinion on each of our four annual audits of IRS' financial statements (from fiscal year 1992 through fiscal year 1995). Notable improvement has occurred across IRS as a result of these audits, which were required by the CFO Act as expanded by the Government Management Reform Act. These two pieces of legislation, and particularly their requirement for audited financial statements, have been instrumental in bringing IRS' top-level management focus to financial management problems that had been neglected for years. Because of our audit efforts, IRS' management, for the first time, has a fuller understanding of the depth and breadth of the financial management problems that beset the agency and has, as a result, begun taking actions to address the problems. The reasons for our disclaimers of opinion were IRS' inability to provide support for its reported over $1.4 trillion in collected revenues in total and by type of tax (i.e., income, social security, etc.), accurately identify and provide support for its reported tax receivables that were estimated in the tens of billions, reconcile its Fund Balance With Treasury accounts (these accounts represent IRS' remaining approved budgetary spending authority--the federal government equivalent of bank accounts), and accurately account for and provide support for significant amounts of its almost $3 billion annually in nonpayroll expenses to establish that these expenses were appropriately included in the respective years' reported expenses. IRS has made progress on addressing some of these problems, and we have worked closely with it to identify interim solutions to address the problems that can be fixed quicker and partially address the problems that will require longer term solutions. IRS has developed an action plan, with specific timetables and deliverables, to attempt to address the reasons for our audit disclaimer. To date, IRS reported it has identified substantially all of the reconciling items for its Fund Balance With Treasury accounts, except for certain amounts that IRS has deemed not to be cost-beneficial to research further because they were thought to be insignificant or that IRS had exhausted all avenues available to resolve the difference and could not; designed an interim solution, until longer term solutions can be identified and implemented, to capture the detailed support for revenue and accounts receivable; and begun designing a short-term and a long-term strategy to fix the problems that contribute to its nonpayroll expenses being unsupported or reported in the wrong period. We are currently reviewing progress in each of these areas as part of our audit of IRS' fiscal year 1996 financial statements and will report the status of these efforts as part of our report that will be issued at the completion of this audit. In closing, I want to reiterate that preparing auditable financial statements and obtaining an unqualified audit opinion on those financial statements are basic to good financial management and one indicator of the condition of financial management of an entity. While IRS has made progress, the catalyst for fixing the problems will be its senior management's continued commitment as well as sustained effective congressional oversight. IRS has recognized its problems and essentially knows what needs to be done. It is now a matter of carrying out improvement plans. This concludes my statement, and I will be glad to answer any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed the Internal Revenue Service's (IRS) financial management challenges. GAO noted that: (1) GAO efforts to audit IRS accounting records have resulted in a disclaimer of opinions each year; (2) IRS' inability to account for tax collections in total and by type of tax collected reduces the Congress' and others' ability to fully assess the effectiveness of tax policies to achieve their intended goals, know the amount the general revenue fund is subsidizing the Social Security Trust Fund, determine whether excise taxes are being collected and distributed in accordance with legislation, and assess IRS' collection efforts on unpaid taxes; (3) while IRS is making interim efforts to increase its capability to account for tax collections, longer term solutions will be needed before IRS will be able to provide this information in an accurate and timely manner; (4) right now, IRS does not have the capacity to account for its costs and outcomes in a manner consistent with good financial management; (5) IRS needs to have good financial management to show that is does not have a double standard for financial management--one that taxpayers must adhere to and another that applies to itself; (6) IRS has made progress on addressing some of these problems, and GAO has worked closely with it to identify interim solutions to address the problems that can be fixed quicker and partially address the problems that will require longer term solutions; and (7) IRS has developed an action plan, with specific timetables and deliverables, to attempt to address the reasons for GAO's audit disclaimer.

Under the U. S. Housing Act of 1937, as amended, Congress created the federal public housing program to provide decent and safe rental housing for eligible low-income families, the elderly, and persons with disabilities. HUD administers the program with PHAs, typically local agencies created under state law that manage housing for low-income residents at rents they can afford. Agencies that participate in the program contract with HUD to provide housing to eligible low-income households and, in return, receive financial assistance from HUD. Public housing comes in all sizes and types, from scattered single-family houses to high-rise apartments. In 1992, Congress established the HOPE VI program, which is administered by HUD. The program provides grants to PHAs to rehabilitate or rebuild severely distressed public housing and improve the lives of public housing residents through supportive services. In 2003, Congress expanded the statutory definition of "severely distressed public housing" for the purpose of HOPE VI to include indicators of social distress, such as a lack of supportive services and economic opportunities. Between fiscal years 1993 and 2005, Congress appropriated $6.8 billion for the HOPE VI program. In addition to managing public housing, some PHAs administer other HUD programs that provide housing assistance for low-income households. Under the Housing Choice Voucher Program, about 2,500 participating PHAs enter into contracts with HUD and receive funds to provide rent subsidies to the owners of private housing on behalf of assisted low- income households. In addition, PHAs assist in administering HUD's project-based rental assistance programs, through which HUD pays subsidies to private owners of multifamily housing that help make this housing affordable for lower income households. Traditionally, HUD has provided funding to local PHAs to manage the public housing system, as well as for the revitalization of severely distressed public housing. HUD's role has also included providing PHAs with guidance and overseeing their performance, including providing technical assistance. HUD provides funding to housing agencies through two formula grant programs: the Operating Fund and the Capital Fund. The Operating Fund provides annual subsidies to housing agencies to make up the difference between the amount they collect in rent and the cost of operating the units. The Capital Fund provides grants to PHAs for the major repair and modernization of the units. In addition, HUD has provided selected agencies with grants under the HOPE VI program to help housing agencies replace and revitalize severely distressed public housing with physical and community and supportive service improvements. As shown in table 1, this HUD funding has totaled about $31.5 billion over the past 5 fiscal years. In exchange for capital and operating funding, PHAs enter into annual contributions contracts. According to this written contract, HUD agrees to make payments to the PHA and the PHA agrees to administer the housing program in accordance with HUD regulations and requirements. HUD provides guidance to PHAs to supplement its regulations, and explicitly convey required program policies and procedures. Some of our past work has shown a need for HUD to improve the clarity and/or timeliness of its guidance to housing authorities. For example: For our 2002 review of HUD's and housing agencies' experiences in preparing annual plans required by the Quality Housing and Work Responsibility Act of 1998 (QHWRA), we surveyed HUD field offices and interviewed eight PHAs to gain insight into their experiences. Respondents reported that HUD-provided guidance on the planning process was less than adequate. One respondent reported that headquarters guidance was delayed in getting to field locations, while another reported that changing rules made it difficult to know what the PHAs should do and what the field locations should look for in reviewing plans. However, some PHAs balanced their comments with positive remarks; for example, one large agency told us that HUD had improved the template for fiscal year 2001. HUD provided a desk guide to assist housing agencies and field locations in fiscal year 2001, in an effort to improve the planning process. In surveying the directors of PHAs on their experiences with a number of QHWRA housing reforms, we again found late and unclear guidance from HUD. Public housing directors reported having to spend more administrative time in implementing reforms, partially due to a lack of clear guidance from HUD. In reviewing HUD's management of the HOPE VI program, we found that the department's guidance on the role of field offices was unclear, and, as a result, some field offices did not seem to understand their role in HOPE VI oversight. For example, some officials stated that they had not performed annual reviews of HOPE VI projects because they did not think they had the authority to monitor grants. Based upon these findings, we recommended that the Secretary of HUD clarify the role of HUD field offices in HOPE VI oversight and ensure that the offices conduct required annual reviews of HOPE VI grants. HUD agreed with this recommendation and published new guidance in March 2004 that clarified the role of the HUD field offices and changed the annual review requirements. HUD is responsible for overseeing PHAs' overall performance and for helping agencies improve their performance (see fig. 1). In 1997, as a part of its 2020 Management Reform Plan, HUD instituted a new approach for evaluating PHAs' performance. The approach includes "scoring" each of several categories of performance, assigning each housing agency to a risk category, designating agencies as "troubled" if their scores are substandard and, in some cases, appointing receivers to actively manage the agencies. Also as a part of its oversight, HUD identifies housing agencies that need technical assistance. HUD's technical assistance involves activities such as training housing agency staff on how to use HUD systems or comply with reporting requirements. HUD uses the Public Housing Assessment System (PHAS) to evaluate public housing agencies' performance, while its Public and Indian Housing Information Center (PIC) risk assessment uses the PHAS score and information about funding and compliance issues to classify housing authorities as high, moderate, or low risk. PHAS is designed to evaluate housing agencies' overall performance in managing rental units, including the physical condition of units, soundness of agencies' financial operations, the effectiveness of their management operations, and the level of resident satisfaction with the services and living conditions. HUD designed the PIC system to facilitate a Web-based exchange of data between PHAs and local HUD offices. PIC contains a detailed inventory of public housing units and information about them, including the number of developments and units, age of the development, and the extent to which apartment units are accessible for persons with disabilities. The system also tracks tenant (household) information, such as age, disability status, and income. Our past work has identified opportunities for HUD to improve its oversight of housing agencies and it provision of technical assistance. For example: In 2002, we reported that the results of the PHAS and PIC systems were inconsistent. Specifically, in comparing information in the two systems, we found that 12 of the agencies that HUD--using PHAS scores--had determined were "troubled" were classified in the PIC system as "low" risk. Accordingly, we recommended that HUD classify all troubled housing authorities as high risk to better ensure that they receive sufficient monitoring. HUD agreed with our recommendation and incorporated it into its risk-assessment system. In preparing a 2002 report on HUD's human capital management, directors of several HUD field offices told us that they lacked the staff to provide the level of oversight and technical assistance that the housing authorities need. In light of this and other findings, we recommended that the Secretary of HUD develop a comprehensive strategic workforce plan. HUD subsequently hired a contractor to develop a Strategic Workforce Plan, which it completed in 2004. The plan includes analysis of current and future demand for staff and an analysis of the skills and competencies needed to accomplish tasks. In our October 2003 report, we noted that small agencies are more likely to require assistance with the day-to-day management of HUD programs and that HUD does not maintain centralized, detailed information on the types of assistance PHAs require or request from them. HUD reported that it was developing a system that would allow it to collect such information in the future. In 2005, we reported on HUD's efforts to assess PHAs' compliance with its policies for determining rent subsidies. We found that HUD had undertaken special reviews that, while useful, had suffered from a lack of clear policies and procedures and that the training and guidance HUD provided to PHAs on its policies for determining rent subsidies were not consistently adequate or timely. We recommended that the HUD Secretary (1) make regular monitoring of PHAs' compliance with HUD's policies for determining rent subsidies a permanent part of HUD's oversight activities and (2) collect complete and consistent information from these monitoring efforts and use it to help focus corrective actions where needed. HUD concurred with the recommendations but has not yet fully implemented them. HUD can take enforcement actions against PHAs that it identifies, through PHAS, as being "troubled." For such agencies, HUD assigns a recovery team and develops a plan to remedy the problems. Initially, HUD may offer technical assistance and training, but it may also sanction an authority; for example, by withholding funding. Ultimately, HUD may place a PHA under an administrative receivership, in which a receiver replaces the top management of the agency. Additionally, some PHAs may have receivers appointed by judges (these are known as judicial receivers). In February 2003, we reported that under administrative or judicial receivers, nearly all of the 15 agencies under receivership showed improvement during their years of receivership, according to changes in HUD's assessed scores and/or other evidence. The four PHAs under judicial receiverships generally had continued to demonstrate strong performance. While PHAs under administrative receiverships had also made improvements, some continued to demonstrate a significant problem with housing units being in very poor physical condition. Finally, HUD's headquarters and field offices are responsible for overseeing PHAs' use of HOPE VI grants. In 2003, we reported that HUD's oversight of HOPE VI grants had been inconsistent due to staffing limitations, confusion about the role of field offices, and a lack of formal enforcement policies. Based upon these findings, we recommended that HUD clarify the role of its field offices in HOPE VI oversight; ensure that the offices conduct required annual reviews of HOPE VI grants; and develop a formal, written enforcement policy to hold PHAs accountable for the status of their grants. HUD agreed with these recommendations and clarified the role of HUD field offices, changed the annual review requirements, and developed an enforcement policy, which it shared with grantees in December 2003. Generally, PHAs are responsible for administering the public housing program in accordance with HUD regulations and requirements. Specifically, PHAs must provide decent, safe, and sanitary housing to their residents, manage their financial resources, meet HUD's standards for management operations, and address residents' satisfaction. Among other things, PHAs are responsible for ensuring that tenants are eligible for public housing and that tenant subsidies are calculated properly. PHAs are also required to develop both short- and long-term plans outlining their goals and strategies. PHAs that receive HOPE VI grants are subject to additional requirements associated with those grants; for example, the agencies must provide residents of HOPE VI sites with certain types of supportive services. During the 1990s, PHAs gained broader latitude from HUD and the Congress to establish their own policies in areas such as selecting tenants and setting rent levels. The Quality Housing and Work Responsibility Act of 1998 (QHWRA), which extensively amended the U.S. Housing Act of 1937, allowed PHAs to exercise still more discretion over rents and admissions. For example, QHWRA increased managerial flexibility by, among other things, making HUD-provided capital and operating funds more fungible, allowing housing authorities to sell some units to residents, and developing mixed-income housing units in order to bring more working and upwardly mobile families into public housing. QHWRA also established new requirements for housing agencies, including, for example, mandatory reporting requirements in the form of a 5-year plan and annual reporting plans. Five-year plans include long-range goals, while annual plans detail the agency's objectives and strategies for achieving these goals, as well as the agency's policies and procedures. For our May 2002 report, we examined PHAs' experiences in preparing the first of their required plans. We visited eight PHAs in the course of this work, and found that their views differed on the usefulness of the planning process and the level of resources required to prepare the plans, among other things. In June 2003, in response to concerns that some QHWRA reforms were placing an undue burden on small PHAs, HUD issued regulations allowing small PHAs to submit streamlined annual plans. We have not revisited this issue, and therefore cannot say how HUD or the PHAs view the usefulness of the plans today. QHWRA also required PHAs to implement a number of additional reforms that affect the Public Housing Program. For our October 2003 report, we surveyed PHAs to find out their views on 18 key changes brought about by QHWRA and to see if views differed among large, medium, and small agencies. Some agencies in each size category viewed both the 5-year plan and the annual plan requirements as helpful to them in managing and operating their programs, although proportionately fewer small agencies had this view. We also found that agencies of all sizes reported spending more time on HUD-subsidized programs after QHWRA than before the reforms were enacted, in part because of increased reporting requirements, difficulties in submitting data to HUD, and lack of resources for hiring and training. PHAs that receive HOPE VI grants to revitalize public housing must obtain HUD's approval for their revitalization plans and must report project status information to HUD. The agencies are also required to offer community and supportive services--such as child care, transportation, job training, job placement and retention services, and parenting classes-- to all original residents of public housing affected by HOPE VI projects, regardless of their intention to return to the revitalized site. In our November 2002 report on HOPE VI financing, we found that PHAs that had been awarded grants in fiscal years 1993 to 2001 had budgeted a total of about $714 million for community and supportive services. Of this amount, about 59 percent were HOPE VI funds while 41 percent was leveraged from other resources. In our November 2003 report on HOPE VI impacts, we reported that limited HUD data on 165 HOPE VI grantees awarded through fiscal year 2001, and additional information, indicated that supportive services had achieved or contributed to positive outcomes. While we have not reviewed the extent to which capital markets can be used with the public housing system, our reviews of the HOPE VI program have shown that some PHAs use HOPE VI revitalization grants to leverage additional funds from a variety of other public and private sources. HUD encourages PHAs to use their HOPE VI grants to leverage funding from other sources to increase the number of affordable housing units developed at HOPE VI sites. Public funding can come from other federal, state, or local sources. Private sources can include mortgage financing and financial or in-kind contributions from nonprofit organizations. In our November 2002 report on HOPE VI project financing, we found that financial leveraging of projects had shown a general increase over time, and that PHAs expected to leverage--for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001--an additional $1.85 in funds from other sources. Our report also noted that HUD had not reported annual leveraging and cost information about the HOPE VI program to the Congress, as it had been required to do since 1998. Consequently, we recommended that HUD provide annual reports on the program, including information on the amounts and sources of funding used at HOPE VI sites, to Congress. In response to this recommendation, in December 2002, HUD began issuing annual reports that include funding information. We also found in the November 2002 report that housing agencies with HOPE VI revitalization grants expected to leverage $295 million in additional funds for community and supportive services. In our most recent report concerning public housing (December 2005), we found that PHAs have used HOPE VI revitalization grants to leverage additional funds from a variety of sources, including private loans. In particular, we noted an example of a renovation and the colocation of supportive services that were made possible through coordination of efforts and use of mixed financing--the Allegheny County Housing Authority's revitalization of the Homestead Apartments outside of Pittsburgh, Pennsylvania. The housing agency built space on-site for two nonprofit elder-care service providers in addition to remodeling the buildings. Approximately 67 percent of the funding for the Homestead renovation was based on Low-Income Housing Tax Credits. Under this program, states are authorized to allocate federal tax credits as an incentive to the private sector to develop rental housing for low-income households. While this represents a way for private capital to be used in conjunction with public housing projects, we noted in our November 2002 report that such funding does entail a federal cost (in the form of taxes foregone). PHAs may utilize community service organizations to provide supportive services to public housing residents. Our recent work has focused on the services that PHAs can provide to elderly and non-elderly persons with disabilities. In a February 2005 report on housing programs that offer assistance for the elderly, we identified programs that public housing agencies can use to assist elderly public housing residents. For example, through the Resident Opportunities and Self Sufficiency (ROSS) grant program, HUD awards grants to PHAs for the purpose of linking residents with supportive services. Also, HUD's Service Coordinator Program provides funding for PHA managers of public housing designated for the elderly or persons with disabilities to hire coordinators to assist residents in obtaining supportive services from community agencies; and its Congregate Housing Services Program provides grants for the delivery of meals and nonmedical supportive services to residents of public and multifamily housing who are elderly or have disabilities. For our December 2005 report on public housing for the elderly and persons with disabilities, we surveyed the directors of 46 PHAs that manage public housing developments that we identified as both severely distressed and primarily occupied by the elderly and persons with disabilities. This work identified examples of partnerships between PHAs and local organizations such as community-based nonprofits and churches to provide supportive services for the elderly and non-elderly persons with disabilities. In some cases, the local agencies paid for the services, while in others the housing agencies used federal grants. For example: A building manager for one development that we visited said the development partnered with a nearby church, which provided a van to take residents shopping once a week. Local churches also provided food assistance to elderly residents and residents with disabilities who were not able to leave their apartments. At another housing development, a community-based organization provided lunches on a daily basis to residents and assorted grocery items such as bread, fruit, and cereal on a weekly basis. The aforementioned Homestead Apartments--a high-rise, primarily elderly occupied public housing development--was revitalized to provide enhanced supportive services to elderly residents, in particular frail elderly residents. To do so, the housing agency partnered with several non- HUD entities to improve services for the elderly and colocate an assisted living type of facility at the development. To help the most frail elderly residents, the housing agency partnered with a nonprofit organization, which offers complete nursing services, meals, and physical therapy to Homestead residents who are enrolled in the program. For most participants, these comprehensive services permitted them to continue living at home. In a partnership in Seattle, Washington, the housing agency partnered with a community-based organization to provide an on-site community center for the elderly, where residents had access to meals, social activities, and assistance with filling prescriptions. Residents at this development also had access to an on-site health clinic. In summary, Mr. Chairman, over the past few years we have identified several ways for HUD to improve its administration of the public housing program. Our work has also identified challenges faced by the local public housing agencies that play such an essential program delivery role, not only those associated with implementing the reforms provided under QHWRA but also such day-to-day matters as correctly determining tenants' incomes and rents. We look forward to working with the Subcommittee as it considers the future of the public housing program. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678. Individuals making key contributions to this testimony included Isidro Gomez, Lisa Moore, David Pittman, Paul Schmidt, and Julie Trinder. Public Housing: Distressed Conditions in Developments for the Elderly and Persons with Disabilities and Strategies Used for Improvement. GAO-06-163. Washington, D.C.: December 9, 2005. Project-Based Rental Assistance: HUD Should Streamline Its Processes to Ensure Timely Housing Assistance Payments. GAO-06-57. Washington, D.C.: November 15, 2005. HUD Rental Assistance: Progress and Challenges in Measuring and Reducing Improper Rent Subsidies. GAO-05-224. Washington, D.C.: February 18, 2005. Elderly Housing: Federal Housing Programs That Offer Assistance for the Elderly. GAO-05-174. Washington, D.C.: February 14, 2005. Public Housing: HOPE VI Resident Issues and Changes in Neighborhoods Surrounding Grant Sites. GAO-04-109. Washington, D.C.: November 21, 2003. Public Housing: Small and Larger Agencies Have Similar Views on Many Recent Housing Reforms. GAO-04-19. Washington, D.C.: October 30, 2003. Public Housing: HUD's Oversight of HOPE VI Sites Needs to Be More Consistent. GAO-03-555. Washington, D.C.: May 30, 2003. Public Housing: Information on Receiverships at Public Housing Authorities. GAO-03-363. Washington, D.C.: February 14, 2003. Major Management Challenges and Program Risks: Department of Housing and Urban Development. GAO-03-103. Washington, D.C.: January 1, 2003. Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not Met Annual Reporting Requirement. GAO-03-91. Washington, D.C.: November 15, 2002. HUD Human Capital Management: Comprehensive Strategic Workforce Planning Needed. GAO-02-839. Washington, D.C.: July 24, 2002. Public Housing: HUD and Public Housing Agencies' Experiences with Fiscal Year 2000 Plan Requirements. GAO-02-572. Washington, D.C.: May 31, 2002. Public Housing: New Assessment System Holds Potential for Evaluating Performance. GAO-02-282. Washington, D.C.: March 15, 2002. 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.

Under the Public Housing Program, the Department of Housing and Urban Development (HUD) and local public housing agencies (PHA) provide housing for low-income residents at rents they can afford. Today, over 3,000 PHAs administer approximately 1.2 million public housing units throughout the nation. First authorized in 1937, the program has undergone changes over the decades. The Quality Housing and Work Responsibility Act of 1998 increased managerial flexibility but also established new requirements for housing agencies. Some observers have questioned the program's ability to provide quality, affordable housing to the nation's neediest families. This testimony, which is based upon a number of reports that GAO has issued related to public housing since 2002, discusses the roles of (1) HUD (2) public housing agencies, (3) capital markets, and (4) community services organizations in the public housing system. Traditionally, HUD's role has been to provide PHAs with funding, guidance, and oversight. HUD provides both capital and operating funding. In addition, HUD has provided selected agencies with grants under the HOPE VI program to demolish and revitalize severely distressed public housing and provide community and supportive services. HUD provides guidance to PHAs to supplement its regulations and explicitly convey required program policies and procedures. Based on past work, GAO has made recommendations to HUD to improve the clarity and timeliness of its guidance to PHAs and to improve its oversight of the program. PHAs are responsible for managing public housing in accordance with HUD regulations and requirements. They are also required to develop and submit plans detailing the agency's goals and strategies for reaching these goals. Further, PHAs that receive HOPE VI grants are required to provide residents with supportive services. GAO's work has identified challenges that the agencies face in carrying out their responsibilities, including difficulty with HUD's data systems and lack of resources for hiring and training staff. GAO has not reviewed the extent to which capital markets can play a role in the public housing system, but its examination of the HOPE VI program and other work has identified examples of leveraging federal funds with funds from a variety of other public and private sources. HUD encourages public housing agencies to use their HOPE VI grants to leverage funding from other sources to increase the number of affordable housing units developed at project sites. The examples GAO has found include private funding for both capital projects and the provision of supportive services. PHAs may utilize community service organizations to assist public housing residents. Work GAO has done on federal housing programs that benefit the elderly, as well as recent work focused on public housing for the elderly and residents with disabilities, identified examples of supportive services being offered or provided to public housing residents. Such services may be provided through HUD grants as well as through partnerships between public housing agencies and community-based nonprofit organizations.

The TacSat experiments and efforts to develop small, low-cost launch vehicles are part of a larger DOD initiative: Operationally Responsive Space (ORS). In general, ORS was created by DOD's Office of Force Transformation (OFT) in response to the Secretary of Defense's instruction to create a new business model for developing and employing space systems. Under ORS, DOD aims to rapidly deliver to the warfighter low-cost, short-term joint tactical capabilities defined by field commanders--capabilities that would complement and augment national space capabilities, not replace them. ORS would also serve as a test bed for the larger space program by providing a clear path for science and technology investments, enhancing institutional and individual knowledge, and providing increased access to space for testing critical research and development payloads. ORS is a considerable departure from the approach DOD has used over the past two decades to acquire the larger space systems that currently dominate its space portfolio. These global multipurpose systems, which have been designed for longer life and increased reliability, require years to develop and a significant investment of resources. The slow generational turnover--currently 15 to 25 years-- does not allow for a planned rate of replacement for information technology hardware and software. In addition, the data captured through DOD's larger space systems generally go through many levels of analysis before being relayed to the warfighter in theater. The TacSat experiments aim to quickly provide the warfighter with a capability that meets an identified need within available resources--time, funding, and technology. Limiting the TacSats' scope allows DOD to trade off reliability and performance for speed, responsiveness, convenience, and customization. Once each TacSat satellite is launched, DOD plans to test its level of utility to the warfighter in theater. If military utility is established, according to a DOD official, DOD will assess the acquisition plan required to procure and launch numerous TacSats--forming constellations--to provide wider coverage over a specific theater. As a result, each satellite's capability does not need to be as complex as that of DOD's larger satellites and does not carry with it the heightened consequence of failure as if each satellite alone were providing total coverage. DOD currently has four TacSat experiments in different stages of development (see figure 1). According to Naval Research Laboratory officials, TacSat 2's delay is primarily the result of overestimating the maturity of its main payload--an off-the-shelf imager that was being refurbished for space use. Officials also noted that the contracting process, which took longer than expected, used multiple and varied contracts awarded under standard federal and defense acquisition regulations. DOD is also using the TacSat experiments as a means for developing "bus" standards--the platform that provides power, attitude, temperature control, and other support to the satellite in space. Currently, DOD's satellite buses are custom-made for each space system. According to DOD officials, establishing bus standards with modular or common components would facilitate building satellites--both small and large--more quickly and at a lower cost. To achieve one of the TacSat experiments' goals--getting new capabilities to the warfighter sooner--DOD must secure a small, low-cost launch vehicle that is available on demand. Instead of waiting months or years to carry out a launch, DOD is looking to small launch vehicles that could be launched in days, if not hours, and whose cost would better match the small budgets of experiments. A 2003 Air Force study determined that DOD's current class of launchers--the Evolved Expendable Launch Vehicle--would not be able to satisfy these requirements. DOD delivered the TacSat 1 satellite within cost and schedule targets. To develop the first TacSat, DOD effectively managed requirements, employed mature technologies, and built the satellite in the science and technology environment, all under the guidance of a leader who provided a clear vision and prompt funding for the project. DOD is also moving forward with developing additional TacSats; bus standards; and a small, low-cost launch vehicle available on demand. In May 2004, 12 months after TacSat 1 development began, the Naval Research Laboratory delivered the satellite to OFT at a cost of about $9.3 million, thereby meeting its targets to develop the satellite within 1 year and an estimated budget of $8.5 million to $10 million. Once TacSat 1 is placed into orbit, it is expected to provide capabilities that will allow a tactical commander to directly task the satellite and receive data over DOD's Secure Internet Protocol Router--a need identified by the warfighter. Before TacSat 1's development began, OFT and the Naval Research Laboratory worked together to reach consensus on known warfighter requirements that would match the cost, schedule, and performance objectives for the satellite. Our past work has found that when requirements are matched with resources, goals can be met within estimated schedule and budget. To inform the requirements selection process, the Naval Research Laboratory used an informal systems engineering approach to assess relevant technologies and determine which could meet TacSat 1 mission objectives within budget and schedule. Once TacSat 1's requirements were set, OFT did not change them. To meet its mission objectives, OFT sought a capability that would be "good enough" for the warfighter, given available resources--rather than attempting to provide a significant leap in capability. OFT and the Naval Research Laboratory agreed to limit TacSat 1's operational life span to 1 year, which allowed the laboratory to build the satellite with lower radiation protection levels, less fuel capacity, and fewer backups than would have been necessary for a satellite designed to last 6 years or longer. The use of existing technologies for the satellite and the bus also helped to keep TacSat 1 on schedule and within cost. For example, hardware from unmanned aerial vehicles and other aircraft were modified for space flight to protect them in the space environment, and bus components were purchased from a satellite communications company. Using items on hand at the Naval Research Laboratory--such as the space ground link system transponder and select bus electronics--resulted in a savings of about $5 million. Using and modifying existing technologies provided the laboratory better knowledge about the systems than if it had tried to develop the technologies from scratch. According to a laboratory official, the TacSat 1 experiment also achieved efficiencies by using the same software to test the satellite in the laboratory and fly the satellite. Developing the TacSat within the science and technology environment also helped the experiment meet its goals. As we have stressed in our reports on systems development, the science and technology environment is more forgiving and less costly than the acquisition environment. For example, when engineers encountered a blown electronics part during TacSat 1's full system testing, they were able to dismantle the satellite, identify the source of the problem, replace the damaged part, and rebuild the satellite--all within 2 weeks of the initial failure. According to the laboratory official, this problem would have taken months to repair in a major space acquisition program simply because there would have been stricter quality control measures, more people involved, and thus more sign-offs required at each step. Moreover, the contracting mechanism in place at the Naval Research Laboratory allows the laboratory to respond quickly to DOD requests. Specifically, the center used several existing engineering and technical support contracts that are competed, generally, at 5-year intervals, rather than competing a specific contract for TacSat 1. According to a number of DOD officials, the ultimate success of the TacSat 1 procurement was largely the result of the former OFT director, who provided the original impetus and obtained support for the experiment from high levels within DOD and the Congress; negotiated a customized mission assurance agreement with Air Force leaders to launch TacSat 1 from Vandenberg Air Force Base at a cost that was affordable given the experiment's budget; empowered TacSat 1's project manager at the Naval Research Laboratory to make appropriate trade-off decisions to deliver the satellite on time and within cost; and helped OFT staff develop an efficient work relationship with the Naval Research Laboratory team and provided the laboratory with prompt decisions. DOD is currently working on developing three additional TacSat experiments--along with bus standards--and a low-cost, on-demand launch vehicle. These efforts are generally in the early stages. DOD expects to launch TacSat 2--which began as an Air Force science and technology experiment and was altered to improve upon TacSat 1's capability--in May 2007. TacSat 3, which will experiment with imaging sensors, is in the development phase. TacSat 4, which will experiment with friendly forces tracking and data communication services, is in the design phase. Table 1 shows the development cost and schedule estimates and the target launch date for each satellite. With TacSat 3, the Air Force began to formalize the process for evaluating and selecting potential capabilities for the TacSats, leveraging the experiences from the first two TacSats. The selection process, which currently takes 3 to 4 months, includes a presentation of capability gaps and shortfalls from the combatant commands and each branch of the military, and analyses of the suitability, feasibility, and transferability of the capabilities deemed the highest priority. According to DOD officials, this process allows the science and technology community to obtain early buy-in from the warfighter, thereby increasing the likelihood that requirements will remain stable and the satellite will have military utility. Obtaining warfighter involvement in this way represents a new approach for the TacSat series. See figure 3 for a more complete description of this evolving process. The Air Force has also begun to create plans for procuring TacSats for the warfighter should they prove to have military utility. The Air Force has developed a vision of creating TacSat reserves that could be deployed on demand, plans to establish a program office within its Space and Missile Systems Center, and plans to begin acquiring operational versions of successful TacSat concepts in 2010. DOD is also working to develop bus standards. Establishing bus standards would allow DOD to create a "plug and play" approach to building satellites--similar to the way personal computers are built. The service research labs, under the sponsorship of OFT, and the Space and Missile Systems Center are in the process of developing small bus standards, each using a different approach. The service labs expect to test some standardized components on the TacSat 3 bus, and system standards by prototyping a TacSat 4 bus. The Space and Missile Systems Center is also proposing to develop three standardized bus models for different-weight satellites, one of which may be suitable for a TacSat. The service labs expect to transition bus standards to the Space and Missile Systems Center in fiscal year 2008, at which time the center will select a final version for procurement for future TacSats. Both DOD and private industry are working to develop small, low-cost, on- demand launch vehicles. DOD's Defense Advanced Research Projects Agency (DARPA), along with the Air Force, established FALCON, a joint technology development program to accelerate efforts to develop a launch vehicle that meets these objectives. Through FALCON, DARPA expects to develop a vehicle that can send 1,000 pounds to low-earth orbit for less than $5 million with an operational cost basis of 20 flights per year for 10 years. FALCON is expected to flight-test hypersonic technologies and be capable of launching small satellites such as TacSats. DARPA is currently pursuing two candidates for its FALCON launch vehicle-- AirLaunch, a company that expects to launch rockets that have been ejected from the back of a C-17 cargo airplane, and SpaceX, whose two- stage launch vehicle will include the second U.S.-made rocket booster engine to be developed and flown in more than 25 years, according to the company's founder. DARPA could transition the AirLaunch concept to the Air Force after its demonstration launch in 2008. TacSat 1 is contracted to launch for about $7 million on SpaceX's vehicle. In addition, in 2005, the Air Force began pursuing a hybrid launch vehicle to support tactically and conventionally deployed satellites. The project is known as Affordable Responsive Spacelift, or ARES, and the Air Force has obtained internal approval to build a small-scale demonstrator that would carry satellites about two to five times larger than TacSats. DOD has several challenges to overcome in pursuing a responsive tactical capability for the warfighter. Although DOD and others are working to develop small, low-cost launch vehicles for placing satellites like the TacSats into space, such a vehicle has yet to be developed, and TacSat 1 has waited nearly 2 years since its completion to be launched. Transferring knowledge from the science and technology community to the acquisition community is also a concern, given that these two communities have not collaborated well in the past. Further, it may be difficult to secure funding for future TacSat science and technology projects since DOD allocates the majority of its research and development money to acquisition programs. Finally, there is no departmentwide vision or strategy for implementing this new capability, and the recent loss of leadership makes it uncertain to what extent efforts to develop low-cost, responsive tactical capabilities such as TacSats will continue to be pursued. While DOD has delivered TacSat 1 on time and within budget, the satellite is not yet operational because it lacks a reliable low-cost--under $10 million--small launch vehicle to place it in orbit. TacSat 1's original launch date was in 2004 on the SpaceX's first flight of its low-cost small launch vehicle. However, because of technical difficulties with the launch vehicle and launch facility scheduling conflicts, the TacSat 1 launch has been delayed 2 years and more than $2 million has been added to the total mission costs. SpaceX now plans to use a different small satellite for its first launch. Placing satellites in orbit at a low cost has been a formidable task for DOD for more than two decades because of elusive economies of scale. There is a strong causal relationship between satellite capabilities and launch lift. As capabilities and operational life are added, satellites tend to become heavier, requiring a launch vehicle that can carry a heavier payload. With longer-lived satellites, fewer launches are needed, making per unit launch costs high. In addition, the high cost of a large launch vehicle can only be justified with an expensive, long-living multimission satellite. Ultimately, the high cost of producing a complex satellite has created a low tolerance for risk in launching the satellite and a "one shot to get it right" mentality. Over the past 10 years, DOD and industry have attempted to develop a low-cost launch vehicle. Three launch vehicles in DOD's inventory--the Pegasus, Taurus, and, to some extent, the Minotaur--were designed to provide space users with a low-cost means of quickly launching small payloads into low-earth orbit. DOD expected that relatively high launch rates, from both commercial and government use, would keep costs down, but the market for these launch vehicles did not materialize. For example, since its introduction in 1990, Pegasus has launched only 36 times, an average of 3 launches per year; Taurus has been launched only 7 times since it was introduced in 1994. The average cost of these launch vehicles is $16 million to $33 million. To provide another avenue for launching small satellites, the Air Force has proposed refurbishing part of its fleet of decommissioned intercontinental ballistic missiles--450 of which have been dismantled. The cost of retrofitting the missiles and preparing them for launch is about $18 million to $23 million. However, one Air Force official questioned whether these vehicles are too large for current TacSats. Some new developers in the space industry are cautiously optimistic about the small satellite market. For example, SpaceX signed seven contracts to launch various small satellites, including TacSat 1. Despite this optimism, SpaceX's first launch of its new vehicle has yet to occur--in part because it lacks a suitable launch facility. The launch facilities located in the United States cannot readily accommodate quick-response vehicles. Vandenberg Air Force Base--one of two major launch sites in the United States--has lengthy and detailed scheduling processes and strict safety measures for preparing for and executing a launch, making it difficult to launch a small satellite within a tight time frame and at a low cost. SpaceX's launch of TacSat 1 at Vandenberg was put on hold because of the potential risks it posed to a billion-dollar satellite that was waiting to be launched from a nearby pad. In addition, the Air Force licensed the use of another nearby pad at Vandenberg to a contractor for larger-scale launches. Given the proximity of the launch pads, SpaceX's insurance premium increased 10-fold, from about $50,000 to as much as $500,000, which added $2.3 million to TacSat 1's total mission costs. Because of these delays, SpaceX decided to carry a different experimental satellite on its first launch and to use a launch facility on Kwajalein Atoll, in the Pacific Ocean. The potential effect of changes--such as increased premiums or the need to transport satellites to distant locations--on efforts to keep costs low and deliver capabilities to the warfighter sooner is unknown. The Air Force is beginning to examine ways to better accommodate a new generation of quick-response vehicles. For example, Air Force officials are examining the feasibility of establishing a location on Vandenberg specifically for these vehicles that is separate from the larger launch vehicle pads. Officials are also assessing the suitability of other locations, such as Kodiak Island, for quickly launching small satellites. To achieve a low-cost, on-demand tactical capability for the warfighter, the TacSat experiments will need to be transitioned into the acquisition community. We have previously reported that DOD's acquisition community has been challenged to maximize the amount of knowledge transferred from the science and technology community, and that DOD's science and technology and acquisition organizations need to work more effectively together to achieve desired outcomes. Many of the space programs we reviewed over the past several decades have incurred unanticipated cost and schedule increases because they began without knowing whether technologies could work as intended and invariably found themselves addressing technical problems in a more costly environment. Although DOD recently developed a space science and technology strategy to better ensure that labs' space technology efforts transition to the acquisition community, the acquisition community continues to question whether labs adequately understand acquisition needs in terms of capabilities and time frames. As a result, the acquisition community would rather use its own contractors to maintain control over technology development. According to DOD officials, action has been taken to improve the level of collaboration and coordination on the TacSat experiments. Officials from DOD laboratories involved in TacSats and acquisition communities agree that they are working better together on the experiments than they have on past space efforts. However, in pursuing a low-cost, on-demand tactical capability, the science and technology and acquisition communities have moved forward on somewhat separate tracks, and it is unclear to what extent the work and knowledge gained by the labs will be leveraged when the TacSat experiments are transferred to the acquisition community. For example, the Air Force and Navy labs are working to develop bus standards for the TacSat experiments that are scheduled to be transitioned to the Space and Missile Systems Center, the Air Force's acquisition arm, in fiscal year 2008. Yet, the Space and Missile Systems Center, working with the Aerospace Corporation, has proposed three different options for standardizing the bus. While two of the options are generally larger--and are intended for larger space assets--one of the proposed designs may be suitable for TacSats, although it will likely be costlier than a lab-generated counterpart. In addition, our past work has shown that DOD's space programs--as well as other large DOD programs--have been unable to adequately define requirements and keep them stable, and seldom achieve a match between resources and requirements at the start of the acquisition. One factor that contributes to poorly defined and unstable requirements is that space acquisition programs have historically attempted to achieve full capability in a single step and serve a broad base of users, regardless of the design challenge or the maturity of technologies. Given this track record, some DOD officials expressed concern over Space and Missile Systems Center's ability to adopt the TacSat approach of delivering capabilities that are good enough to meet a warfighter need within cost and schedule constraints. Air Force officials identified the center's organizational culture of risk avoidance and the acquisition process as two of the most significant barriers to developing and deploying space systems quickly. TacSats 1 and 2 have been fully funded within DOD, and TacSats 3 and 4 were recently funded. However, funding is uncertain for TacSats beyond 3 and 4. While the Congress added funding to DOD's 2006 budget to support TacSat efforts, such as developing bus standards, DOD did not request such funding. According to a DOD official, there would not be an effort to develop bus standards if funding had not come from the Congress. Historically, DOD's research and development budget has been heavily weighted to system acquisitions--80 percent of this funding goes to weapon system programs, compared with 20 percent going to science and technology. In addition, science and technology funding is spread over thousands of projects, while funding for weapon system programs is spread over considerably fewer, larger programs. This funding distribution can encourage financing technology development in an acquisition program. However, as we have previously reported, developing technologies within an acquisition program typically leads to cost and schedule increases--further robbing the science and technology community and other acquisition programs of investment dollars. DOD currently has no departmentwide strategy for providing a responsive tactical capability for the warfighter. Without such a strategy, it is unknown whether and to what degree there may be gaps or overlaps in efforts. DOD efforts to develop low-cost satellite and launch capabilities are moving forward under multiple offices at different levels (see table 2). Since these efforts are occurring simultaneously, it is unclear how and if they will be used to inform one another. Moreover, there are different visions for the roles of low-cost, responsive satellites and launch vehicles in DOD's overall space portfolio. For example, one Air Force official stated his office is looking for direction from the Congress on how to move forward rather than from somewhere within DOD. Further, when interviewed, other Air Force officials were not in agreement over how the Air Force's vision for using TacSats fits in with OFT's proposed use of this capability for DOD. In addition to the lack of a DOD-wide strategy, the recent departure of key personnel may have created a gap in leadership, making it uncertain to what extent efforts to develop tactical capabilities such as TacSats will be pursued. As we reported in November 2005, program success hinges on whether leaders can make strategic investment decisions and provide programs with the direction or vision for realizing goals and alternative ways of meeting those goals. One official involved in developing the overall architecture described the pursuit of these capabilities as a "grassroots effort," underscoring the importance of having enthusiastic individuals involved in moving it forward. According to a number of DOD officials, the former OFT director was widely respected within and outside the agency and served as a catalyst for transformation across DOD, and was credited with championing and pursuing innovative concepts that could sustain and broaden military advantage. With the departure of the OFT director and other key advocates of the TacSat concept, service lab officials told us they are concerned about the fate of the TacSat experiments. DOD officials we spoke with acknowledged that there is no agreement on who should ultimately be responsible for deciding the direction of the TacSat experiments and other efforts to develop low-cost responsive tactical capabilities for the warfighter. DOD's experiences developing a tactical capability for the warfighter through TacSats may be used to inform the way major space systems are acquired. Specifically, DOD's process for developing TacSat 1 reflects best practices that larger space system programs could employ to achieve better acquisition outcomes. In addition, some DOD officials believe that these efforts--focusing on delivering capabilities to the warfighter through TacSats and small, low-cost launch vehicles--could lead to long-term benefits, including providing opportunities for major space systems to test new technologies, enhancing the skills of DOD's space workforce, and broadening the space industrial base. Our past work has shown that commercial best practices--such as managing requirements, using mature technologies, and developing technology within the science and technology community--contribute to successful development outcomes. TacSat 1 confirms that applying these practices can enable projects to meet cost and schedule targets. While TacSat 1, as a small experimental satellite with only a few requirements, is much less complex than a major space system, we have reported that commercial best practices are applicable to major space system acquisitions and recommended that DOD implement them for such acquisitions. Despite our recommendation, DOD's major space system acquisitions have yet to consistently apply these best practices. Manage requirements. DOD's major space acquisition programs have typically not achieved a match between requirements and resources (technology, time, and money) at program start. Historically, these programs have attempted to satisfy all requirements in a single step, regardless of the design challenge or the maturity of technologies needed to achieve the full capability. As a result, these programs' requirements have tended to be unstable--that is, requirements were changed, added, or both--which has led to the programs not meeting their performance, cost, and schedule objectives. We have found that when resources and requirements are matched before individual programs are started, programs are more likely to meet their objectives. One way to achieve this is through an evolutionary development approach, that is, pursue incremental increases in capability versus significant leaps. Use mature technologies. DOD's major space acquisition programs typically begin product development before critical technologies are sufficiently matured, forcing the program to mature technologies after product development has begun. Our reviews of DOD and commercial technology development cases indicate that demonstrating a high level of maturity before new technologies are incorporated into product development puts those programs in a better position to succeed. Develop technology within the science and technology environment. DOD's space acquisition programs tend to take on technology development concurrently with product development, increasing the risk that significant problems will be discovered late in development and that more time, money, and effort will be needed to fix these problems. Our reviews have shown that developing technologies separate from product development greatly minimizes this risk. DOD officials and industry representatives we spoke with also noted that some long-term benefits could result from focusing on delivering capabilities to the warfighter quickly. First, small, low-cost, responsive satellites like the TacSats could augment major space systems--provided there is a means to launch the satellites. Because TacSats do not require significant investment and are not critical to multiple missions, the consequence of failure of a TacSat is low. In contrast, major space systems typically are large, complex, and multimission, and take many years to build and deliver. If a major space satellite fails, there are significant cost and schedule consequences. Ultimately, the already long wait time for the warfighter to receive improved capabilities is extended. Second, developing small, low-cost launch vehicles could provide an avenue for testing new technologies in space. According to DOD officials, less than 20 percent of DOD's space research and development payloads make it into space, even while relying heavily on the National Aeronautics and Space Administration's Space Shuttle, which was most recently grounded for 2 1/2 years. We recently reported that DOD's Space Test Program, which is designed to help the science and technology community find opportunities to test in space relatively cost-effectively, has only been able to launch an average of seven experiments annually in the past 4 years. According to industry representatives and DOD officials, efforts to develop a small, low-cost launch vehicle could improve the acquisition process because testing technologies in an operational environment could lower the risk for program managers by providing mature technologies that could be integrated into their acquisition programs. Third, giving space professionals the opportunity to manage small-scale projects like TacSats from start to finish may better prepare them for managing larger, more complex space system acquisitions in the future. According to Navy and Air Force lab officials, managing the TacSat experiments has provided hands-on experience with the experiment from start to finish, unlike the experience provided to program managers of large systems at the Air Force Space and Missile Systems Center. Finally, building low-cost, responsive satellites and launch vehicles could create opportunities for small, innovative companies to compete for DOD contracts and thereby increase competition and broaden the space industrial base. In April 2005, over 50 small companies sent representatives to the Third Responsive Space Conference, an effort hosted by a small private launch company. An industry representative stated that a number of small companies are excited about developing TacSats and small, low-cost launch vehicles and the potential to garner future DOD contracts, but he cautioned that it would be important to maintain a steady flow of work in order to keep staff employed and preserve in-house knowledge. Other industry representatives told Air Force officials that they are receiving mixed signals from the government regarding its commitment to these efforts--there has been a lot of talk about them, but relatively little funding. In addition, another industry representative stated that requirements must be contained; otherwise, costs will increase and eventually squeeze small companies back out of the business. For more than two decades, DOD has invested heavily in space assets to provide the warfighter with critical information needed to successfully conduct military operations. Despite this investment, DOD has been challenged to deliver its major space acquisitions quickly and within estimated costs. TacSat 1--an experimental satellite--has shown that by matching user requirements with available resources, using mature technologies, and developing technologies separate from product development, new tactical capabilities can be delivered quickly and at a low cost. By establishing a capabilities selection process, the TacSat initiative has also helped to ensure that future TacSats will address high- priority warfighter needs. At the same time, the TacSats may demonstrate an alternative approach to delivering capabilities sooner--that is, using an incremental approach to providing capabilities, rather than attempting to achieve the quantum leap in capability often pursued by large space systems, which leads to late deliveries, cost increases, and a high consequence of failure. By not optimizing its investment in TacSat and small launch efforts, DOD may fail to capitalize on a valuable opportunity to improve its delivery of space capabilities. As long as disparate entities within DOD continue moving forward without a coherent vision and sustained leadership for delivering tactical capabilities, DOD will be challenged to integrate these efforts into its broader national security strategy. To help ensure that low-cost tactical capabilities continue to be developed and are delivered to the warfighter quickly, we recommend that the Secretary of Defense assign accountability for developing and implementing a departmentwide strategy for pursuing low-cost, responsive tactical capabilities--both satellite and launch--for the warfighter, and identify corresponding funding. We provided a draft of this report to DOD for review and comment. DOD concurred with our recommendation and provided technical comments, which we incorporated where appropriate. DOD's letter is reprinted as appendix II. We plan to provide copies of this report to the Secretary of Defense, the Secretary of the Air Force, and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available 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. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to the report are Arthur Gallegos, Maricela Cherveny, Jean Harker, Leslie Kaas Pollock, Noah B. Bleicher, and Karen Sloan. To assess the outcomes to date from the TacSat experiments and efforts to develop small, low-cost launch vehicles, we interviewed Department of Defense (DOD) officials in the Office of Force Transformation, Washington, D.C.; Air Force Space Command, Peterson Air Force Base, Colorado; Space and Missile Systems Center, Los Angeles Air Force Base, California; Air Force Research Laboratory, Kirtland Air Force Base, New Mexico, and Wright-Patterson Air Force Base, Ohio; U.S. Naval Research Laboratory, Washington, D.C.; and the Defense Advanced Research Projects Agency, Virginia, via written questions and responses. We also analyzed documents obtained from these officials. In addition, we interviewed industry representatives involved in developing large space systems and small commercial launch vehicles. To understand the challenges to DOD's efforts and to determine whether DOD's experiences with TacSats and small, low-cost launch vehicles could inform major space system acquisitions, we analyzed a wide body of GAO and DOD studies that discuss acquisition problems and associated challenges, including our work on best practices in weapon system development that we have conducted over the past decade. In addition to having discussions with officials at the Office of Force Transformation, the Air Force Space Command, the Space and Missile Systems Center, and the Air Force and Navy research labs, we spoke with officials from the National Security Space Office, Virginia, and the Force Structure, Resources, and Assessment Directorate of the Joint Chiefs of Staff, Washington, D.C. We conducted our review from June 2005 to March 2006 in accordance with generally accepted government auditing standards.

For more than two decades, the Department of Defense (DOD) has invested heavily in space assets to provide the warfighter with mission-critical information. Despite these investments, DOD commanders have reported shortfalls in space capabilities. To provide tactical capabilities to the warfighter sooner, DOD recently began developing TacSats--a series of small satellites intended to be built within a limited time frame and budget--and pursuing options for small, low-cost vehicles for launching small satellites. GAO was asked to (1) examine the outcomes to date of DOD's TacSat and small, low-cost launch vehicle efforts, (2) identify the challenges in pursuing these efforts, and (3) determine whether experiences with these efforts could inform DOD's major space system acquisitions. Through effective management of requirements and technologies and strong leadership, DOD was able to deliver the first TacSat satellite in 12 months and for less than $10 million. The Office of Force Transformation, TacSat 1's sponsor, set requirements early in the satellite's development process and kept them stable. DOD modified existing technologies for use in space, significantly reducing the likelihood of encountering unforeseen problems that could result in costly design changes. The satellite was also built within DOD's science and technology environment, which enabled service laboratory scientists to address problems quickly, inexpensively, and innovatively. The vision and support provided by leadership were also key to achieving the successful delivery of TacSat 1. DOD has also made progress in developing three additional TacSats and is working toward developing a low-cost launch vehicle available on demand. Despite this achievement, DOD faces several challenges in providing tactical capabilities to the warfighter sooner. First, DOD has yet to develop a low-cost, small launch vehicle available to quickly put tactical satellites, including TacSat 1, into orbit. Second, limited collaboration between the science and technology and the acquisition communities--as well as the acquisition community's tendency to expand requirements after program start--could impede efforts to quickly procure tactical capabilities. Securing funding for future TacSat experiments may also prove difficult because they are not part of an acquisition program. Finally, DOD lacks a departmentwide strategy for implementing these efforts, and because key advocates of the experiments have left DOD, it is unclear how well they will be supported in the future. Regardless of these challenges, DOD's experiences with the TacSat experiments thus far could inform its major space system acquisitions. DOD's approach to developing the TacSats--matching requirements to available resources, using proven technologies, and separating technology development from product development--reflects best commercial practices that lead to quicker delivery with less risk. According to some DOD officials, the TacSats and small, low-cost launch vehicles--once they are developed--could also provide an avenue for large space system acquisitions to prove out technologies in the space environment, something DOD has avoided because of the high cost of launching such experiments. These officials also believe that giving space professionals the opportunity to manage small-scale projects like TacSats may better prepare them for managing larger, more complex space system acquisitions. Finally, these officials noted that building small-scale satellite systems and launch vehicles could create opportunities for small, innovative companies to compete for DOD contracts and thereby broaden the space industrial base.

Navy boats are self-propelled craft, suitable primarily to be carried on board ships and to operate in and around naval activities. As of November 2011, there were 2,872 small boats in the Navy's inventory and 58 different types of small boats, varying in length from 16 feet to over 200 feet, with expected service lives ranging from 7 to 12 years. Small boat types include rigid inflatable boats, riverine command boats, riverine assault boats, force protection boats, fleet harbor security boats, and unmanned craft. These small boats vary widely in the missions they perform, which include maritime interdiction, antiterrorism, force protection, and oil spill response operations, as well as riverine operations in Iraq. Table 1 provides the inventory and mission descriptions for various types of Navy small boats. Appendix II contains photographs of selected Navy small boats. Navy small boats are military equipment and are centrally procured, managed, and tracked by Naval Sea Systems Command (Program Executive Office, Ships, Support Ships, Boats and Craft Program Office). Naval Surface Warfare Center (Carderock Division, Detachment Norfolk, Combatant Craft Division) is responsible for boat inventory management and other activities, including boat allocation changes for certain activities. A small boat may be assigned to and carried aboard a ship as a ship's boat. Also, small boats may be assigned to an expeditionary command, shore station, or fleet operating unit. Navy officials reported that currently the Navy has assigned small boats to over 320 separate commands and activities (e.g., Navy Expeditionary Combat Command). According to Chief of Naval Operations Instruction 4780.6E, these commands and activities are responsible for proper maintenance of their small boats and for establishing a boat maintenance program for them. The Navy utilizes several techniques to store and harbor small boats, including trailers and lifts. The Navy may use trailers, which can be purchased as an accessory to the boat and may allow for the boat to be kept out of the water and then launched back into the water via a boat ramp. According to the Navy, the use of trailers can also facilitate timely logistical movement. The Navy has over 1,800 boat trailers in stock. Another technique is to use boat lifts, which are designed to raise a boat out of the water to reduce the effects of the saltwater environment on the hull, appendages, and exposed machinery components. The Navy has 72 boat lifts in stock located at Navy installations around the world (e.g., Norfolk, Virginia; Pearl Harbor, Hawaii; and Bahrain). These lifts were acquired from fiscal year 2007 to fiscal year 2010 at a cost of about $7 million. Small boats can also be stored in the water or on a ship. Figure 1 displays various techniques the Navy uses to store and harbor small boats. The Navy report addressed four of the five elements specified in the House report, while partially addressing one of the five elements. Figure 2 identifies the five elements the House report directed the Navy to address and our assessment of the degree to which the Navy report addressed each of them. The Navy report addressed the following elements: Investigate the potential for reduced maintenance and repair costs for the Navy's small boat fleet by using advanced boat lifts: The report discussed potential benefits associated with using boat lifts to remove boats from water during periods of nonuse. These potential benefits included reducing some types of corrosion and lowering maintenance costs by eliminating the need to remove the boat from the water for inspection. Include a recommendation regarding the potential establishment of improved boat corrosion control and prevention as a key performance parameter for the selection of boat maintenance and storage equipment: The report did not recommend improved boat corrosion control and prevention as a key performance parameter for the It noted that selection of boat maintenance and storage equipment.boat maintenance and storage equipment should be selected based on its potential benefit to corrosion control and prevention on boats and craft, but added that improved corrosion control and prevention will be hard to clearly define and measure, making them inappropriate for key performance parameters. Include a recommendation regarding the potential establishment of improved boat corrosion control and prevention as a key performance parameter for sustainment: The report did not recommend improved boat corrosion control and prevention as a key performance parameter for sustainment. It stated that boat corrosion control and prevention is certainly an important aspect of sustainment; however, it is not sufficiently definable to be used as a key performance parameter. Specifically, the report noted that the boat corrosion and control prevention aspect of sustainment is not a stand-alone testable quantity; therefore it fails to meet an important criterion for a key performance parameter. Include a recommendation regarding the potential establishment of improved boat corrosion control and prevention as a requirement for Naval Sea Systems Command to incorporate into its acquisition strategies: The report stated that corrosion control and prevention are already a well-established part of the requirements used by Naval Sea Systems Command in its acquisition strategies for procurement contracts for small boats. It noted that corrosion control and planning are addressed through performance requirements, design requirements, and contractual requirements to the extent possible. A review of current fleet repair and maintenance procedures and records does not reflect a need for additional requirements, according to the Navy report. The Navy report partially addressed the following element: Include an evaluation and business case analysis of the impact of advanced boat lifts for potential improvements to small boat acquisition costs and life-cycle sustainment: The report's business case analysis evaluated potential improvements to life-cycle sustainment, focusing on potential maintenance cost savings associated with boat lifts. However, this business case analysis did not evaluate the impact of the use of advanced boat lifts on potential improvements to small boat acquisition costs. Navy officials told us that the use of advanced boat lifts would not significantly contribute to extending the service life of the boats or produce any other additional benefits that would lead to reduced small boat acquisition costs. This is primarily because a critical feature of current procurement strategies is to select, specify, or design boats that are made from corrosion-resistant materials and use components that are corrosion resistant. Nonetheless, the Navy did not include this justification in the report or analyze the potential effects of the use of boat lifts on small boat acquisition costs in the report's business case analysis. While the Navy completed a business case analysis of the impact of reduced maintenance and repair costs for the Navy's small boat fleet through the use of advanced boat lifts, we found several areas in which more complete information could have been included to better support the findings of the Navy study. Navy officials told us that they broadly used service experience and general guidance from the Naval Center for Cost Analysis to structure and execute the business case analysis. The Navy collected data from the existing boat inventory; maintenance procedures and practices, such as inspections; and maintenance actions to determine potential maintenance cost savings associated with boat lifts and compared them with data collected on lift installation and lift maintenance costs to determine the payback on a boat lift investment. The Navy assigned risk ranges to each data input and ran them through a software program that used Monte Carlo simulation techniques and ran 5,000 simulations. Based on this analysis, the Navy concluded that it was unlikely that implementing boat lifts would provide a positive return on investment. The April 2011 DOD Product Support Business Case Analysis Guidebook presents a uniform methodology for developing accurate, consistent, and effective support of value-based decision making while better aligning the acquisition and life-cycle product support processes. The guidebook provides standards for the DOD business case analysis process used to conduct analyses of costs, benefits, and risks. We identified several areas in which more comprehensive information, consistent with the DOD guidebook, could have been included in the business case analysis. For example: The Navy did not utilize discounting in the business case analysis and did not document its reasons for not doing so within the report or in additional documentation provided to us. The DOD guidebook indicates that as a general rule, discounting should be done unless there is a documented rationale not to discount. Discounting future benefits and costs using an appropriate discount rate illustrates the time value of money, as benefits and costs are worth more if they are experienced sooner. Discounting benefits and costs transforms gains and losses occurring in different time periods to a common unit of measurement. The Navy did not include comprehensive data from Navy installations that are using 72 recently acquired boat lifts on (1) actual lift installation and maintenance cost data or (2) qualitative data on other potential costs and benefits associated with the use of boat lifts. Navy officials reported that they contacted one primary boat lift user command to gather a significant amount of data for the study and relied on boat lift vendors' estimates for lift cost and maintenance data. The DOD guidebook indicates that authoritative data sources-- those used to conduct the financial and nonfinancial analysis for a business case analysis--should be comprehensive and accurate. Navy officials explained that because the way boat lifts are used and any benefits associated with their use are location and mission specific, qualitative data would be particularly valuable. For example, Navy officials told us that boat lifts may improve the operational availability of small boats at installations that have limited access to boat ramps that allow boat trailers to launch boats in the water. Navy officials responsible for conducting the business case analysis were unaware of the DOD Product Support Business Case Analysis Guidebook, but acknowledged its applicability to their analysis. Navy officials recognized that more comprehensive information would have been useful, but noted that they were unable to systematically survey all current boat lift users within the few months they had to complete their business case analysis. Navy officials reported that including this information would likely not have changed the study's conclusions, as the analysis showed that the opportunity for a positive return on investment from implementing boat lifts for storage and harboring was so low. Navy officials also noted that the business case analysis did not address other potential costs associated with the use of boat lifts, such as the cost of adding new pier space to accommodate boat lifts. Although a more comprehensive analysis may not reverse this study's conclusions, decision makers would benefit from collecting and including more complete information in future analyses, particularly when evaluating investment decisions at individual locations, such as using discounting and conducting comprehensive surveys of boat lift users to obtain all potential costs and benefits associated with implementing boat lifts. The Navy noted in its report that a significant number of boat lifts have recently entered service in the fleet and that the Navy will monitor service experience, data that may provide a basis for future decisions regarding the use of boat lifts. Without more complete information, the Navy may not be fully informed when it considers making future investments in boat lifts or other storage and harboring techniques at individual locations. The Navy continues to rely on small boats to meet emerging fleet, antiterrorism, and force protection needs and support ongoing operations. While these boats vary widely in the missions they perform and the approaches for maintaining them, fiscal challenges require DOD to maximize its investment in small boats by reducing maintenance and repair costs where appropriate. Making informed decisions on effective and efficient small boat storage and harboring options will play a key role in doing so. While the Navy report addressed nearly all of the elements specified in House Report 112-78, additional information would better inform Navy decision makers. In particular, collecting and including more complete information--such as using discounting and conducting comprehensive surveys of boat lift users to obtain all potential costs and benefits associated with implementing boat lifts--would better inform the Navy when it considers making future investments in boat lifts or other storage and harboring techniques at individual locations. To enable the Navy to make informed decisions when it considers making future investments in boat lifts or other storage and harboring techniques, we recommend that the Secretary of Defense direct the Secretary of the Navy to collect and include more complete information when evaluating investment decisions at individual locations, for example, by using discounting and conducting comprehensive surveys of boat lift users to obtain all potential costs and benefits associated with implementing boat lifts. We provided a draft of this report to DOD for comment. DOD concurred with our recommendation to have the Secretary of Defense direct the Secretary of the Navy to collect and include more complete information when evaluating investment decisions at individual locations (DOD's comments are reprinted in app. III). DOD provided technical comments during the course of the engagement, and these were incorporated as appropriate. We are sending copies of this report to the Secretary of Defense, the Secretary of the Navy, and appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5257 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To determine the extent to which the Navy's report addressed the House Armed Services Committee's direction, we analyzed House Report 112- 78 to identify each element of the committee's direction for the Navy report. We developed an evaluation tool based on House Report 112-78 to assess the extent to which the Navy's report addressed these elements. Using scorecard methodologies, two GAO analysts independently evaluated the Navy report against the elements specified in the House report. The analysts rated compliance for each element as "addressed," "partially addressed," or "not addressed." We considered the element to be addressed in the report when the Navy explicitly addressed all parts set forth in the element. We considered the element partially addressed in the report when the Navy addressed at least one or more parts of the element, but not all parts of the element. We considered the element not addressed by the Navy when the report did not explicitly address any part of the element. After the two analysts had completed their independent analyses, they compared the two sets of observations and discussed and reconciled any differences. The final assessment reflected our consensus. We also interviewed Navy subject matter experts to obtain additional information and corroborate the statements made in the Navy report, and we obtained the officials' opinions of our assessments. We interviewed officials from the Office of the Deputy Assistant Secretary of the Navy for Ships, Naval Sea Systems Command, and the Naval Surface Warfare Center. To determine the extent to which the findings in the Navy's study are supported by the data and information examined, we reviewed the study and obtained information on the objectives, scope, and methodology officials used to conduct it. We evaluated the Navy study's business case analysis using criteria found in the DOD Product Support Business Case Analysis Guidebook, which provides standards for the Department of Defense's (DOD) business case analysis process as well as generally acceptable economic methodologies. We reviewed the Navy's study to determine the extent to which the Navy incorporated elements of the DOD guidebook into the planning, design, and execution of the study. We also obtained and analyzed key data sources, such as maintenance cost savings inputs and boat lift cost data, for information included in the study. We interviewed Navy officials to obtain their views on key aspects of the study, findings and conclusions, and any limitations that may have affected the study's findings. We also interviewed officials responsible for procuring and maintaining Navy small boats, to determine the extent to which the Navy factored appropriate costs and benefits into the study's key assumptions and related findings. We assessed the reliability of the data we analyzed by reviewing existing documentation related to the data sources and interviewing knowledgeable agency officials about the data that we used. We found the data sufficiently reliable for the purpose of evaluating the planning, design, and execution of the Navy's business case analysis. We conducted this performance audit from November 2011 to March 2012 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. Figures 3 through 5 contain photographs of different types of Navy small boats in use. In addition to the contact named above, Carleen Bennett, Assistant Director; Tarik Carter; Joanne Landesman; Mehrzad Nadji; Terry Richardson; Mike Shaughnessy; Amie Steele; and Chris Watson made key contributions to the report.

The Navy has noted that successful execution of its maritime strategy requires the acquisition of not only surface combatants, but also small boats. The Navy reported that it received about $135 million in fiscal year 2010-2012 base procurement funding for small boats. These small boats vary widely in the missions they perform, their sizes, and the approaches for their maintenance. The House Armed Services Committee directed the Navy in House Report 112-78 to conduct a study on strategies to reduce maintenance and repair costs associated with small boat storage and harboring and to submit a report to the House and Senate Armed Services Committees on its findings by October 31, 2011. The committee directed GAO to assess the Navy's report for completeness, including the methodology used in the Navy's analysis. For this report, GAO evaluated the extent to which (1) the Navy's report addressed the committee's direction and (2) the findings in the Navy's study are supported by the data and information examined. GAO analyzed study documents and the business case analysis, obtained and analyzed key documents, and interviewed cognizant officials. The Navy report addressed four of the five elements specified in House Report 112-78, while partially addressing one of the five elements. The Navy report addressed the potential for reducing maintenance and repair costs for the Navy's small boat fleet by using advanced boat lifts, and it addressed recommendations regarding the potential establishment of improved boat corrosion control and prevention as key performance parameters. The Navy report partially addressed the committee's direction to include an evaluation and business case analysis of the impact of advanced boat lifts for potential improvements to small boat acquisition costs and life-cycle sustainment. The report's business case analysis evaluated potential improvements to life-cycle sustainment, focusing on potential maintenance cost savings associated with boat lifts. However, this business case analysis did not evaluate the impact of the use of advanced boat lifts on potential improvements to small boat acquisition costs. Navy officials told GAO that the use of advanced boat lifts would not significantly contribute to extending the service life of the boats or produce any other additional benefits that would lead to reduced small boat acquisition costs. This is primarily because a critical feature of current procurement strategies is to select, specify, or design boats that are made from corrosion-resistant materials and use components that are corrosion resistant. Nonetheless, the Navy did not include this justification in the report or analyze the potential effects of the use of boat lifts on small boat acquisition costs in the report's business case analysis. While the Navy completed a business case analysis of the impact of reduced maintenance and repair costs for the Navy's small boat fleet through the use of advanced boat lifts, GAO found several areas in which more complete information could have been included to better support the findings of the Navy study. The April 2011 DOD Product Support Business Case Analysis Guidebook provides standards for the DOD business case analysis process used to conduct analyses of costs, benefits, and risks. GAO identified several areas in which more comprehensive information, consistent with the DOD guidebook, could have been included in the Navy's business case analysis. For example, the Navy did not include (1) actual lift installation and maintenance cost data or (2) qualitative data on other potential costs and benefits associated with the use of boat lifts, particularly location- and mission-specific benefits, from Navy installations that are using 72 recently acquired boat lifts. The DOD guidebook indicates that authoritative data sources--those used to conduct the financial and nonfinancial analysis for a business case analysis--should be comprehensive and accurate. Navy officials recognized that more comprehensive information would have been useful, but noted that they were unable to systematically survey all current boat lift users within the few months they had to complete their business case analysis. The Navy noted in its report that a significant number of boat lifts have recently entered service in the fleet and that the Navy will monitor service experience, data that may provide a basis for future decisions regarding the use of boat lifts. Without more complete information, the Navy may not be fully informed when it considers making future investments in boat lifts or other storage and harboring techniques at individual locations. GAO recommends that the Navy collect and include more complete information when evaluating future investment decisions at individual locations. DOD concurred with the recommendation.

The broadening of purchase card use from procurement offices to individual government cardholders in 1994 improved the ability of agencies to quickly and easily acquire items needed to support daily operations and reduced the administrative costs associated with such small purchases. Though government purchase cards were originally reserved for use by procurement personnel, the Federal Acquisition Streamlining Act of 1994 allowed authorized government cardholders to make purchases under the micro-purchase threshold without obtaining competitive quotations if the price to be paid was considered reasonable. Further, the act dictated that cardholders distribute their purchases equitably among qualified suppliers. Moreover, according to the Federal Acquisition Regulation (FAR), these cards are the preferred means to complete purchases under the micro-purchase threshold. According to GSA, from fiscal year 2010 to 2015, cardholders spent a range of about $17 billion to $19.5 billion annually in goods and services using purchase cards. (See figure 1) Although purchase cards may be used as a payment mechanism against contracts, for the agencies in our review, over 97 percent of the purchases in fiscal year 2015 were transactions valued below the micro- purchase threshold. (See table 1) The government's purchase card program--part of the SmartPay program--is managed by GSA, which currently administers the purchase card contracts with three banks: US Bank, Citibank, and JP Morgan Chase. According to GSA's SmartPay website, streamlining paper-driven acquisition processes of the past with the use of purchase cards saves the government about $1.7 billion annually (approximately $70 per transaction) in administrative costs. Further, when selecting which bank to use for its purchase card program, an agency can negotiate with its bank the terms for purchase card refunds under the purchase card program's contract. These refunds are based on speed of payment and volume of transactions and may also result in a cost savings for agencies. The GSA's SmartPay website indicates that the government has received approximately $3 billion in refunds from purchase card spending since the SmartPay program's inception in 1998. Purchase card data are available from two sources: the bank servicing the agency as well as a system developed by GSA called the SmartPay Data Warehouse, which was designed to assist with purchase card analysis. According to GSA officials, the Data Warehouse can be used to compile aggregate data from banks for each participating agency and for the government as a whole. The data can be sorted by various fields, such as vendor, agency, and transaction date. Additionally, GSA officials stated that they can sort the data based on an agency's spend for improving internal management and, in the future, may be used to identify opportunities for savings. Although purchase card data can be used to support spend analysis, agency officials told us that these data are primarily used for internal control purposes, notably to mine the data in order to identify card misuse and potential fraud and abuse. In 2004, GAO found that while agencies had begun to take actions to achieve cost savings through purchase card programs, most had not yet taken full advantage of available opportunities to obtain more favorable prices on the items purchased with cards. For example, we found that agencies had only negotiated discount agreements with a few of the vendors frequently used by cardholders; purchase card training programs lacked practical information to help cardholders take advantage of the discounts that had been negotiated; and there was a lack of management focus on leveraging buying power to achieve cost savings on items purchased. As a result, we found that the government was not taking advantage of opportunities which could have saved taxpayers hundreds of millions of dollars. Officials cited inconsistent vendor reporting of detailed transaction data--referred to as level 3 data, which is necessary for identifying specific items for each transaction--as an impediment to analysis of purchase card spending patterns. However, we found that despite lacking specific data on transactions, agencies could take steps to get better prices such as identifying vendors with high volumes of sales. As a result, we made several recommendations to focus management attention on the cost saving opportunities available for purchase card buys, facilitate cardholder access to discounted prices, and develop mechanisms that provide cardholders with better pricing from major vendors for key commodities, such as agency-wide discount agreements. Over the last decade, OMB has taken additional steps to implement strategic sourcing initiatives meant to increase the value of each dollar spent by government. In 2005, it issued a memorandum implementing strategic sourcing practices across the government. In the same year, OMB, Department of Treasury, and the General Services Administration established the Federal Strategic Sourcing Initiative (FSSI) to identify government-wide opportunities to strategically source commonly purchased products and services and to eliminate duplication of efforts across agencies. Further, in a 2009 update to its purchase card guidance for federal agencies, OMB asked that agencies think more strategically about what they were buying with purchase cards. The guidance required that agencies incorporate purchase card spending into analysis that supports strategic sourcing decisions and recommended that agencies review and analyze patterns of purchase card spending for potential cost- saving opportunities. More recently, OMB announced the government's intent to use a category management approach and GSA issued guidance in May 2015 to provide agencies with consistent standards for its implementation. Category management calls for lead agencies to analyze acquisition approaches for particular groups of goods or services to further reduce duplication of acquisition efforts among agencies and help ensure that agencies receive uniform, competitive pricing. However, this guidance on category management does not address agencies' review of purchase card transaction patterns. Although the federal government has taken these steps to enhance strategic sourcing of goods and services, GAO has reported multiple times on the shortcomings of implementing such initiatives by federal agencies. For example, in 2012 we found that selected agencies were only leveraging a fraction of their buying power through contracts as a result of strategic sourcing analysis. While leading private sector companies reported strategically managing as much as 90 percent of their spending, we found that agencies responsible for the majority of government procurement spending reported managing less than 5 percent of their spending through strategically sourced contracts. Further, we found that FSSI contracts had low levels of use and that commodities and services purchased the most by the government were not available through FSSI. We made several recommendations to DOD, VA, and OMB to improve department and government-wide strategic sourcing efforts. While DOD has taken steps to evaluate resources devoted to strategic sourcing, it has not yet completed steps to identify and evaluate the best way to strategically source its highest spending categories. VA implemented both of its recommendations by taking steps to evaluate ways to strategically source high spending goods and services and by establishing strategic sourcing goals and metrics. OMB has not yet fully addressed recommendations to provide federal agencies with metrics to measure progress toward strategic sourcing goals nor to require an assessment of whether more top spend products and services should be considered for strategic sourcing. All of the agencies in our review incorporated purchase card data into aggregate spend analysis to support strategic sourcing initiatives as required by OMB; however, many officials pointed to data challenges, such as a lack of specificity, that make it difficult to conduct more detailed analysis. Despite these challenges, four of the six agencies took additional steps to conduct specific analysis of purchase card spending patterns as recommended by OMB guidance. Moreover, two of these four agencies identified opportunities for savings through such analysis, demonstrating that savings can be found. However, while some DOD components analyzed purchase card data, certain components of DOD did not. Further, Energy did not perform agency-wide analysis of purchase card data. Without more focused efforts on this type of analysis, these agencies may be missing opportunities to find cost savings with purchase card buys. The January 2009 OMB Circular A-123, Appendix B, stipulates that to support strategic sourcing initiatives underway at agencies, purchase card data must be incorporated into spend analysis along with contract and delivery order data. All six of the agencies selected for our review incorporated purchase card spend data into their annual or quarterly aggregate spend analysis to support strategic sourcing initiatives. Our prior work defines spend analysis as providing knowledge about how much is being spent for which products and services, who the buyers are, who the suppliers are, and where the opportunities are for leveraged buying and other tactics to save money and improve performance. From this analysis, organizations can evaluate and prioritize commodities to create a list of top products or services to target for strategic sourcing. This list typically includes the products or services on which most of the organization's spending is focused. Although agencies we reviewed incorporated purchase card data into their aggregate spend analysis, some officials stated that its inclusion had little impact on results due to its relatively small dollar value. The OMB guidance also states that agency purchase card program coordinators should further conduct a more specific analysis of purchase card data, reviewing spending patterns and levels--independent of the aggregate agency spend analysis--to identify opportunities for savings through negotiation of discounts, improvements to the buying process, and increased volume purchases. Officials at most of the selected agencies, however, raised concerns about the costs and benefits of using resources to analyze purchase card spending because it represents a small part of overall spending. The six agencies' average purchase card spend ranged from about 2 percent to 17 percent of total spend for fiscal year 2015 (see table 2). Furthermore, officials also stated that the value of extensive analysis is questionable, as individual purchase card transactions are low-cost and, therefore, considered low risk. For example, Interior officials told us that, in general, the cost of doing analysis on such a small portion of overall spending tends to outweigh benefits if it does not lead to a cost-saving contract. DOD officials told us they do not focus on purchase card spend, using resources to focus on higher dollar value spending instead. Moreover, although purchase card data are readily available, agency officials cited several challenges as obstacles to analyzing the data separately. Similar to what we found in 2004, officials at all six selected agencies stated that purchase card data are generally not sufficient to support the detailed spend analysis necessary to target specific commodities or services for strategic sourcing opportunities. Bank databases provide agency officials with information on all purchase card transactions, including vendor name, merchant category code (general description of what a vendor sells), transaction date, and transaction dollar amount, but other transaction level details are not consistently tracked or provided. Transaction level data--referred to as level 3 data-- would provide insight into the specific items purchased, including quantity and unit prices. However, only vendors can provide level 3 data to the banks and we found not all vendors submit this information. Without it, agencies rely on merchant category codes, which provide only a general description of what vendors sell, and the total amount spent with each vendor. Our analysis of the 18 months of bank data we had requested confirmed this data challenge and also highlighted that the level 3 data fields are not standardized, which further complicates data analysis. For example, approximately 36 percent of records did not contain information in data fields meant to provide a description of the item being purchased. Further, the information that was included varied significantly. Although some transaction records contained information on the make and model of items, other transactions had general descriptions of what was purchased. Other purchase card transaction records contained only a series of letters and numbers without a description of what was purchased. Additionally, purchase card data also may associate multiple merchant category codes with one type of vendor, impeding spend analysis and requiring extensive, time-consuming data cleanup to maximize usefulness. For example, office supply vendors can be classified under merchant category codes for Office/Photo Equipment, Stationary/Office Supplies, Stationery Stores, and Combination Catalog and Retail. DHS officials reported that in fiscal year 2014 transactions with Staples and Office Depot--both vendors under the Office Supply FSSI--were largely recorded under different merchant category codes. To perform an analysis of office supplies, officials would have had to use a combination of merchant category codes and vendor names for both vendors. However, they would not have had enough information to know which vendors provide what commodities or services. Another challenge with the purchase card data is that one vendor may be listed under multiple names, making it time consuming to develop a list of top vendors. For example, as part of its agency-wide strategic sourcing efforts, DHS regularly standardizes different names for the same vendor reported in purchase card data to improve the accuracy of vendor information for analysis. DHS officials noted that there may be many variations of vendor name, for example, for vendors with franchises or multiple locations, complicating analysis of bank data. Our analysis of 18 months' worth of purchase card data confirmed this phenomenon; for example, one major general merchandise store was identified with more than 5,000 different variations of its name. Although time consuming, standardizing vendor names helps ensure that vendor information is more appropriately counted when developing a list of top-spend vendors to support analysis for potential savings. Despite concerns with the data, four agencies in our review--DHS, EPA, VA, and Interior--took additional steps to analyze purchase card spending patterns as recommended by OMB guidance. Because the data do not provide consistent insights into what agencies are buying, these agencies identified the vendors with which they spent the most. Interior reviewed quarterly reports provided by its purchase card bank to identify the top high-spend vendors. To improve the accuracy of vendor information for analysis, DHS took the extra step to normalize the differing names reported in bank data for the same vendor. VA has performed product spend analysis on an as-needed basis to identify opportunities to leverage spend. The last of these analyses was conducted in May 2015 resulting in consideration of a potential department-wide contract for specific medical equipment which would provide for discounts on items that could be procured with purchase cards. In January 2016, VA began a pilot program where a small core team will routinely conduct spend analysis to identify opportunities to aggregate requirements and leverage purchase card spending. Further, VA purchase card officials have access to reports from the bank that may assist with analysis of purchase card spend patterns and plan to collaborate with the department's procurement office to establish regular reviews of these data in the future. Some positive outcomes resulted from individual agencies' purchase card analyses. Specifically, two agencies--EPA and Interior--used their analysis of purchase card data to identify potential commodities to be strategically sourced. For example, EPA, spurred by dissatisfaction with previous contracts, identified the vendors its cardholders most frequently used to obtain lab supplies. Officials stated that based on this analysis of its data, the agency established three new blanket purchase agreements (BPA) for the lab supplies. EPA reported approximately $50,000 savings to date on lab supplies, $43,000 of which it attributed to purchase card procurements. In another instance, Interior used bank data to identify that wireless service providers were among the top vendors with whom the agency used purchase cards. However, officials are still evaluating possible solutions to determine the best combination of wireless services and equipment to be provided through contract. Two agencies in our review did not perform agency-wide analysis of purchase card data--DOD, which accounts for just over one quarter of all government purchase card spending--and Energy. Though DOD purchase card program guidance does not require analysis of spending patterns, DOD officials told us that they expect such analysis to be performed at the component level rather than across the entire department. The department provided examples of steps taken by individual DOD components to perform analysis of purchase card spend: The Army reported that it coordinates with US Bank to perform an annual review of spending to identify potential strategic sourcing opportunities and to review Army usage of FSSI and mandatory vendors--but did not provide us with examples of results of this analysis. Washington Headquarters Services reported that management attention to recurring purchases within the organization resulted in the award of 16 BPAs for supplies and services including ones for locksmith supplies, maintenance services, and interpreter services. Defense Logistics Agency (DLA) conducts analysis of government purchase card data yearly to identify opportunities to leverage buying power. Recently, DLA reported the award of a contract based on this analysis that allows for centralized ordering of nails and staples-- two items previously purchased separately by component sites. However, other components of DOD, such as the Air Force and Navy, did not report any purchase card spend analysis activity. Until DOD, specifically the Office of Defense Procurement and Acquisition Policy, issues agency-wide guidance or direction on analysis of purchase card spending, components may be inconsistently identifying opportunities for cost savings. Similarly, Energy did not conduct agency-wide analysis of purchase card data citing resource and data constraints as an impediment. Energy officials stated that they lack tools necessary to develop accurate analysis of vendor spending. However, our own analysis of VA and DOD purchase card data shows it is possible to analyze vendor names to more accurately identify high-spend vendors. Through statistical analysis that compared vendor names, similar names were identified, evaluated, and aggregated as appropriate. This allowed us to have a more accurate count of transactions for high-spend vendors from the Army and VA offices from which we selected case study cardholders. Like DOD, Energy may be missing opportunities to obtain savings without performing some level of analysis of purchase card spending. We examined local efforts at two of the six agencies in our review--VA and DOD--and found local initiatives that may benefit the whole agency. None of the local DOD purchase card program officials we spoke with provided examples where they reviewed purchase card spending patterns to identify areas for cost savings. However, based on local knowledge of purchase card spend patterns, cardholders and other officials we interviewed from VA regional offices identified commodities procured with purchase cards that could be bought through BPAs instead, helping ensure pre-negotiated discounted prices and reliable service from vendors. Specifically, In December 2014, a regional VA office established two BPAs for modular wheelchair ramps and installation services--once procured through individual purchase card transactions--to achieve better prices and to ensure more timely delivery. According to officials, these BPAs reduced delivery and installation times from 4-6 weeks to approximately 4 days and saved $1.1 million. Similar arrangements for use across VA are expected to be established in the third quarter of fiscal year 2016. This same office reported that they recently awarded orthotics contracts to 17 vendors for various items, including diabetic shoes and braces that had been procured with purchase cards. The contracts are intended to access the best quality of care for veterans, but the office also achieved better prices, getting discounts from 1 to 22 percent on items purchased through the contracts. Another VA regional office reported that it transitioned bed rentals from individual card buys to a national contract to avoid instances of cardholders' purchase authority being exceeded when patients required use of beds for longer than anticipated. The contracts allowed for reduced workload and easier placement of orders according to officials, even though the level of usage was not enough to achieve significant cost savings. Further, individual VA cardholders we spoke with leveraged knowledge of existing local contracts to receive better prices or provided information to contracting staff of possible opportunities to obtain savings. For example, one VA cardholder noticed that a contract for protective boots had been allowed to lapse and that VA was using purchase cards to buy the boots at a higher price than the previously negotiated contract rate. Her office informed contracting officials, who are planning to negotiate lower prices on a new contract. This cardholder also noticed that when she moved from one VA office to another, the prices her new office paid for protective eyewear was much more expensive than what her old office paid. According to this cardholder, she was able to coordinate the use of a contract from her previous office at her new one thereby reducing costs for eyewear by approximately 77 percent. Another cardholder noticed her office was making recurring purchases for data communication services. Her office reviewed purchase card orders and worked with the contracting office to place these services on a contract. Agency officials expect this contract to reduce costs and to be available to multiple VA hospitals. These efforts further demonstrate that with more attention to patterns of purchase card buys and increased information sharing, the government could better leverage its buying power when using purchase cards. As seen in the example with the wheelchair ramps, some of these opportunities for savings may be appropriate to expand to the entire agency, which may increase potential savings significantly. Cardholders we spoke with were generally aware of existing contracts that they could use to procure items. Further, we also found examples where agency offices used various mechanisms to share information with cardholders and to remind cardholders of negotiated contracts that could provide a cost savings. Some of the training or practices we identified may be useful for other offices to use or emulate. For example, One Army program manager includes information on government contracts cardholders should use in a quarterly newsletter he sends out. Another Army program manager provides training on purchase card operating procedures that directs cardholders to use government contracts. Additionally, one cardholder told us that she incorporated these topics into her own training which she provides to local personnel who place purchase card order requests with her. One program manager we spoke with from VA forwards emails from agency-level contracting offices concerning the mandatory use of certain contracts or changes to existing government contracts to cardholders under his responsibility. For example, one email directed cardholders to VA's list of national mandatory government contracts and noted that the contracting office updates the list monthly. Another VA program manager provides supplemental purchase card training to cardholders which discusses mandatory use of certain strategic sourcing contracts and other agency-wide contracts and notes that open-market purchases are a last resort for cardholders. Some cardholders we spoke with told us that other factors may result in using a vendor other than those under an FSSI contract or other contract vehicle. For example, speed of delivery is at times a consideration when selecting a vendor, especially for urgent requirements. Further, some Army cardholders we spoke with noted that they frequently need to purchase equipment that meets specific technical requirements for conducting experiments, and thus need to use vendors that can meet these specific criteria. None of the six agencies in our review have purchase card guidance that encourages local officials to examine purchase card spend patterns to obtain savings and to share information on such efforts. The existing guidance focuses largely on preventing fraud or misuse of purchase cards, rather than leveraging buying power to achieve savings. However, the examples we found demonstrate that sharing information on initiatives at the local level broadly across the agency may help to improve knowledge of available cost saving contracts--such as the example with the cardholder that knew of the contract for protective eyewear--and finding new opportunities for cost savings--such as the instance where VA is expanding use of a contract for wheelchair ramp services. Also, sharing information on local training efforts may be a way for other offices to use pre-existing resources to train their own cardholders. Federal internal control standards state that management should internally communicate the necessary information to achieve the entity's objectives. Effective information and communication throughout an organization are vital for an entity to achieve its objectives, which can be accomplished through written guidance. Although we did not speak with local offices in the other agencies in our review, our experience in speaking with officials at VA regional offices indicates that other agencies could benefit from identifying and sharing information on local initiatives that leverage spend. Without communication of any local efforts taking place, agencies may be missing opportunities to leverage the buying power when using purchase cards. OMB's policy clearly indicates the importance of conducting analysis on purchase card data to identify cost savings. Paying attention to purchase card spending has yielded positive results, both at an agency-wide level--where EPA and Interior's actions resulted in savings or potential better terms for government buyers--and at a local level where VA cardholders noticed patterns and focused efforts to obtain savings. However, agencies remain reluctant to invest substantial time and resources into leveraging the government's purchasing power when it comes to purchase cards. Some of the reasons are valid--imperfect and challenging data, larger procurements that require attention, and lack of resources. Yet, when totaled across agencies, purchase card spend represents billions of taxpayer dollars that the government has a responsibility to spend wisely. Agencies that are not performing even a modest amount of purchase card spend analysis, specifically certain components within DOD and Energy, may be missing opportunities to identify areas for savings with purchase cards. Although some DOD components have taken steps to analyze purchase card spend data for cost-saving opportunities, without clear guidance from DOD for all components, resources may not be applied to seek out opportunities. Aside from spend analysis, an agency has shown that paying attention to purchase card spending at the local level can also result in cost savings. Further, by having all agencies encourage local officials to examine purchase card spend patterns to identify opportunities to obtain savings and to share information on such efforts, agencies may leverage buying power more effectively. To help identify opportunities for cost savings, we recommend that the Secretary of the Department of Defense direct the Office of Defense Procurement and Acquisition Policy to issue guidance or instruction to help ensure that components make reasonable efforts to analyze component-level purchase card spend patterns to identify areas for possible savings. To help identify opportunities for cost savings, we recommend that the Secretary of the Department of Energy take reasonable steps to regularly analyze agency-wide purchase card spend patterns to identify areas such as high-use vendors or frequently purchased commodities for further analysis. To ensure that good practices are shared within agencies, we recommend that the Secretaries of Defense, Veterans Affairs, the Interior, Homeland Security, and Energy, and the Environmental Protection Agency develop guidance that encourages local officials to examine purchase card spend patterns to identify opportunities to obtain savings and to share information on such efforts. Where applicable, we further recommend that these agencies determine the feasibility for broader application of these efforts across the agency or organization. We provided a draft of our report to the Secretaries of Defense, Veterans Affairs, the Interior, Homeland Security, and Energy as well as the Administrators of the Environmental Protection Agency and General Services Administration, and the Director of the Office of Management and Budget. DOD, VA, DHS, and Energy concurred with our recommendations and Interior partially concurred. Agencies' comments are summarized below and written comments from DOD, VA, Interior, Energy, and DHS are reproduced in appendices II-VI. OMB and GSA did not to provide comments on our report. EPA did not respond to our request for comments on the draft. We also received technical comments from VA, which we incorporated as appropriate. In its written comments, DOD concurred with both of our recommendations and stated that the Office of Defense Procurement and Acquisition Policy will issue guidance to help ensure that DOD components and local officials take steps to analyze purchase card spending for potential cost-saving opportunities. Similarly, Energy concurred with both recommendations in its written response. It will use a new spend analytics database to analyze agency-wide purchase card spending patterns and update existing acquisition guidance, purchase card policy, and operating procedures to encourage local examination of spending patterns and share information on such efforts. Both agencies estimate implementation of these recommendations by the fourth quarter of fiscal year 2016. DHS and VA agreed with our recommendation to develop guidance that encourages local officials to examine purchase card spending patterns for opportunities to obtain savings and to share results of these analyses. Staff from the Office of the Chief Finance Officer will update the DHS purchase card manual to encourage local officials to perform quarterly analysis of purchase card data in order to identify strategic sourcing opportunities. In its written comments, VA stated that the Office of Management is working with the Office of Acquisition, Logistics, and Construction to develop guidance and implement strategic sourcing for the department's overall spending to include purchase cards. The Office of Management will also update the VA's purchase card policy to encourage agency officials to analyze purchase card spending patterns for cost-saving opportunities and share the results of these analyses. Interior partially concurred with our recommendation to encourage examination of purchase card spending patterns by local officials. The agency stated in its written comments that it will encourage its bureaus to use data analysis tools to make purchase card spend data available to program managers and buyers. It will promote sharing of data across regional boundaries to help identify potential opportunities to negotiate savings for commonly used items. However, the agency does not see a need for additional guidance to assist the bureaus in implementing these efforts. While encouraging additional, bureau-level analysis of purchase card data is a positive step toward fully leveraging Interior's buying power, we continue to believe that formalizing these actions through guidance will help ensure uniform implementation across its offices. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Defense, Veterans Affairs, Interior, Homeland Security, and Energy as well as the Administrators of the Environmental Protection Agency and General Services Administration, and the Director of the Office of Management and Budget, In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII. The Office of Management and Budget's Circular No. A-123 Appendix B requires agencies to incorporate purchase card spending data into overall spend analysis to support strategic sourcing initiatives and recommends that agencies analyze purchase card spending patterns and levels to identify opportunities for negotiation of discounts and increased savings based on volume. In response to a congressional committee request, we assessed the extent to which selected (1) agencies analyze purchase card data to identify opportunities to leverage buying power agency-wide and (2) local purchase cardholders take advantage of opportunities to achieve cost savings when using purchase cards. To address these objectives, we reviewed laws and regulations in place relating to the use and management of purchase card programs and strategic sourcing initiatives. We met with General Service Administration (GSA) officials who manage the SmartPay purchase card program as well as officials from the Office of Management and Budget responsible for issuing government-wide guidance on managing purchase card programs to gain insight into what purchase card transaction data are available to individual agencies and the requirements placed upon these agencies to analyze purchase card spending. We also collected and analyzed government-wide purchase card transaction data from the three SmartPay banks for fiscal year 2014 and the first two quarters of fiscal year 2015 to understand what data are available to agencies for performing spend analysis and to identify potential challenges presented by the data supplied by vendors through the banks. We analyzed data to determine top vendors used by certain agency offices and understand the extent to which descriptive information on procured goods and services is included in purchase card transaction data supplied by the banks. To determine the extent to which individual agencies perform analysis of purchase card data, we reviewed policies and conducted interviews with finance and acquisition officials from six, case study agencies that represent three differing levels of purchase card spending. Based on analysis of fiscal year 2014 purchase card statistical data available from the GSA website describing total spending and transactions by each agency participating in the SmartPay program, we selected: 1. The Department of Defense (DOD) and Department of Veterans Affairs (VA), the two largest users of purchase cards, both making purchases valued well over $500 million, 2. The Departments of Homeland Security (DHS) and Interior (DOI), each having spent between $100 and $500 million, and 3. The Environmental Protection Agency (EPA) and Department of Energy (Energy), each having spent less than $100 million. Selection of DHS and EPA was also informed by the findings of GAO and inspector general reports. Specifically, previous GAO reports found that DHS has a well-resourced strategic sourcing program and a recent EPA Inspector General report stated that the agency had begun to conduct analysis of purchase card spend to identify commodities to be sourced strategically. We used this information as an indicator that these agencies may have performed analysis of purchase card spending patterns to identify new strategic sourcing opportunities as recommended by OMB guidance. We reviewed each agency's own policies describing the responsibilities of cardholders and program management to understand the extent to which they address issues of pricing and vendor selection. We conducted interviews with agency purchase card program and strategic sourcing officials to understand how data on purchase card transactions are used to inform overall spend analysis and to identify specific services or commodities where buying power could be better leveraged through strategic sourcing. We asked each of the six agencies to provide us data describing the purchase card transactions and spending for fiscal year 2015 which we used to provide context. Findings based on information collected from these six agencies cannot be generalized to all agencies. To examine the extent to which cardholders seek opportunities to achieve cost savings when making purchases, we collected purchase card documentation and conducted interviews with 20 purchase cardholders from DOD and VA. We selected cardholders from these two agencies because DOD and VA have the highest amount of purchase card spending, representing nearly 78 percent of total government purchase card spending in fiscal year 2014. To select the cardholders we analyzed the transaction data for these two agencies collected from US Bank, one of the three SmartPay banks, to identify top vendors used by DOD and VA and compared this list to vendors associated with the Federal Strategic Sourcing Initiative (FSSI). We then analyzed bank data further to determine which two offices within each agency had the highest levels of purchase card spending with the FSSI vendor and selected cardholders from each office to interview. Specifically, we selected cardholders from Army Materiel Command, the United States Army Corps of Engineers, and two regional Veteran's Health Administration offices. Each selected cardholder made purchases with this FSSI vendor as well as from other vendors. Bank data used to select cardholders were examined for duplicate records and invalid information and were found to be sufficiently reliable for the purposes of this work. We interviewed cardholders and collected transaction documentation to understand the extent to which these individuals consider price options prior to making a purchase and are cognizant of contracts or other vehicles meant to provide a savings to government buyers. While the results based on interviews with the selected purchase card holders cannot be projected to all cardholders, their experience provides insight into how cardholders consider price and strategic sourcing options when making purchase card buys. We conducted this performance audit from April 2015 to May 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Tatiana Winger (Assistant Director), Pete Anderson, Ji Byun, Virginia Chanley, Lorraine Ettaro, Robert Heilman, Mitch Karpman, Ralph Roffo, Sylvia Schatz, and Thomas Twambly made key contributions to this report.

The purchase card program was designed to streamline relatively small dollar value acquisitions of goods and services. In fiscal year 2015, the government spent approximately $19 billion using purchase cards. GAO was asked to review whether agencies are effectively leveraging their buying power when using purchase cards. This report assesses the extent to which selected (1) agencies analyze purchase card data to identify opportunities to leverage buying power agency-wide and (2) purchase cardholders seek opportunities to achieve cost savings when using purchase cards. GAO analyzed data from the three banks that work with the six selected agencies--selected in part on varying levels of purchase card spend volume--to manage their purchase card programs. GAO evaluated policies, reviewed strategic sourcing efforts related to purchase cards, and interviewed officials. GAO also interviewed officials from the General Services Administration who manage the government's purchase card contracts, and interviewed selected cardholders at the two agencies with the highest purchase card spend. The agencies in GAO's review--the Departments of Defense (DOD), Veterans Affairs (VA), the Interior (Interior), Homeland Security, and Energy (Energy), and the Environmental Protection Agency (EPA)--have made varied use of purchase card data, and additional opportunities exist to negotiate discounts and leverage buying power. As the chart below shows, spending with government purchase cards represents billions of dollars each year. The Office of Management and Budget (OMB) guidance that prescribes policies for agencies on how to manage their purchase card programs (1) requires agency officials to incorporate purchase card data into strategic sourcing analysis and (2) recommends that agencies review and analyze purchase card spending patterns for opportunities to negotiate discounts, improve buying processes, and leverage buying power. All the agencies in GAO's review incorporated purchase card data into overall spend analysis to support strategic sourcing efforts as required by OMB, but officials noted challenges that impede review of purchase card data. For example, purchase card data do not always include enough specificity to identify particular commodities to target for savings. Despite these challenges, four of the six agencies GAO reviewed took additional steps to independently analyze purchase card spending patterns as recommended by OMB. Two agencies--EPA and Interior--identified opportunities for savings through such analysis, demonstrating that savings can be found. However, Energy and certain DOD components, such as the Air Force and Navy, did not perform analysis of purchase card spending. Without more focused efforts, these agencies may be missing opportunities to find cost savings. GAO also found instances where regional VA offices were successful in identifying opportunities for local or agency-wide savings on items procured with purchase cards. For example, one office recognized an opportunity for savings when purchasing wheelchair ramps for disabled veterans, resulting in savings of $1.1 million and faster delivery. Federal internal controls state that management should communicate the necessary information to achieve objectives. Given the examples GAO found, developing guidance and sharing information may help agencies identify opportunities to leverage buying power with purchase cards. GAO recommends that Energy analyze purchase card data and DOD ensure its components do the same. GAO also recommends that each agency develop guidance to encourage local officials to examine purchase card spend patterns and share this information. Four agencies concurred, Interior partially concurred, and EPA did not comment.

DOD's health care system, costing over $15 billion annually, has the dual mission of providing medical care to 1.6 million military personnel during war or other military operations and offering health care to 6.6 million military dependents and retirees. Most care is provided in about 600 military medical facilities worldwide, including medical centers, community hospitals, and clinics. The system employs about 100,000 active duty military personnel. Military medical personnel include about 12,275 physicians, of whom about 3,000 are in GME programs in military facilities. The services view GME as the primary pipeline for developing and maintaining the required mix of medical provider skills to meet wartime and peacetime care needs. They also view GME as important to successful physician recruitment and retention. GME includes internships, residencies, and fellowships enabling medical school graduates to become specialists in such areas as internal medicine, radiology, and general surgery. Some of the military personnel GME training is done in civilian hospitals. The cost of GME is unclear. In May 1997, the DOD Inspector General reported that GME costs exceed $125 million annually, with per-student costs ranging from about $20,000 to $100,000, but reported also that military facilities did not accurately account for such costs. DOD's Office of Health Affairs is responsible for developing overall GME policy guidance and promoting GME program coordination and integration among the services. The services are responsible for ensuring that GME goals are met and for individual GME programs. Civilian boards review DOD's GME programs to ensure that they meet such medical standards as minimum numbers of trainees per program and can thus be accredited. GME is taught at the services' facilities throughout the United States, as shown in figure 1. Several DOD policies directly affect the services' GME program size, locations, and specialty types. In 1996, for example, DOD issued a requirement that medical force levels including GME trainee numbers be linked to each service's wartime and operational support requirements.This was a major departure from when each service did as much GME training as it had capacity for or when it trained to the prior year's level. DOD also defined GME trainees as nondeployable unless a full mobilization state has been reached. Deploying trainees would disrupt the specialty physician pipeline and would likely result in lost GME program accreditation. Thus, as defined, about 25 percent of active duty physicians are not deployable. A 1994 DOD strategic plan set forth the following added GME rightsizing principles: Base realignment and closure (BRAC) 1995 would determine whether further sites conducting GME training will close. GME programs having no new trainees for 2 years are to be phased out. Duplicate Washington, D.C., and San Antonio, Texas, GME programs should be integrated to the extent possible. The number of GME trainees in DOD medical facilities should not exceed their aggregate fiscal year 1994 proportion of all active-duty physicians. In response to the 1994 plan, BRAC 1995 identified two hospitals for closure that had GME programs, thus eliminating 177 GME positions. But BRAC legislative authority has expired, and any such future authority is uncertain. Also, ending programs lacking new trainees has resulted in few position reductions, according to Health Affairs officials. And the Washington, D.C., and San Antonio GME program integrations have also produced few trainee reductions, while no other GME locations appear to be susceptible to such integration. Maintaining a maximum ratio of GME trainees to active duty physicians is referred to as DOD's "25 percent policy." The aim is a proper mix of experienced specialists, supplemented by the flow of newly trained specialists needed to maintain that mix. The services' actual GME percentages vary slightly, but in total they equal about 25 percent of active duty physicians. In the past, the GME ratio was met through BRAC actions and by reducing GME without closing programs, but DOD and service officials now agree that GME programs have been cut to levels below which accreditation would be lost. Thus, rather than basing GME size on training capacity, the services are shifting toward basing their reductions of GME on wartime requirements. Beyond trimming programs, moreover, the services are now seeking to close GME programs in specific locations. The Navy Surgeon General's GME closure attempts at the Portsmouth, Virginia, and Bremerton, Washington, medical facilities would have made far larger trainee reductions than any such prior Navy efforts had made. But the closure decisions were withdrawn when those affected strongly objected. Clearly at issue was (1) the guidance that the Navy had followed in making the closure decisions, (2) whether DOD had properly deliberated and agreed upon the decisions, and (3) whether those who were affected both within and outside the Navy were aware of the bases for the decisions and whether they had been consulted when the decisions were being made. DOD's lack of a policy framework for formulating and implementing such decisions will likely spawn continued resistance and thwart the Navy's and other services' attempts to reduce GME positions when they are no longer needed to meet wartime needs. The Navy's GME closure efforts began in November 1996. The Navy Surgeon General concluded that the then-current military force downsizing and DOD policy necessitated reducing GME training--such that GME training would be limited to projected wartime requirements. On November 5, 1996, the Navy Surgeon General directed his advisers, the Navy Medical Education Policy Council (MEPC), to recommend appropriate GME training reductions, and this effort resulted in targeted reductions of 162 positions, or 16 percent. In February 1997, the MEPC recommended making most of the GME reductions by closing the Navy's Bethesda Medical Center's programs while preserving GME at the Navy's other major centers at San Diego and Portsmouth. Lacking specific guidance on how to select closure sites, the MEPC primarily focused on meeting the Navy sizing model's needed medical specialist estimates and complying with the Surgeon General's past statements about the importance of having GME where the active duty personnel are concentrated--which today is in San Diego and Portsmouth. Records indicate that MEPC considered such other factors as civilian GME accreditation standards and the population, particularly active duty, to be served but did not comparatively analyze how well the areas' available patient mix would support GME--believing that Bethesda and Portsmouth were more than sufficient on both scores. While the MEPC weighed the potentially adverse effects of closing Bethesda's GME programs on the GME integration efforts, it concluded that preserving GME at Portsmouth and San Diego, where active duty personnel are more concentrated, was still preferable. Otherwise, the MEPC viewed essentially all current GME programs to be of equal merit. Notwithstanding the MEPC's recommendations for closing GME programs at Bethesda, the Navy Surgeon General decided to close programs at Portsmouth. The Surgeon General informed the MEPC that his decision resulted from an agreement made the previous week among Health Affairs and the surgeons general that the national capital area, including the Bethesda center, was to be one of four areas where the services would begin concentrating GME. Other such areas would be San Antonio, San Diego, and Madigan Army Medical Center near Tacoma, Washington. In further justifying his decision, the Surgeon General later announced that integrated national capital area GME programs would be maintained. The Surgeon General told us that while the MEPC had acted in the Navy's interests, broader DOD interests were also at stake. Moreover, about 5 months after announcing the Portsmouth GME closure decision, the Navy Surgeon General's office completed a study of health care demographics and workload covering the Bethesda, San Diego, and Portsmouth areas, where it has major health care concentrations. That study concluded that, on the basis of population, workload, and other factors, GME should be preserved at Bethesda and San Diego rather than Portsmouth. Along with his Portsmouth GME closure decision, the Surgeon General announced plans to close the Bremerton, Washington, naval hospital's GME family practice program. But the MEPC had specifically recommended against family practice program closures, concluding that such residencies were needed services. The Surgeon General, however, had opted for closure based on the Bremerton program's proximity to the Madigan Army Medical Center's GME family practice--a key factor that the MEPC did not consider. Surprised by the Portsmouth decision, medical center officials and their supporters, including a local active duty forces commander and congressional members, disagreed with the Navy's basis for the Portsmouth GME closure decision, arguing that GME trainee losses would reduce services to active duty personnel and their dependents and other beneficiaries and would harm readiness. The Surgeon General's office responded that it would monitor the effect on Portsmouth's workload and would add resources if needed. Portsmouth Medical Center officials also argued that their center was as rich a GME environment as any of the four locations apparently selected for GME concentration. Taking particular issue with Navy study findings supporting Bethesda, Portsmouth officials told us that they have comparable or better facilities, workload, patient mix, and other GME support advantages. MEPC officials told us that while both locations have more than enough to support GME, Bethesda has the greater workload for supporting GME. And while the Surgeon General agreed that Portsmouth is an attractive GME environment, he told us that Bethesda is preferable because of greater available population and patient mix and the overriding need to continue the national capital area GME program integration efforts. Regarding the Surgeon General's reliance on the apparent agreement for a four-area GME concentration, Health Affairs officials told us that such an agreement was not made formal or otherwise published. Rather, these officials said the policy aim now is for the services to size their GME programs by requirements-driven analyses rather than by dictating some fixed number of GME centers. Nonetheless, they said that in today's environment having perhaps three to five GME teaching centers with populations and other characteristics best supporting GME would be a worthwhile, overall program outcome. Local Portsmouth officials were not included in or adequately informed about the Navy Surgeon General's GME closure decision, and thus they were surprised by it and strongly resisted it. The local Navy command authorities, for example, learned of the decision upon its being made public, which, as Health Affairs officials told us, increased the difficulty of overcoming their objections. While the Surgeon General's office later offered clarifications and reassurances about the decision, the initial impressions were not overcome. Paralleling this outcome was the Navy's announcement of the Bremerton family practice GME closure. Along with local resistance came local publicity and misunderstanding that the family practice clinic would be closed. Health Affairs officials told us that while the facilities generally know that GME must be downsized, those affected, regardless of the service or medical center targeted, will object. The officials also agreed that the communication of such GME decisions has been inadequate but must be delivered convincingly to those within the services who are affected, including line commands, as well as to beneficiary groups and affected congressional members, since such decisions affect them just as BRAC decisions do. In April 1997, while still trying to reassure all concerned, the Navy suspended its Portsmouth GME closure decision pending the outcome of a then-in-progress DOD-wide quadrennial defense review and further Navy analysis. The Navy expected the quadrennial review's results to add GME reduction pressure but, as DOD reported in May 1997, it did not. And the Navy's further analysis, completed in July 1997, supported the Portsmouth closure. But the 1998 National Defense Authorization Act prohibited the Navy from making any GME changes until we complete our review. As with the general response at Portsmouth, those affected locally objected to the decision to close Bremerton's family practice GME program. They argued that the Navy significantly lacked such specialists and that Bremerton's health care would be markedly reduced with the loss of GME trainees. Initially offering reassurances about maintaining Bremerton's health care levels, the Surgeon General eventually deferred the decision--which occurred at about the same time as he deferred the Portsmouth GME decision. However, the Surgeon General still considered the reasons for closing Bremerton's family practice GME to be valid. While the Army's GME sizing efforts--and the Air Force's for that matter--are independent of the Navy's, the services are subject to the same general policies and downsizing pressures. A few months after the Navy's closure attempts, the Army Surgeon General acted on an internal recommendation to close all remaining GME programs at the Army's William Beaumont Medical Center in El Paso. A representative from the Surgeon General's office told us that the apparent proposal to concentrate GME in four geographic locations was not a factor in choosing William Beaumont. The official told us that essentially the Army projected a need to eliminate about 50 GME trainee positions, and William Beaumont's remaining 64 positions met that requirement. Like the Navy's efforts, the Army's closure attempt was met with surprise and resistance by medical center, line command, and congressional representatives, who took issue with the decision's basis. The Army decided not to proceed with the closures, but like the Navy it still faces the need to close programs to achieve GME reductions. Upon learning that the William Beaumont closure decision was based almost entirely on the need to decrease GME trainee numbers to an extent that the Beaumont numbers would meet, medical center officials argued that the basis was arbitrary and unfair and that they had already scaled back their GME programs. Medical center officials and their local supporters argued that the care level for active duty personnel and their dependents and other beneficiaries in El Paso's medically underserved community would be devastated and that most El Paso physicians trained in certain specialties are at William Beaumont. The officials also argued that when a military hospital loses its GME training, either the service relocates its best teaching specialists or civilian markets attract them away. An Army Surgeon General's office representative told us that while the plan was to redistribute William Beaumont teaching faculty to other locations, the center's full patient care capability was to be maintained. Like the Navy, moreover, the Army had not involved those most directly affected by their closure deliberations in the initial decision process. And after William Beaumont officials and a local congressional member appealed for the decision's reconsideration, the Army conducted further analysis of such factors as patient demographics, workload, and quality indicators among the Army's teaching centers and GME programs but then suspended GME reduction decisions for the coming training year. The Air Force has not recently attempted major GME program closures. But it has been gradually reducing GME trainee numbers in ongoing programs, and soon it too will need to close programs to comply with wartime sizing requirements. The Air Force is subject to the same general closure policies, and we believe that its future attempts to formulate, communicate, and sustain major GME closure decisions will be as controversial as the Navy's and Army's recent experiences. Air Force officials told us that they are uncertain how such future reduction processes will work. Air Force officials told us that if future GME closures were driven by the four GME geographic centers concept, the Air Force would stand to lose one-third of its programs--including all programs in certain medical specialties. These officials also told us that they were unaware of any formal policy on the four GME center approach. The Navy's and Army's recent attempts to reduce their GME programs were resisted by those who were affected, and they were otherwise unsuccessful because DOD and the services lack accepted criteria on such matters as what factors to weigh in deciding which programs to close, including who should participate when and how in the decisions. In the absence of such criteria, DOD, the services, and we cannot appropriately judge the merits of closing one GME program rather than another. Such criteria would also need to account for other DOD initiatives' possible effects on GME; developing a framework for the criteria might be facilitated by DOD's review of lessons learned with private sector GME programs. The services' GME decisions can be affected by other DOD initiatives that have to be taken into account for the GME reduction process to work effectively. For example, DOD has two studies that could affect GME's size and location. One is an ongoing, long overdue study of the medical personnel required to meet wartime requirements, commonly referred to as the 733 Update, originally scheduled for completion by the end of March 1996. The other is the Defense Reform Initiative, announced in November 1997, that recommended reorganizing the DOD health care program. Related actions are expected to strengthen program oversight and thus will likely affect the way GME decisions are guided and made. Another influence on GME is the nationwide implementation of TRICARE, DOD's managed health care program. TRICARE requires military hospitals to be more cost effective, focus on primary care, and share the care workload with support contractors. Such health care management shifts under TRICARE may reduce funding and, according to DOD officials, reduce or otherwise change the workload support for military facilities' GME. Further, DOD and the services are engaged in joint efforts toward more integrated GME management, including collective oversight over DOD's GME strategic plan, joint evaluation of GME applicants, and planned efforts to consolidate GME administrative functions. Also, DOD is working toward standardizing the application of medical force sizing models. In 1996, we reported that while the services' respective modeling approaches to estimating medical strength requirements appeared to be reasonable, the models' results were largely affected by input data and judgmentally assigned values and assumptions. Because the services differ somewhat in their modeling applications, DOD is examining and seeking to reconcile the differences--such as the relative effects of the Army's inclusion of a "peacetime mission" component that the other services' models do not include. Differences in sizing model applications are also expected to be addressed in the 733 Update report. (Appendix II provides more information on the services' models.) The private medical sector has faced and continues to face the need to reduce, close, or otherwise modify its GME programs at medical schools and hospitals. Growth in managed care, physician oversupply, care delivery changes, and reduced funding to support civilian GME have altered the demands on GME. In October 1997, an Association of American Medical Colleges workgroup representing more than 140 medical schools and 400 major teaching hospitals and health systems published a resource document to assist teaching hospitals and medical schools in developing institution-specific approaches to analyzing and, if need be, modifying their GME programs. Synthesizing case studies and best practices, the work group identified a number of elements it termed "critical success factors" for rightsizing GME programs that we believe also have general applicability for future DOD GME sizing efforts. The factors include starting the GME resizing process well in advance of a critical need to reduce the number of residents; establishing clear guiding principles and ground rules; ensuring a proper time period for the resizing; securing top management's support, mindful that appropriate information to make a case for resizing can enhance the plan's acceptance; ensuring an inclusive process to minimize anxiety and identify and address concerns; affirming an institution's commitment to residents currently in training; assessing the financial effect of the resizing; and reengineering an institution's patient care processes where significant reductions in residents will occur. The work group also pointed out that a resizing effort's success depends largely on minimizing its effects on patient care and fully engaging the institution's leaders in the decisions. To attain DOD's overall GME policy goal of training to wartime requirements, the services need the ability to make GME reductions now and in the future. Recent Navy and Army GME program closure efforts, however, have not been successful, and the Air Force may face similar problems when it attempts closures. DOD and the services lack policy guidance and criteria governing site and program selection, including collaboration among decision makers and those affected. In deliberating closure alternatives, for example, the Navy's MEPC did not know that (1) a change in position had occurred on preserving GME where active duty personnel are concentrated, (2) ongoing GME integration efforts were to be preserved, (3) there apparently were to be only four GME concentration centers, or (4) study results would be produced later in support of either Bethesda or Portsmouth. Along with disputes about decision criteria, a key omission in the Navy's and Army's closure attempts was that of not involving medical and line commanders and others most directly affected by the decisions. Unsuccessful closure efforts dissatisfy those making and affected by the decisions and reduce the credibility of the process but they also may result in too many GME trainees, who are not readily deployable, and too few deployable physicians ready when needed. Thus, we believe that with commonly accepted GME sizing criteria, DOD and the services could make the program consolidations and closures needed to meet readiness goals. And we believe DOD and the services should have an opportunity to collaboratively develop and implement the criteria. But because the programs are highly prized and protected by the service hospitals and areas that have them, achieving criteria and closure decision agreement may not be easy. Moreover, if unsurmountable differences surface in developing or later applying the criteria, DOD may need to resort to forming a group independent of it and the services tasked with developing criteria or recommending and overseeing the implementation of specific closure or consolidation decisions. Other DOD initiatives, including TRICARE, ongoing sizing studies, and medical modeling application differences can bear on GME decisions, and they need to be taken into account in the development of GME program closure guidance for the closure process to be effective. In this regard, the Association of American Medical Colleges study of critical success factors in GME resizing efforts could prove helpful to DOD in its future resizing activities, particularly with respect to establishing downsizing principles and ground rules, securing top management support, and ensuring the inclusion of all who are affected. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs and the services' surgeons general to collaboratively develop GME closure policy guidance and implementing criteria and processes covering such matters as key factors in identifying and winnowing potential sites, how to project and mitigate potentially adverse effects on beneficiary health care and readiness, how and when to involve those affected in the services and local areas in the decision-making process, how to reach program closure agreement, and how to communicate and implement the resulting decisions; provide in the guidance for the potential effects of such DOD and service initiatives as TRICARE, with its emphasis on cost control and primary care, that can affect GME decisions; and develop, obtain agreement on, and publish such policy guidance before any further GME closure decisions are made. In its written comments on a draft of this report, DOD agreed with the report and its recommendations, characterizing our work as objective in addressing the aborted GME closure attempts and the need for clear downsizing criteria. DOD stated, without further elaborating, that the Navy and Air Force also concurred with the report and recommendations but that the Army did not. Nonetheless, DOD stated that Health Affairs would develop a draft DOD directive providing GME program closure and consolidation guidance that takes into account managed care exigencies. DOD and the Navy, Air Force, and Army would be bound by such a directive once it is made final. We continue to believe that with commonly accepted GME sizing criteria, DOD and the services could make the program consolidations and closures needed to meet readiness goals. And we continue to believe that DOD and the services should have an opportunity to collaboratively develop and implement the criteria. But, as exemplified by the Army's singular nonconcurrence with our recommendations, getting agreement on the criteria and implementing closure decisions likely will not be easy. The programs are highly prized and hence protected by the service hospitals and areas that have them. Thus, in the event that insurmountable differences surface in developing or later applying the criteria, DOD may need to resort to forming a body independent of it and the services tasked with developing criteria or recommending and overseeing the implementation of specific closure or consolidation decisions. We have added this matter to the report's conclusions section. We are sending copies of this report to the Secretary of Defense and will make copies available to others upon request. Please contact me at (202) 512-7101 or Dan Brier, Assistant Director, at (202) 512-6803 if you or your staff have any questions concerning this report. Other GAO staff who made contributions to this report are Elkins Cox, Beverly Brooks-Hall, and Allan Richardson. To assess the services' experiences in downsizing their graduate medical education (GME) programs, particularly the Navy's experiences, we examined the role of the Navy Medical Education Policy Council (MEPC) and the guidance and data the MEPC considered, evidence of the Navy's need for GME reductions and of the expected advantages and disadvantages of closing GME programs at one location versus another, and evidence that the Navy can still achieve needed GME reductions in ways that comply with DOD guidance and that overcome the kinds of objections raised in their recent closure attempts. For comparison, we examined comparable guidance, processes, and data used by the other services in their GME decisions. Information sources included Department of Defense (DOD) Health Affairs, the MEPC, the Navy Surgeon General's office, and other cognizant organizations within the Navy, along with comparable units in the other services. We interviewed (1) representatives of the Navy MEPC; (2) other Navy officials responsible for sizing and managing GME; (3) Health Affairs officials who provide GME guidance and oversight; (4) officials of the other services in Washington, D.C., and San Antonio, Texas, who direct and coordinate GME policy and programs; (5) officials at selected medical centers--particularly the Navy center in Portsmouth and the Army center in El Paso--where recent GME sizing decisions have become an issue; and (6) officials of DOD's TRICARE Northeast and Southwest regions, headquartered in Washington, D.C., and San Antonio, which also included officials of military medical centers in those areas. We also reviewed their policy statements, briefing documents on GME requirements, data on population and workload, studies of GME placement, and other records and reports. We evaluated the Navy council's recommendations and subsequent GME sizing decisions by the Navy Surgeon General in light of available policy guidance, relevant available data, and other influential factors that were or should have been considered. We compared the Navy's GME approach to decisions with that of the other services for possible lessons from successful efforts and for any common problems that need to be solved for all the services. We also considered the effects on GME of larger DOD initiatives, including the quadrennial defense review, the Defense Reform Initiative, update of the 733 study, and managed care under TRICARE, as well as the services' use of different sizing models to determine overall military medical readiness requirements, including GME. While we noted differences of opinion about the application of the overall sizing models, resolving those differences was beyond the scope of our work; the differences are expected to be addressed in the update of the 733 study. We also researched efforts by private sector medical schools and hospitals to alter the size of their GME programs, including a recent study by the Association of American Medical Colleges, representing medical schools and teaching hospitals, including the Department of Veterans Affairs medical centers. Each service has its own sizing model for adjusting military medical forces to meet its requirements. Health Affairs offers a sizing model also and has been promoting a more standardized sizing approach for the services. However, while the models can reveal overall medical force requirements, they do not indicate where medical forces should be located or where GME training should be done. In response to budgetary and legislative pressures to properly size Navy medical force structure, the Navy Surgeon General completed a requirements model in March 1994, called Total Health Care Support Readiness Requirements (THCSRR), to determine and project its active duty medical force readiness requirements. In November 1996, the Surgeon General decided to apply THCSRR, which resulted in attempts to significantly reduce GME. The THCSRR model defines readiness requirements as supporting three missions, including (1) a wartime mission meeting the demands of two nearly simultaneous major regional conflicts, including mobilizing hospital ships, supporting Navy fleet and Marine Corps operations ashore and afloat and numerous fleet hospitals, and maintaining military treatment facilities outside the United States; (2) a day-to-day operational support mission for the Navy fleet and Marine Corps that allows Navy personnel to rotate between the United States and operational Navy platforms and overseas assignments and that includes GME; and (3) a peacetime health benefit mission providing health care benefits in military treatment facilities in the United States. While the Navy views all three missions as imperative to Navy medicine under the THCSRR model, the first two are to determine the number of needed active duty personnel. It is only because of the first two missions of wartime readiness and day-to-day operational support that active duty Navy personnel are to be available to support the third mission of providing peacetime health care benefits. Pressure to develop a model such as THCSRR came from a study by the Office of the Secretary of Defense of the overall military health services system and the system's wartime medical force requirements; commonly referred to as the 733 study, it was required by section 733 of the 1992 National Defense Authorization Act and was completed in 1994. The 733 study examined the total medical care requirements needed to support all three services during a post-cold war wartime scenario along with peacetime health care requirements. The study concluded that the three services' medical force requirements for the two major regional conflict scenarios would be significantly reduced from earlier global wartime scenarios. However, the Navy saw a need for further study on its own to adequately determine its medical force requirements for day-to-day operational support and to combine those requirements with the wartime requirements to define the minimum number of fully trained active duty personnel required to accomplish both missions. The determinations for operational support requirements include the needed flow of trained physicians from GME. The Army and Air Force have independently developed sizing models to project their readiness needs, including GME requirements, and Health Affairs has presented a DOD medical sizing model to all three services to promote the standardization of requirements determinations and has used that model to compare requirements projections by the three services. A comparison in March 1997 showed that the Army's model included consideration of GME requirements beyond readiness to include what the Army defined as "peacetime mission," thus projecting more needed training positions than did the DOD model. Health Affairs used the Navy's THCSRR model as the starting point for the DOD model, specifying the same three critical DOD health care missions of readiness, day-to-day operational support, and peacetime health care and providing that only the first two missions are to determine the required number of active duty personnel. Also, use of the DOD medical sizing model is to be reflected in an ongoing update to the 733 study, which was initially to be completed by the end of March 1996 and may lead to a more standardized sizing approach. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a legislative requirement, GAO reviewed a Navy advisory council's recommendations for restructuring Navy graduate medical education (GME), focusing on: (1) why the Navy did not accept its council's recommendations for Bethesda GME closures and why its other closure attempts did not succeed; (2) whether the other services already have faced or may face similar experiences; and (3) what improvements may be needed if the services are to successfully make and implement their GME sizing decisions. GAO noted that: (1) in early 1997, the Navy Surgeon General decided to eliminate 162 GME positions to comply with lower projected wartime requirements and with Department of Defense (DOD) restrictions on the ratio of physicians in training to those deployable; (2) a Navy advisory council, lacking specific guidance but responding to the Navy Surgeon General's indications that GME should occur where active duty personnel are concentrated, recommended that such training be dropped at the Bethesda Medical Center; (3) the Navy Surgeon General, however, instead decided to close some of the Navy's Portsmouth Medical Center's programs following a then newly discussed agreement among DOD and the services' surgeons general to concentrate GME in four geographic locations that included Bethesda and San Diego but not Portsmouth; (4) lacking site selection guidance, the council submitted its recommendation to the Surgeon General without taking account of the agreement, which has never been formalized or acted on by the other services; (5) when announced, the Portsmouth closure decision surprised Navy command and medical center officials there, as well as local congressional representatives; (6) publicized arguments ensued that Portsmouth was as advantageous as Bethesda for concentrating GME and that losing Portsmouth's GME would reduce trainee-provided health care to active duty personnel and other beneficiaries and would harm Navy readiness; (7) although it was unsuccessful, the Surgeon General's office tried justifying the decision and later withdrew it for further study; (8) shortly thereafter and for the same ends, the Army Surgeon General's office sought to eliminate the 64 GME positions at the William Beaumont Medical Center in El Paso, Texas, also without site selection guidance and likewise failing to involve those who were affected; (9) while the Air Force also foresees the need for GME program closures, it has not yet attempted to make them; (10) but in the absence of closure policies and criteria and judging from the Navy's and Army's closure attempt experiences, GAO has no reason to believe that the Air Force would be any more successful in bringing about required GME program adjustments; and (11) while not a direct parallel to DOD GME with its readiness dimension, private-sector medical schools and hospitals have been downsizing their GME programs and in doing so have documented success factors that may provide a useful reference for DOD in developing guidance for its future sizing efforts.

VA operates one of the nation's largest health care systems to provide care to approximately 5.2 million veterans who receive health care through 158 VA medical centers (VAMC) and almost 900 outpatient clinics nationwide. The VA health care system also consists of nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. In 1986 Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments from veterans for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and were not made specifically available to VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. As part of VA's 1997 strategic plan, VA expected that collections from first- and third-party payments would cover the majority of the cost of care provided to veterans for nonservice-connected disabilities. VA has determined that some of these veterans, about 25 percent of VA's user population in fiscal year 2002, were required to pay a copayment because of their income levels. In September 1999, VA adopted a fee schedule, called "reasonable charges," which are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. To implement this, VA created additional bill-processing functions-- particularly in the areas of documenting care, coding the care, and processing bills for each episode of care. To collect from health insurers, VA uses a four-function process with 13 activities to manage the information needed to bill and collect third-party payments--also known as the MCCF revenue cycle (see fig. 1). First, the intake revenue cycle function involves gathering insurance information on the patient and verifying that information with the insurer as well as collecting demographic data on the veteran. Second, the utilization review function involves precertification of care in compliance with the veteran's insurance policy, including continued stay reviews to obtain authorization from third-party insurers for payment. Third, the billing function involves properly documenting the health care provided to patients by physicians and other health care providers. Based on the physician documentation, the diagnoses and medical procedures performed are coded. VA then creates and sends bills to insurers based on the insurance and coding information obtained. Finally, the collections, or accounts receivable, function includes processing payments from insurers and following up on outstanding or denied bills. See appendix II for a description of the activities that take place within each of the four functions. VA's Chief Business Office utilizes a performance measure--an efficiency rating it refers to as "cost to collect"--that reflects VA's cost to collect one dollar from first- and third-parties. To calculate the efficiency rating VA divides the costs of generating a bill and collecting payments from veterans and private health insurers by the actual revenue received from these sources. To measure the cost, cost data are extracted from two financial accounts, or cost centers, which are intended to capture field office costs and central office costs. Specifically, cost centers are used for classifying costs related to each of the 13 functional activities and the organizations that support these activities. According to an official with the Healthcare Financial Management Association, because business practices differ among entities, there are many variables that entities include in their calculations of the cost for collecting funds from first and third parties. Thus, a comparison of collection efficiency--the cost to collect one dollar--between different entities would be difficult. However, according to the official, it is reasonable to expect that business practices within the same organization such as the VA can be standardized, which would facilitate such a comparison internally. The VA health care system has unique rules and regulations governing its billing practices. For instance, VA is generally not authorized to bill Medicare or Medicaid for care provided to Medicare- or Medicaid-eligible veterans. VA must pay for all inpatient and outpatient care associated with a service-connected disability--it cannot collect copayments or bill third- party insurers for this care. VA uses third-party collections to satisfy veterans' first-party debt. Specifically, if VA treats an insured veteran for a nonservice-connected disability, and the veteran is also determined by VA to have copayment responsibilities, VA will apply each dollar collected from the insurer to satisfy the veteran's copayment debt related to that treatment. As we stated in a previous report to Congress, the statutes governing VA recoveries from private health insurers and veteran copayments do not clearly specify the relationship between the two provisions. In the absence of definitive guidance in the law, VA's General Counsel has determined that insurance recoveries should be used to satisfy veterans' copayment debt. The law and the relevant legislative history are not clear on whether third-party collections can be used for this purpose. VA has not provided guidance to the Chief Business Office or VISNs for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, we found that VA's Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used in the calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, reported costs to collect are inaccurate. We found that some costs incurred by VA's central office as part of its efforts for collecting first- and third-party payments were not allocated to the central office cost center. For example, the following activities are costs incurred by organizations that support the Chief Business Office, but are not included in the central office cost center: Staff at the Health Eligibility Center spend a portion of their time determining veterans' copayment status. Staff at the Health Revenue Center processed first-party refunds resulting from a settlement with a third-party payer regarding claims submitted from January 1995 through December 2001. VA reported that about 15 full- time staff members are dedicated to this effort. Staff assigned to Health Informatics assisted with contractor-developed software to review third-party claims for accuracy. Some costs incurred by field locations also were not always allocated to the field office cost center. Cost allocation differences occur because VA does not provide guidance to its field locations on which costs to allocate to specific cost centers. Thus, each of VA's health care VISNs makes a determination as to which cost center to use when allocating costs for specific revenue cycle functions--such as patient intake and registration and utilization review. Figure 2 shows inconsistencies among VISNs in the way they allocate costs to some of the activities within the revenue cycle functions. For example, for precertification and certification activities within the utilization review function, 13 VISNs allocated all of the cost, 3 VISNs allocated some costs, and 5 VISNs allocated none of the cost to the field office cost center. In addition, the following are examples of costs that are related to collection activities but were not included in the costs for collecting payments: A veteran call center in VISN 8 (Bay Pines, Florida)--staffing resources valued at about $635,000 designed to assist veterans with questions about bills they receive and, if necessary, the arrangement of payment plans. Two service contracts in VISN 2 (Albany, New York)--approximately $470,000 in contract expenses for collecting third-party payments and a service contract estimated at $104,000 for insurance verification. Two service contracts in VISN 10 (Cincinnati, Ohio)--approximately $100,000 in contract expenses to use a software package that reviews claims sent to third-party insurers for technical accuracy. Also not included was an estimated $425,000 to license the use of insurance identification and verification software. In an attempt to standardize how MCCF staff carry out the revenue cycle functions and to instill fiscal discipline throughout its entire health system, VA is piloting the Patient Financial Services System (PFSS) in VISN 10 (Cincinnati, Ohio). PFSS is a financial software package that contains individual patient accounts for billing purposes. According to the Chief Business Office, the system is a key element to standardize MCCF operations throughout the entire VA health care system. PFSS is expected to improve first- and third-party collections by capturing and consolidating inpatient and outpatient billing information. However, PFSS is not currently designed to capture the cost of staff time for these activities--a key element for assessing the efficiency of VA's collection efforts. VA's practice of satisfying veterans' copayment debt with collections from third-party insurers has reduced overall collections and increased administrative expenses. VA does not quantify the lost revenue from veterans' copayments that is not collected and could be used to supplement its medical care appropriation. Based on interviews with network officials and site visits to individual medical facilities, we did not discover any locations that track the volume of first-party debt that is not collected and its relative dollar value. Hence, the exact dollar value of first-party revenue that was not collected is unknown. Seventeen of the 21 network officials we interviewed stated that considerable administrative time is dedicated to the process required to satisfy first-party debt with third-party collections--resources that could be invested elsewhere if the practice did not exist. One facility official estimated that approximately 5 full-time equivalent staff are used to satisfy first-party debt. Furthermore, one VISN official estimated that its medical facilities use approximately 11 full-time equivalent staff on this process. Collections staff routinely receive insurance payments that include voluminous reports that detail each claim. For example, one medical center provided us with a report that contained approximately 1,000 line items, each representing a pharmaceutical reimbursement. Staff at the medical center must sort through each line item and manually match it to a claim in the veteran's file to determine if the veteran was charged a copayment for the pharmaceutical. In those cases where VA receives a reimbursement and the veteran was charged a copayment, VA will issue a credit or refund to the veteran--in the case of pharmaceuticals this amount can be up to $7. VA will delay billing copayments to veterans with private health insurance for 90 days to allow time for the insurer to reimburse VA. However, when insurers reimburse VA after the 90-day period, VA must absorb the cost of additional staff time for processing a refund if the veteran has already paid the bill. In our 1997 report, we discussed that VA's practice of satisfying copayment debt with recoveries made from third-party insurers has resulted in reduced overall cost recoveries and increased administrative expense. In the report we suggested that Congress consider clarifying the cost recovery provisions of title 38 of the U.S. Code to direct VA to collect copayments from patients regardless of any amounts recovered from private health insurance except in instances where the insurer pays the full cost of VA care. VA does not provide guidance to its Chief Business Office and VISNs for accounting for the costs associated with collecting payments from private health insurers and veterans. As a result, VA's Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used by the Chief Business Office in its calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, VA's reported cost-to-collect measure is inaccurate. Furthermore, VA has determined that it should use collections from private health insurers to satisfy veteran copayment debt. The law is silent on this point. VA's determination has resulted in increased administrative expenses and reduced overall collections, thus making fewer dollars available for veteran health care. We believe our previous suggestion to Congress--that it consider clarifying the cost recovery provisions of title 38 of the U.S. Code to direct VA to collect copayments from patients regardless of any amounts recovered from private health insurance except in instances where the insurer pays the full cost of VA care--is still valid. Such action would reduce the administrative burden on VA staff, reduce VA administrative expenses, and allow VA to maximize collections to help meet its costs for providing health care. To accurately determine and report the cost to collect first- and third-party payments, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to provide guidance for standardizing and consistently applying across VA the accounting of costs associated with collecting payments from veterans and private health insurers. We provided a draft of this report to VA for comment. In oral comments, an official in VA's Office of Congressional and Legislative Affairs informed us that VA concurred with our recommendation. We are sending copies of this report to the Secretary of Veterans Affairs, interested congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov/. If you or your staff have any questions about this report, please call me at (202) 512-7101 or Michael T. Blair, Jr., at (404) 679-1944. Michael Tropauer and Aditi Shah Archer contributed to this report. To do our work, we reviewed our prior work and Department of Veterans Affairs (VA) Office of Inspector General reports on VA's first- and third- party revenue collection for the Medical Care Collections Fund (MCCF). We obtained and reviewed copies of VA policies and regulations governing these collection activities. Also, we reviewed statements by the Federal Accounting Standards and Advisory Board on managerial cost accounting concepts and standards for the federal government. We interviewed officials at VA's Chief Business Office, which provides policy guidance to MCCF field staff, and obtained information on what they consider to be direct expenses of collecting first- and third-party revenue and documentation on how they calculate the cost to collect first- and third-party revenue. This information was validated through telephone interviews of key officials at each of VA's 21 networks and site visits to 4 medical facilities. Also, we obtained information on the organizational structure for each network and its medical facilities and obtained the views of VISN and medical facility officials on the accuracy of the Chief Business Office's cost reporting. In addition, we obtained information from the Healthcare Financial Management Association on other health care industry practices for reporting the cost to collect first- and third- party payments. Regarding the practice of satisfying first-party debt with third-party revenue, we reviewed past opinions and decisions by VA's Office of General Counsel, applicable laws and regulations, and existing GAO matters for consideration. We also discussed the implementation of VA's Office of General Counsel's decisions with staff from VA's Chief Business Office and medical facilities. In 1986, Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and not made specifically available to the VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. To collect from health insurers, VA uses a four-function process with the following 13 activities to bill and collect third-party payments. 1. Patient Registration: Collecting patient demographic information, determining eligibility for health care benefits, ascertaining financial status, and obtaining consent for release of medical information. 2. Insurance Identification: Obtaining insurance information from veteran, spouse, or employer. 3. Insurance Verification: Confirming patient insurance information and contacting third-party insurer for verification of coverage and benefit structure. 4. Precertification and Certification: Contacting third-party insurer to obtain payment authorization for VA-provided care. 5. Continued Stay Reviews: Reviewing clinical information and obtaining payment authorization from third-party insurer for continuation of care. 6. Coding and Documentation: Reviewing and assigning appropriate codes to document diagnosis of patient ailment and treatment procedures and validating information documented by the physician. 7. Bill Creation: Gathering pertinent data for bills; authorizing and generating bills; and submitting bills to payers. 8. Claims Correspondence and Inquiries: Providing customer service for veterans, payers, Congress, and VA Regional Counsel. 9. Establishment of Receivables: Reviewing outstanding claims sent to third-party insurers and identifying amount of payment due to VA for collection follow-up work. 10. Payment Processing: Reviewing, posting, and reconciling payment received. 11. Collection Correspondence and Inquiries: Following up with payers; resolving first-party bankruptcies, hardships and waivers; processing refund requests, repayment plans, and returned checks; referring claims to utilization review; and generating probate action. 12. Referral of Indebtedness: Referring delinquent first-party debt to the U.S. Treasury for collection against any future government payment to the veteran, such as reducing an income tax refund by the amount of the first-party debt. 13. Appeals: Receiving notification of partial or nonpayment from the third-party insurer, reviewing documentation, initiating an appeal to the third-party insurer for payment, and following up for appropriate payment. VA Health Care: VA Increases Third-Party Collections as It Addresses Problems in Its Collections Operations. GAO-03-740T. Washington, D.C.: May 7, 2003. VA Health Care: Third-Party Collections Rising as VA Continues to Address Problems in Its Collections Operations. GAO-03-145. Washington, D.C.: January 31, 2003. VA Health Care: VA Has Not Sufficiently Explored Alternatives for Optimizing Third-Party Collections. GAO-01-1157T. Washington, D.C.: September 20, 2001. VA Health Care: Third-Party Charges Based on Sound Methodology; Implementation Challenges Remain. GAO/HEHS-99-124. Washington, D.C.: June 11, 1999. VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult. GAO/HEHS-98-4. Washington, D.C.: October 17, 1997. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select "Subscribe to Updates."

During a May 2003 congressional hearing, questions were raised about the accuracy of the Department of Veterans Affairs' (VA) reported costs for collecting payments from veterans and private health insurers for its Medical Care Collections Fund (MCCF). Congress also had questions about VA's practice of using third-party collections to satisfy veterans' first-party debt. GAO's objectives were to determine: (1) the accuracy of VA's reported cost for collecting first- and third-party payments from veterans and private health insurers, and (2) how VA's practice of satisfying first-party debt with third-party payments affects the collections process. VA has not provided guidance to its Chief Business Office and Veterans Integrated Service Networks (VISN) for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, GAO found that the Chief Business Office and VISNs excluded some costs associated with collecting first- and third-party payments. In addition, GAO found inconsistencies in the way VISNs allocate these costs. Consequently, VA's reported costs to collect are inaccurate. VA's practice of satisfying--or paying for--first-party, or veterans' copayment debt, with collections from third-party insurers has resulted in a reduction in overall collections and increased administrative expenses due to the reconciliation process. VA has taken the position that payments made from third-party insurers should be used to satisfy veterans' first-party debt. The law and legislative history are not clear on whether third-party collections can be used for this purpose.

In March 2008, we reported that CDC had 13 guidelines for hospitals on infection control and prevention, and in these guidelines CDC recommended almost 1,200 practices for implementation to prevent HAIs and related adverse events. (See table 1.) CDC's infection control and prevention guidelines set forth recommended practices, summarize the applicable scientific evidence and research, and contain contextual information and citations for relevant studies and literature. Most of CDC's infection control and prevention guidelines are developed in conjunction with HICPAC, an advisory body created in 1992 by the Secretary of HHS. CDC publishes the final guidelines in its Morbidity and Mortality Weekly Report, on its Web site, or through a professional journal. We found that CDC's guidelines covered such topics as prevention of catheter-associated urinary tract infections, prevention of surgical site infections, and hand hygiene. An example of a recommended practice in the hand hygiene guideline is the recommendation that health care workers decontaminate their hands before having direct contact with patients. Most of the practices were sorted into five categories--from strongly recommended for implementation to not recommended-- primarily on the basis of the strength of the scientific evidence for each practice. Over 500 practices were strongly recommended. We also found that CDC and AHRQ had conducted some activities to promote implementation of recommended practices, such as disseminating the guidelines and providing research funds. However, these steps were not guided by a prioritization of recommended practices. Our March 2008 report noted that one factor to consider in prioritization is strength of evidence, as CDC had done. In addition to strength of evidence, an AHRQ study identified other factors to consider in prioritizing recommended practices, such as costs and organizational obstacles. Furthermore, the efforts of the two agencies had not been coordinated. For example, we found that CDC and AHRQ independently examined various aspects of the evidence related to improving hand hygiene compliance, such as the selection of hand hygiene products and health care worker education. This could have been an opportunity for coordination. We found that no one in the HHS Office of the Secretary was responsible for coordinating infection control activities across HHS. The department subsequently established the Steering Committee for the Prevention of Healthcare-Associated Infections, with senior-level representation of HHS offices and operating divisions, to develop the HHS Action Plan. To facilitate implementation of recommended practices among health care organizations, the plan prioritized some recommended practices to address four of its six targeted HAIs. In March 2008, we reported that while CDC's infection control guidelines described specific clinical practices recommended to reduce HAIs, the infection control standards that CMS and accrediting organizations require as part of the hospital certification and accreditation processes described the fundamental components of a hospital's infection control program. These components included the active prevention, control, and investigation of infections. Examples of standards and corresponding standards interpretations that hospitals must follow included educating hospital personnel about infection control and having infection control policies in place. The standards were far fewer in number than the recommended practices in CDC's guidelines--for example, CMS's infection control COP contained two standards. We also found that as a whole, the CMS, Joint Commission, and AOA standards and their interpretations described similar required elements of hospital infection programs. For example, all required that the hospital designate a person or persons to be responsible for the infection control program. However, there were differences, including the extent to which the standards and their interpretations required implementation of practices recommended in CDC's infection control guidelines. Although CMS and the accrediting organizations generally did not require that hospitals implement all recommended practices in CDC's infection control and prevention guidelines, we reported that the Joint Commission and AOA had standards that required the implementation of certain practices recommended in CDC's infection control guidelines. For example, we reported that the Joint Commission and AOA required hospitals to annually offer influenza vaccinations to health care workers, whereas CMS's interpretive guidelines, or standards interpretations, were more general, stating that hospitals should adopt policies and procedures based as much as possible on national guidelines that address hospital-staff- related issues, such as evaluating hospital staff immunization status for designated infectious diseases. In our March 2008 report, we proposed that HHS determine how to promote implementation of prioritized practices, including whether to incorporate selected practices into CMS's hospital standards. In its Action Plan, HHS indicates its preference not to include specific infection control practices in its hospital standards in order to keep its standards flexible and broad. In our March 2008 report, we also discussed how compliance with hospital standards is assessed. CMS, the Joint Commission, and AOA assessed compliance with their infection control standards during on-site surveys through direct observation of hospital activities and review of hospital policy documents. Among the surveys conducted in the first quarter of 2007, 12.6 percent of CMS-surveyed hospitals, 17.6 percent of Joint Commission-surveyed hospitals, and 22.2 percent of AOA-surveyed hospitals were cited as noncompliant with one of the respective organizations' standards on infection control. In March 2008, we reported that multiple HHS programs collected data on HAIs but that limitations in the scope of information they collected and the lack of integration across the databases maintained by these separate programs constrained the utility of the data. Three agencies within HHS-- CDC, CMS, and AHRQ--collect HAI-related data for a variety of purposes in databases maintained by four separate programs: CDC's National Healthcare Safety Network (NHSN) program, CMS's Medicare Patient Safety Monitoring System (MPSMS), CMS's Annual Payment Update (APU) program, and AHRQ's Healthcare Cost and Utilization Project (HCUP). (See table 2.) We found that the most detailed source of information on HAIs in HHS was the NHSN database. It began as a voluntary program in the 1970s to assist hospitals that wanted to monitor their HAI rates. CDC has drawn on these data to publicly report aggregate trends in selected HAIs, and we found that it was working with a number of states that were implementing mandatory programs for hospitals to submit HAI-related data through NHSN. We reported that the MPSMS database provided CMS with information on national trends in the incidence of selected adverse events among hospitalized Medicare beneficiaries, including a number of different types of HAIs. These data were collected from medical records selected for annual random samples of approximately 25,000 Medicare inpatients. We also reported that the APU program implemented a financial incentive for hospitals to submit to CMS data that were used to calculate hospital performance on measures of quality of care. The program received quality-related data quarterly for a range of medical conditions, including data on three surgical infection prevention measures. We noted that CMS reported the results of its analyses of these data on its Hospital Compare Web site. Finally, we reported that AHRQ sponsored the development of the HCUP databases to create a national information resource of patient-level health care data. Two of the 20 Patient Safety Indicators that AHRQ derived from these data were related to HAIs, one involving infections caused by intravenous lines and catheters, and the other postoperative sepsis. We found that each of these databases presented only a partial view of the extent of the HAI problem because each focused its data collection on selected types of HAIs and collected data from a different subset of hospital patients across the country. Although two databases--NHSN and MPSMS--addressed many of the same types of HAIs, the former provided information only from selected units of hospitals that participated in the NHSN program (which did not represent hospitals nationwide), while the latter provided information only on a representative sample of Medicare inpatients (i.e., MPSMS did not provide information on non-Medicare patients). In addition, the data collection methods employed by the NHSN, MPSMS, and HCUP databases ranged from concurrent review of patient care as patients were being treated in the hospital, to retrospective review of patient medical records after patients had been discharged, to analyses of diagnostic codes recorded electronically in patient billing data. Although we noted that officials from the various HHS agencies discussed HAI data collection with each other, we found that the agencies were not taking steps to integrate any of the existing data from the four databases. This integration could involve creating linkages across the databases by, for example, creating common patient identifiers so that data from the same individuals in multiple databases could be pulled together. Creating linkages across the HAI-related databases could enhance the availability of information to better understand where and how HAIs occur. For example, data on surgical infection rates and data on surgical processes of care were collected for some of the same patients in two different databases that were not linked. In our March 2008 report, we concluded that, as a consequence, the potential benefit of using the existing data to monitor the extent to which compliance with the recommended surgical care processes led to actual improvements in surgical infection rates had not been realized. In its January 2009 Action Plan, HHS proposes remedying this situation by undertaking a series of short- and longer-term initiatives to coordinate and align its various HAI-related data collection activities, under the guidance of a new interagency working group. In our March 2008 report, we reported concerns with the use of HAI data for providing a national picture of HAIs. Although none of the databases collected data on the incidence of HAIs for a nationally representative sample of hospital patients, CDC officials had produced national estimates of HAIs. However, those estimates derived from assumptions and extrapolations that raised questions about the reliability of those estimates. In its Action Plan, HHS proposes to draw on some of the same data sources--primarily NHSN--to track progress in reducing the incidence of five of its six targeted HAIs. HAIs in hospitals can cause needless suffering and death. Federal authorities and private organizations have undertaken a number of activities to address this serious problem; however, to date, these activities have not gained sufficient traction to be effective. In our March 2008 report, we identified two possible reasons for the lack of effective actions to control HAIs. First, although CDC's guidelines are an important source for its recommended practices on how to reduce HAIs, the large number of recommended practices and lack of department- level prioritization hinder efforts to promote their implementation. The guidelines we reviewed contain almost 1,200 recommended practices for hospitals, including over 500 that are strongly recommended--a large number for a hospital trying to implement them. A few of these are required by CMS's or accrediting organizations' standards or their standards interpretations, but it is not reasonable to expect CMS or accrediting organizations to require additional practices without prioritization. Although CDC has categorized the practices on the basis of the strength of the scientific evidence, there are other factors to consider in developing priorities. For example, work by AHRQ suggests factors such as costs or organizational obstacles that could be considered. The lack of coordinated prioritization may have resulted in duplication of effort by CDC and AHRQ in their reviews of scientific evidence on HAI- related practices. Second, we reported that HHS had not effectively used the HAI-related data it had collected through multiple databases across the department to provide a complete picture of the extent of the problem. Limitations in the databases, such as nonrepresentative samples, hinder HHS's ability to produce reliable national estimates on the frequency of different types of HAIs. In addition, data collected on HAIs are not being combined to maximize their utility. HHS has made efforts to use the currently collected data to understand the extent of the problem of HAIs, but the lack of linkages across the various databases results in a lost opportunity to gain a better grasp of the problem of HAIs. HHS has multiple methods to influence hospitals to take more aggressive action to control or prevent HAIs, including issuing guidelines with recommended practices, requiring hospitals to comply with certain standards, releasing data to the public to expand information about the nature of the problem, and using hospital payment methods to encourage the reduction of HAIs. Prioritization of CDC's many recommended practices can help guide their implementation, and better use of currently collected data on HAIs could help HHS--and hospitals themselves-- monitor efforts to reduce HAIs. In our March 2008 report, we concluded that leadership from the Secretary of HHS was lacking to do this and that without such leadership, the department would not be able to effectively leverage its various methods to have a significant effect on the suffering and death caused by HAIs. The recently released HHS Action Plan identifies strategies that are intended to address some of the reasons for the lack of effective actions to control HAIs, including some identification of priorities from among the 1,200 recommended practices, and plans to coordinate HAI-related data collection activities across HHS. HHS released the Action Plan for comment in early January 2009, with the intent of revising it based on the public input it received. Following the transition to the new presidential administration, HHS has continued to solicit public comments on the plan with no designated deadline for submissions. Consequently, it remains uncertain when or if the new administration will choose to implement this plan, and if so, with what modifications, to address our recommendations and reduce the serious problem of HAIs. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this statement, please contact Marjorie Kanof at (202) 512-7114 or [email protected] or Cynthia A. Bascetta at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were William Simerl, Assistant Director; Mary Giffin; Shannon Slawter Legeer; Eric Peterson; and Roseanne Price. 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.

According to the Centers for Disease Control and Prevention (CDC), health-care-associated infections (HAI)--infections that patients acquire while receiving treatment for other conditions-- are estimated to be 1 of the top 10 causes of death in the nation. The statement GAO is issuing today summarizes a March 2008 report, Health-Care-Associated Infections in Hospitals: Leadership Needed from HHS to Prioritize Prevention Practices and Improve Data on These Infections (GAO-08-283). In this report, GAO examined (1) CDC's guidelines for hospitals to reduce or prevent HAIs and what HHS does to promote their implementation, (2) Centers for Medicare & Medicaid Services' (CMS) and hospital accrediting organizations' required standards for hospitals to reduce or prevent HAIs, and (3) HHS programs that collect data related to HAIs and integration of the data across HHS. To conduct the work, GAO reviewed documents and interviewed HHS and accrediting organization officials. To update certain information for this statement, GAO reviewed relevant HHS documents released after GAO's March 2008 report. In its March 2008 report, which is summarized in this statement, GAO found that CDC has 13 guidelines for hospitals on infection control and prevention, which contain almost 1,200 recommended practices, but activities across HHS to promote implementation of these practices are not guided by a prioritization of the practices. Although most of the practices have been sorted into categories primarily on the basis of the strength of the scientific evidence for the practice, other factors to consider in prioritizing, such as costs or organizational obstacles, have not been taken into account. While CDC's guidelines describe specific clinical practices recommended to reduce HAIs, the infection control standards that CMS and the accrediting organizations require describe the fundamental components of a hospital's infection control program. The standards are far fewer in number than CDC's recommended practices and generally do not require that hospitals implement all recommended practices in CDC's guidelines. Multiple HHS programs have databases that collect data on HAIs, but limitations in the scope of information collected and a lack of integration across the databases constrain the utility of the data. GAO concluded that the lack of department-level prioritization of CDC's large number of recommended practices had hindered efforts to promote their implementation. GAO noted that a few of CDC's strongly recommended practices were required by CMS or the accrediting organizations but that it was not reasonable to expect CMS or the accrediting organizations to require additional practices without prioritization. GAO also concluded that HHS had not effectively used the HAI-related data it had collected through multiple databases across the department to provide a complete picture of the extent of the problem. Subsequent to GAO's report, HHS established a steering committee, with senior-level representation of HHS offices and operating divisions, to develop the HHS Action Plan to Prevent Healthcare-Associated Infections. This plan includes strategies that are intended to address some of the reasons for the lack of effective actions to control HAIs, including some identification of priorities from among the 1,200 recommended practices, and plans to coordinate HAI-related data collection activities across HHS. HHS released the Action Plan for comment in early January 2009, with the intent of revising it based on the public input it received. Following the transition to the new presidential administration, HHS has continued to solicit public comments. Consequently, it remains uncertain when or if the new administration will choose to implement this plan, and if so, with what modifications, to address GAO's recommendations and reduce the serious problem of HAIs.

Preserving U.S. industrial capabilities in sectors critical to national security has been a traditional U.S. policy goal. An important concern in the debate on foreign investment in the United States is the possibility that key segments of industries critical to the national security could come under foreign control through foreign investments. Because U.S. defense strategy relies on the deterrent effects of technological rather than numerical superiority, concern about foreign investment focuses on the U.S. government's ability to identify technologies crucial to defense systems and to act to preserve and promote U.S. leadership in them. The United States does not screen inward investment but relies on certain laws or regulations to ensure that foreign investment does not assume forms harmful to the nation's interests. For example, specific restrictions are in place to protect classified defense information from foreign access and to ensure U.S. production of vital defense goods in the event of a crisis. Foreign investments in U.S. firms performing classified defense work are monitored under the National Industrial Security Program. Restrictions under this program provide authority to restrict or deny foreign access to classified information. Although they do not authorize denials of foreign investments, they can, in effect, deter potential investors who are seeking access to classified information. The U.S. government, in addition, restricts foreign investment in certain sectors, such as energy resources, coastal and domestic shipping, and air transport. To counter the loss of leading-edge or highly advanced technology and processes that are important to the country's security through the acquisition of U.S. companies by foreign investors, Congress passed the Exon-Florio legislation in 1988. Congress was concerned that foreign takeovers of U.S. firms that harmed U.S. security could not be stopped unless the President declared a national emergency or regulators invoked Federal antitrust, environmental, or securities laws. The Exon-Florio legislation grants the President the authority to take appropriate action to suspend or prohibit foreign acquisitions, mergers, or takeovers of U.S. businesses that threaten to impair the national security. To exercise this authority, the President must find that (1) credible evidence exists that the foreign interest might take action that threatens to impair national security and (2) provisions of law, other than the International Emergency Economic Powers Act, do not provide adequate and appropriate authority to protect the national security. However, Congress did not intend for the legislation to raise obstacles to foreign investment. The President designated CFIUS as responsible for reviewing transactions. CFIUS is an existing Committee comprised of representatives from 11 agencies or offices. The Secretary of the Treasury chairs the Committee and the Departments of State, Commerce, and Defense are among the agencies represented. The Defense Technology Security Administration coordinates the positions of various Department of Defense (DOD) components and provides the final DOD position for CFIUS reviews. Notification to CFIUS of an acquisition is voluntary. However, it is in the interest of foreign investors to do so because CFIUS retains the right to review in the future any acquisition not notified to the Committee. The Exon-Florio regulations also permit a Committee member to submit a notice of a proposed or completed acquisition for a national security review. The CFIUS review process serves both to protect national security and to minimize any potential adverse effect of the Exon-Florio legislation on foreign investment in the United States. CFIUS determination that there are no national security issues essentially eliminates the risk that the President will at a later time block the transaction or order a divestiture. Once it is notified, CFIUS has an initial 30-day review period to determine if the transaction involves foreign control and whether there are national security concerns that warrant further investigation. If CFIUS decides that there will be foreign control and that potentially serious national security concerns are present, the Committee initiates a 45-day investigation. It then submits a report and recommendation to the President. The President has 15 days to decide whether or not to take appropriate action. The President may exercise the authority conferred by the Exon-Florio legislation, however, only if there is credible evidence that a foreign controlling interest might threaten national security and that other legislation cannot provide adequate protection. As shown in table 1, between October 1988 and December 1994, CFIUS received 918 voluntary notifications. Of these, 15 involved 45-day investigations with recommendations to the President. In 5 of the 15 investigations, the companies voluntarily withdrew their investment offers. Of the remaining 10 investigations, the President decided not to intervene in 9 transactions and ordered divestiture in 1 case involving a Chinese company's acquisition of a U.S. aircraft parts company. In 1992, Thomson-CSF, a French government-owned company, attempted to acquire the LTV Corporation's Missile Division, which prompted legislation aimed at strengthening Exon-Florio. One provision made a distinction between foreign control and foreign government control and mandated 45-day investigations when the acquiring company is controlled by or acting on behalf of a foreign government and the acquisition could result in foreign government control that could affect the national security. Another provision required intelligence agency assessments of the risk of diversion of a defense critical technology when the U.S. company is engaged in the development of such a technology or is otherwise important to the defense industrial and technology base. Our analysis of data on CFIUS cases from October 1988 through May 1994 showed that about two-thirds of the filings involved high-technology industries in which there could be potential national security concerns.Among these industries are computers and semiconductors, electronics, aerospace, advanced materials, chemicals, biotechnology, and telecommunications. About one-third of the notifications to CFIUS involved industries in which national security concerns would be unlikely to arise. Examples of these industries include mining, plastics and rubber, construction, retailing, real estate, and entertainment. (App. III contains additional information on the industries with foreign investments that were reported to CFIUS.) Companies from Japan, the United Kingdom, France, and Germany accounted for over 65 percent of the notifications to CFIUS since 1988. Japanese companies were the leading investors notifying CFIUS, primarily on investments in computers and semiconductors. British companies were the second most active investors filing with CFIUS, most frequently on investments in advanced materials and electronics. French companies most frequently notified CFIUS of investments in aerospace, computers, and telecommunications companies, while German companies filed with CFIUS for investments in chemicals, industrial controls, equipment and machinery, and energy industries. Our comparison of CFIUS data with two private sector databases on foreign investments showed somewhat comparable investment concentrations by country and by industry. (Details on the four countries' CFIUS filings by industry are in app. IV.) The 1992 legislation required the President to report on various aspects of foreign investment in U.S. critical-technology companies. The National Economic Council formed a working group to respond to the requirement and reported its findings in 1994. The group found no credible evidence that a country or private companies had a coordinated strategy to acquire U.S. critical-technology companies. It also noted that the absence of credible evidence demonstrating a coordinated strategy should not be viewed as conclusive proof that a coordinated strategy does not exist. The report also indicated that foreign governments, including those of France, Germany, and Japan, provide indirect assistance and guidance to their companies regarding foreign investments in high-technology U.S. firms. The Exon-Florio legislation and implementing regulations do not define which investments are important to review for national security reasons. Moreover, notification to CFIUS is voluntary. CFIUS officials believe that the Committee has been notified of most foreign investments in key or high-technology companies that could affect national security. CFIUS officials pointed out that investors have a strong inducement to notify CFIUS and seek its prior approval because the President retains the authority to order divestitures of transactions not cleared by CFIUS. However, we found that many foreign investments occur in high-technology or defense-related industries that were not reported to CFIUS. While the significance of the gap is unclear, it does suggest that the CFIUS process alone cannot be relied on to surface transactions posing potential national security concerns. Our comparison of two private databases on foreign investment in the United States with CFIUS data showed that many transactions occurred in high-technology industries that were not filed with CFIUS. Among these industries were telecommunications, advanced materials, biotechnology, electronics, computers, and aerospace. We verified selected transactions and determined that an acquisition of a U.S. aircraft parts manufacturer and investments in biotechnology and chemical companies occurred without being reported to CFIUS. However, these databases do not contain sufficient information to establish a link to national security, since they do not contain information on, for example, whether the acquired company had DOD contracts or produced products subject to U.S. export controls. (See app. I for an explanation of our comparison and app. II for details on transactions not notified to CFIUS, according to these private databases.) Furthermore, because Exon-Florio was never intended to be a comprehensive foreign investment review act, it is to be expected that there would be foreign investments that are not notified to CFIUS. Under the Exon-Florio legislation, CFIUS has considerable flexibility to decide if a transaction results in foreign company control over a U.S. firm or if a foreign government has control over an acquiring company. The implementing regulations do not specify that a given percentage of foreign ownership automatically results in control because minority owners can exercise control under various conditions. For example, a minority owner might hold board membership and have special voting rights over certain company actions. For this reason, the regulations broadly define control to mean having the power to directly or indirectly effect key company decisions and actions. CFIUS generally relies on a company's stated intentions regarding the structure of the investment and the decision-making framework of the corporation. While decisions about foreign control are straightforward in complete acquisitions and majority investments, such decisions can be complicated and difficult in minority investment cases. Also, deciding foreign government control over the acquiring company can be difficult and involves a high degree of judgment. Of the 16 cases we reviewed, 12 involved majority investments or 100 percent acquisitions, and 4 involved minority investments. In two of the minority investment cases, CFIUS found foreign control and in two cases it determined there was no foreign control. A British company notified CFIUS of its intention to acquire 20 percent of a U.S. company. The U.S. company had classified contracts and provided a critical U.S. government emergency service. The acquisition would give the British company 3 of the 15 seats on the company's board of directors and certain "consent rights" that would enable the British company to block several corporate actions. CFIUS found that foreign control would result on the basis of the British company's right to veto certain acquisitions, joint ventures, and asset sales as well as any company charter amendment adversely affecting the British company. CFIUS conducted a 30-day review. However, this review determined that national security concerns were not sufficient to warrant an investigation. A German company notified CFIUS of its intention to purchase 12.25 percent of the common stock of a U.S. company. The U.S. parent company controlled 51 percent of the stock, and three European companies controlled the remaining 49 percent. The proposed investment would redistribute the stock among the foreign owners, leaving the U.S. majority ownership intact. The U.S. company had classified DOD and other U.S. government contracts that were protected by facility security clearances. CFIUS determined that the purchase of 12.25 percent of the company's voting stock constituted foreign control because of several minority veto rights. These rights included the ability of any single foreign director to block decisions such as the adoption of a strategic plan or annual budget or the development of a new product that varies from the types of business stated in the strategic plan. CFIUS reviewed the company's notification for national security concerns and decided to proceed with a 45-day investigation. During the investigation, CFIUS addressed issues relating to DOD's ability to mitigate foreign control and influence over the company under the existing security agreement. As required, CFIUS prepared a report to the President. The transaction was not blocked. A Singaporean company proposed acquiring 22.8 percent of the voting stock in an investor group formed to acquire all of a U.S. company. A majority of the investor group's voting stock was held by U.S. entities. The Singaporean company was indirectly owned by a holding company that was 99.9 percent owned by the Singapore Ministry of Finance. The U.S. company had classified contracts with DOD, necessitating a security agreement protecting classified information and technologies. CFIUS based its finding that the foreign company would not have control partly on the minority investor's willingness to execute a proxy agreement under industrial security regulations that would give the minority investor's voting rights to two U.S citizens. (The minority foreign investor later entered into a security agreement that would allow the foreign investor to gain board membership.) In our discussions on this case, CFIUS officials agreed that a proposed security agreement should not be used to determine foreign control. The Exon-Florio control standards are not comparable to the control issues under the industrial security regulations, which intend to isolate foreign control and influence over certain aspects of the business, not to determine whether the entire company will become foreign controlled. Although CFIUS's letter to the company notifying it of its decision referenced the proxy agreement, CFIUS officials stated the finding of no foreign control was based on other factors, including a requirement for a two-thirds stockholder majority for certain decisions. Because CFIUS found no foreign control, it did not review the transaction for national security concerns. Two Israeli companies acquired a total of 35.6 percent of the outstanding stock of a U.S. company. One of the Israeli companies increased its ownership from 10.5 percent of the outstanding stock to 17.4 percent, while the second company acquired 18.2 percent of the outstanding stock. The notification to CFIUS stated that the two companies were considering entering into a shareholders' agreement to vote their respective shares in concert. In subsequent correspondence, CFIUS was informed that the two Israeli companies had not concluded a shareholders' agreement. CFIUS found that there was no foreign control because the two firms were not acting together and did not either individually or collectively have the ability to control the U.S. company. Because CFIUS found no foreign control, it did not review the transaction for national security concerns. The 1992 legislation required mandatory investigations of CFIUS cases in which the foreign company proposing an investment is controlled by a foreign government and the transaction could result in foreign control that "could affect the national security." As a result, CFIUS also reviews cases for foreign government control. Of the 174 cases reviewed between October 1992 and December 1994, CFIUS found foreign government control in 18 cases. None of these cases resulted in investigations. CFIUS found the national security concerns in these cases were not sufficient to warrant investigations. In implementing the legislative requirement, CFIUS has determined that even when there is foreign government control, the provision does not mandate an investigation for a notification that does not pose a credible threat to the national security. Of the 16 cases we reviewed, 13 occurred after the 1992 legislation. Six cases involved some level of foreign government ownership of or participation in the acquiring companies. In two of these cases, CFIUS determined there was foreign government control. A subsidiary of a German company proposed acquiring a U.S. manufacturer of large machine tools. The U.S. company had unclassified contracts with DOD, and its products were subject to export controls applying to dual-use products, but it did not possess unique capabilities, and its technology was not considered defense critical. About one-third of the German company was indirectly owned by one German state government and two German city governments. Under German law, this level of ownership gave the government-owned entities the power to block certain decisions, such as the acquisition or closing down of businesses. The government-owned entities offered to abstain on shareholder decisions affecting the U.S. company. CFIUS found that there was foreign control because the acquiring company was German-owned and planned to purchase substantially all the assets of the U.S. company. Because the government entities had the power to block certain decisions, CFIUS determined there was foreign government control. CFIUS also concluded that there were not sufficient national security concerns to warrant an investigation. A subsidiary of a French company proposed purchasing a U.S. developer and manufacturer of software tools. The U.S. company had unclassified contracts with DOD and other U.S. government entities, but the technology was not militarily sensitive. The ultimate parent of the acquiring company is 100 percent owned by the French government. CFIUS determined that the acquiring company was foreign owned and that the outright acquisition of the U.S. company would result in foreign control. Because the buyer was owned by the French government, CFIUS decided that foreign government control would result from this acquisition. CFIUS also concluded that there were not sufficient national security concerns to warrant an investigation. In the other four cases, CFIUS determined that there was no foreign government control. Two of these cases are discussed below for illustrative purposes. In the other two cases, CFIUS decided there was no foreign government control because either multiple intervening layers of ownership diluted government control or the foreign government could not appoint board members. A South Korean company notified CFIUS of its intent to acquire a U.S. designer and manufacturer of semiconductor devices. The U.S. company was a defense subcontractor engaged in a defense-critical but not state-of-the-art technology. The foreign buyer indicated its intention to transfer the U.S. company's technology to Korea and establish a production facility there. The foreign buyer received a small proportion of its total assets from two banks owned by the Korean government. Because this was a 100-percent acquisition by a Korean-owned company, CFIUS made a determination of foreign control. Although the foreign buyer had financing arrangements with the government-owned banks, CFIUS determined the amount of capital provided was not sufficient to constitute foreign government control. CFIUS also determined that there were not sufficient national security concerns to warrant a 45-day investigation. A British company notified CFIUS of its intention to acquire 20 percent of a U.S. company. The U.S. company had classified contracts and provided a critical U.S. government emergency service. Although the British government owned only 1.5 percent of the acquiring company's issued shares, it retained special powers over the acquiring company. These powers included requiring the government shareholder's written consent to alter certain sections of the foreign buyer's articles of incorporation. For example, consent must be obtained when there are changes in the limit of any single shareholder owning more than 15 percent. The British government could also appoint two directors. As discussed on page 8, CFIUS determined that the minority investment would result in foreign control. CFIUS decided that there was no foreign government control because the government owned only a small amount of stock, had not recently appointed directors to the board, and had no significant consent rights over the acquiring company. CFIUS conducted a 30-day review and determined that there were not sufficient national security concerns to warrant a 45-day investigation. DOD has no special statutory role in reviewing transactions for national security concerns, and all other CFIUS members have equal standing to raise such concerns. However, officials from other CFIUS agencies stated that they look to DOD to make key judgments regarding the national security risks of a transaction. DOD considers, among numerous factors, whether (1) the technologies and products involved are critical to the national security, (2) the firm being acquired is a sole-source supplier to DOD, and (3) the U.S. company has classified contracts with the U.S. government. In addition, DOD reviews and analyzes information from the intelligence community regarding the foreign buyer's past record of compliance with export controls, proliferation of sensitive weapons-related technologies, and other matters. Our sample included some cases involving intelligence information on the acquiring company or its government's practices, including violations of U.N. sanctions and transfers of U.S. technology to proscribed countries; for most of these cases, DOD did not recommend a 45-day investigation. According to Defense Technology Security Administration officials, this information alone did not provide sufficient grounds to warrant investigations. They said that in some cases the technology at the U.S. company was not deemed to be critical and in others the intelligence information was not sufficiently corroborated, did not show violations of U.S. laws, or had occurred so long ago that it was no longer relevant. As required by the 1992 legislation, DOD agencies, including defense intelligence entities, assess the risk of diversion when the Secretary of Defense determines that a proposed merger, acquisition, or takeover may involve a firm engaged in the development of a defense-critical technology or is otherwise important to the defense industrial and technology base. These assessments are to be shared with all the Committee members, according to CFIUS officials. The Office of the Assistant Secretary of Defense for Economic Security found that 9 of the 174 CFIUS cases reviewed between October 1992 and December 1994 required a risk of diversion assessment. The responsible DOD official noted that the legislation requires a risk of diversion assessment only when the company is involved in the development, not the application, of a critical technology or is otherwise important to the defense industrial base. DOD uses the Key Technologies Plan, as authorized by the legislation, to decide whether the company is developing a defense-critical technology. The Departments of Defense, State, and the Treasury generally agreed with our draft report and provided minor technical comments. The Department of Defense said it concurred with the report as presented. The Department of State, in official oral comments, said that the report fairly and thoroughly describes the activities of CFIUS and accurately reflects the role of CFIUS members. The Department of the Treasury discussed the voluntary nature of CFIUS notification and said it will remind agencies to bring to CFIUS's attention transactions in high-technology industries that have not been notified to CFIUS. Treasury also stated that it believes Exon-Florio implementation "has increased the awareness of investors to national security issues, brought transactions into conformity with existing laws where needed, and caused investors to consider explicitly national security when putting together proposals to acquire U.S. businesses." The full text of the comments from the Departments of the Treasury and Defense are included in appendixes V and VI, respectively. The Department of Commerce reviewed the final draft and provided minor technical comments. The Department of Justice also reviewed the report but did not comment. We are sending copies of this report to other congressional committees; the Secretaries of the Treasury, State, Defense, Commerce, and Justice; and the Director, Office of Management and Budget. We are also making copies available to other interested parties upon request. Please contact me at (202) 512-4125 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VII. Our examination of the implementation of Exon-Florio legislation and its amendments was requested by the former Chairs of the Subcommittee on Legislation and National Security and the Subcommittee on Commerce, Consumer, and Monetary Affairs, House Committee on Government Operations, and the Chairs and Ranking Minority Members of the Subcommittee on Research and Technology and the Subcommittee on Oversight and Investigation, House Committee on Armed Services. Specifically, we focused on (1) the extent foreign investments are reported to the Committee on Foreign Investment in the United States (CFIUS) and the characteristics of these investments and (2) the factors CFIUS considers in making decisions on whether the foreign investment would result in foreign companies' control of U.S. companies, whether the acquiring foreign company is controlled by a foreign government, and whether there are associated national security risks. To address these objectives, we interviewed officials and examined records at the Departments of Defense (DOD), the Treasury, State, and Commerce. We also discussed CFIUS procedures and selected foreign company notifications with officials from the Defense Technology Security Administration and other DOD participants, including the Office of the Under Secretary of Defense for Acquisition and Technology; the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the military services; the Defense Intelligence Agency; the National Security Agency; the Defense Investigative Service; the Defense Logistics Agency; and the Advanced Research Projects Agency. We also obtained information from other CFIUS participants, including the Department of Justice, and contacted the Council of Economic Advisers, the Office of Management and Budget, the Office of Science and Technology Policy, and the National Security Council. To examine the scope of foreign investments voluntarily filed with CFIUS, we used an unofficial Department of Commerce database on CFIUS cases maintained by the Office of Strategic Industries and Economic Security.We also compared the CFIUS data with foreign investment databases maintained by the Economic Strategy Institute (ESI) and Securities Data Company (SDC). The ESI database tracks foreign investments in and acquisitions of U.S. companies involved in high, key, or critical technologies. These technology categories are developed by consultation with technical experts and generally follow broad standard technology categories. The SDC tracks investments, acquisitions, and mergers worldwide, but we obtained selected data on foreign investment in the United States in technology areas comparable to those tracked by ESI. SDC categorizes the technology sector by ascertaining the primary business of each company and by identifying pertinent standard industrial classification codes. From this comparison of the databases, we identified transactions not reviewed by CFIUS. We further selected transactions involving foreign acquisitions of or majority investments in high-technology industries and verified that these transactions were completed without CFIUS review for foreign control and national security concerns. We eliminated duplications in the Commerce database and deleted notifications withdrawn from CFIUS review. To develop industry categories, we relied primarily on those used by Commerce but also considered ESI's categories. We divided the U.S. industries listed in the database into two categories, high technology and low technology, by referring to DOD's Key Technologies Plan and the Militarily Critical Technologies List. We consulted with experts within and outside the government on our industry groupings and made changes in response to their recommendations. To evaluate the overall concentration or frequency of foreign investments by country and industry, we obtained data from federal government reports and interviewed agency officials at Commerce's Bureau of Economic Analysis about aspects of their data collection efforts. We also obtained information from several private sector firms tracking foreign investment in U.S. companies, including SDC, Ulmer Brothers, Inc., and Technology Strategic Planning, Inc. We did not independently verify the information in the Commerce, ESI, or SDC databases. To examine the factors CFIUS considers in its decision-making process, we selected a judgmental sample of notifications from 1992 and 1993. We used the Defense Intelligence Agency's list of 188 CFIUS filings for these years to select 33 notifications that the agency ranked high, moderate, and low risk. After an initial examination, we focused on 16 cases for in-depth review on the basis of the following criteria: (1) the technologies and industries involved, including cases DOD found to involve critical technologies; (2) the countries and companies involved in the transactions, including foreign government-owned companies; (3) whether validated export licenses are required; (4) the risk and intelligence analyses done; (5) the presence of DOD classified contracts and associated security agreements; and (6) the presence of sole-source or last supplier considerations. The 16 cases we reviewed covered 8 foreign countries and 6 industrial sectors. Table I.1 shows the 16 cases we selected for review. Percent acquired Risk of diversion Case withdrawn Represents two investors. Technology information is not included to avoid revealing the transaction. The sampling is not statistically representative of the entire CFIUS caseload, but these cases illustrate the CFIUS process and allowed us to examine the more difficult cases (that is, those involving minority investments, foreign government ownership and control, critical defense technologies, and/or adverse intelligence information). We reviewed records for each of the 16 cases at the Departments of the Treasury, Defense, State, and Commerce because CFIUS does not maintain a central file repository. DOD and State screened their CFIUS files and documents before making them available to us, which may have impeded our scope. The Defense Intelligence Agency and Central Intelligence Agency also provided information on our sample cases, where applicable. We reviewed the Exon-Florio legislation and subsequent amendments, implementing regulations, and the legislative history. We considered DOD's role in the legislation and focused on the implementation of recently related legislation. We performed our work between March 1994 and April 1995 in accordance with generally accepted government auditing standards. Tables II.1 and II.2 provide information on foreign investment transactions from two private databases that were not in the Commerce Department's database on CFIUS notifications. In our tables, we include only those transactions involving high-technology industries. From the Commerce Department's database on CFIUS cases, we obtained data on cases reviewed for national security concerns between October 1988 through May 1994. Table III.1 shows the number of CFIUS cases reviewed during that period, by country, in high-technology and non-high-technology industry categories. Table III.2 provides further details of CFIUS cases reviewed for national security concerns by high-technology industry category and by country. Table III.3 illustrates CFIUS cases in non-high-technology industries by country. We developed these industry categories using the Commerce Department's groupings and by consulting with industry experts within and outside the U.S. government. Defense Industrial Security: Issues in the Proposed Acquisition of LTV Corporation Missiles Division by Thomson-CSF (GAO/T-NSIAD-92-45, June 25, 1992). Foreign Investment: Analyzing National Security-Related Investment Under the Exon-Florio Provision (GAO/T-GGD-92-49, June 4, 1992). National Security Reviews of Foreign Investment (GAO/T-NSIAD-91-8, Feb. 26, 1991). National Security Review of Two Foreign Acquisitions in the Semiconductor Sector (GAO/T-NSIAD-90-47, June 13, 1990). Foreign Investment: Analyzing National Security Concerns (GAO/NSIAD-90-94, Mar. 29, 1990). The President's Decision to Order a Chinese Company's Divestiture of a Recently Acquired U.S. Aircraft Parts Manufacturer (GAO/T-NSIAD-90-21, Mar. 19, 1990). Strategic Minerals: Implications of Proposed Takeover of a Major British Mining Company (GAO/NSIAD-89-123, Mar. 3, 1989). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO examined the Committee on Foreign Investment in the United States' (CFIUS) implementation of the Exon-Florio legislation and related amendments, focusing on: (1) the characteristics of foreign investments in the United States and the extent to which they are reported to CFIUS; (2) the factors CFIUS considers in determining whether a foreign investment results in foreign control of a U.S. company; and (3) whether foreign control of U.S. companies threatens U.S. national security. GAO found that: (1) about two-thirds of the cases notified to CFIUS between October 1988 and May 1994 involved defense-related and high-technology industries that raised possible national security concerns; (2) many companies voluntarily notified CFIUS of proposed investments in and acquisitions of U.S. companies, but, according to two private-sector databases, many others did not; (3) the CFIUS process was not intended to provide a comprehensive screening mechanism for all foreign investment although CFIUS officials expressed the view that, because CFIUS clearance essentially eliminates the risk of a forced divestiture, most transactions affecting national security are reported; (4) in deciding whether a foreign investment will result in a foreign company gaining control of a U.S. company, CFIUS considers many factors related to the investor's ability to affect key company decisions; (5) when deciding on foreign government control, CFIUS examines the extent to which a foreign government owns and controls the acquiring company; (6) of the 174 transactions filed between the 1992 legislation and December 1994, CFIUS decided there was foreign government control in 18 cases; (7) none of these cases were investigated since CFIUS decided the national security concerns were not sufficient to warrant further investigation; (8) the Exon-Florio legislation does not provide a precise definition of national security, and neither the statute nor the implementing regulations contain guidelines for weighing the various factors considered in examining the national security risks of a transaction; (9) as a result, CFIUS agencies have significant flexibility in making such judgments; (10) CFIUS members noted that they rely primarily on the Department of Defense's (DOD) assessment of national security risks; (11) the 1992 legislation requires DOD to direct appropriate defense intelligence and other agencies to assess the risks of diversion when DOD decides that a CFIUS case involves a company engaged in the development of defense-critical technology or is otherwise important to the defense industrial or technology base; and (12) of the 174 cases reviewed between October 1992 and December 1994, the Office of the Assistant Secretary of Defense for Economic Security found that 9 cases required a risk of diversion assessment.

The United States has the largest, most extensive aviation system in the world with over 19,000 airports ranging from large commercial transportation centers transporting millions of passengers annually to small grass airstrips serving only a few aircraft each year. Of these, nearly 3,400 airports are designated as part of the national airport system and thus are eligible for federal assistance. The national airport system consists of two primary types of airports--commercial service airports, which have scheduled service and board 2,500 or more passengers per year, and general aviation airports, which have no scheduled service and board fewer than 2,500 passengers. FAA divides commercial service airports into primary airports (boarding more than 10,000 passengers annually) and commercial service nonprimary airports. The 389 primary airports are arranged into various types of hub airports--large, medium, and small hub, and nonhub--based on passenger traffic (see fig. 1). Passenger traffic is highly concentrated: 88 percent of all passengers in the United States boarded at the 62 large or medium hub airports in 2012. More than 2,500 airports in the national airport system are designated as "general aviation" (GA) airports. These airports range from large business aviation and cargo-shipment centers that handle thousands of operations a year to small rural airports with fewer operations per year but which provide vital access to the national transportation system for their communities. Since 1946, the federal government has sponsored a grant program to fund airport development. Today, those monies come from Airport Improvement Program (AIP) grants. AIP is supported by the Airport and Airway Trust Fund (trust fund), which is funded in part by airline ticket taxes and fees. General aviation flights also contribute to the trust fund through a tax on noncommercial jet fuel. Airports in the national airport system may receive AIP entitlement grants based on the number of passengers and amount of cargo carried and may also compete for AIP discretionary grants. FAA selects grantees for discretionary grants according to national priorities and objectives. AIP grants can only be used for eligible projects, generally those that enhance capacity, safety, or environmental concerns, such as runway construction and rehabilitation, airfield lighting, and airplane noise mitigation. AIP appropriations totaled $3.35 billion in fiscal year 2013. The grants require a local match ranging from 5 to 25 percent, depending on the size of the airport and type of project. 49 U.S.C. SS 47102 (3). types of projects as AIP grants, but are also allowed to pay interest costs on debt issued for those projects. The $4.50 maximum PFC was last increased in 2000. Collections totaled $2.8 billion in calendar year 2013. According to FAA, 388 commercial service airports were approved to collect PFCs as of April 2014. Airports also fund development projects from revenues generated directly by the airport. Airports generate revenues from aviation activities such as aircraft landing fees and terminal rentals, and non-aviation activities such as concessions, parking, and land leases. Aviation revenues are a traditional method for funding airport development; however, because Department of Transportation (DOT) regulations generally limit aviation charges to the recovery of historical airport costs--rather than replacement costs--they may not fully fund new investment. Generally, the level of aviation activity--whether commercial passenger and cargo or general aviation business and private aircraft--drives airport development and the monies that finance it. While only three new major airports have been built in the United States over the last three decades, billions of dollars have been invested in building new capacity and maintaining and upgrading existing airport infrastructure during that time. In addition, according to the most recent FAA forecast, air traffic demand is projected to increase 2.7 percent per year from 2014 through 2034. Funding for both AIP and PFCs is linked to passenger activity. In this way, Congress aims to direct funds to where they are needed most. Similarly, airport-generated revenues are also tied to aviation activity and the number of passengers who use airport-related services. These revenues are typically used to finance the issuance of local debt such as tax-exempt bonds, which for larger commercial airports constitutes more than half of their funding. Because of the size and duration of airport development--for example, planning, funding and building a new runway can take more than a decade and several hundred million dollars to complete--long-term debt is used to help finance these types of projects. While almost all airport sponsors in the United States are states, municipalities, or public authorities, there is a significant reliance on the private sector for finance, expertise, and control of airport assets. For example, the majority of airport employees are employed by private sector entities, such as vendors and baggage handlers, and private companies also own and operate some airports. Under congressional authorization, since 1996, FAA has piloted an airport privatization program that relaxes certain restrictions on the sale or lease of airports to private entities. Since 2007, economic pressures--including record-high fuel prices and the recession of 2007 through 2009--helped spark a wave of consolidation across the airline industry. For instance, Delta acquired Northwest in 2008, United and Continental merged in 2010, Southwest acquired AirTran in 2011, and US Airways and American Airlines received U.S. District Court approval for their proposed merger in April 2014. As part of this restructuring and a more general focus on capacity decisions, U.S. airlines have reduced the number of flights they offer passengers in certain markets. We found in June 2014, based on our analysis of DOT data, that there were 1.2 million fewer scheduled domestic flights at large, medium, and small hub, and nonhub airports in 2013 than during 2007. The greatest reduction in scheduled flights occurred at medium hub airports, which decreased nearly 24 percent from 2007 through 2013, compared to a decrease of about 9 percent at large hub airports and about 20 percent at small hub airports over the same time period. Medium hub airports also experienced the greatest percentage reduction in air service as measured by available seats (see fig. 2). However, because airlines are now better able to match capacity to demand, planes are fuller than they have ever been. As a result, passenger boardings did not fall as much as either the number of flights or available seats. According to our analysis of DOT's data from 2007 through 2012, passenger boardings decreased approximately 17 percent at medium hub airports and about 2 percent at large hub airports, but increased more than 4 percent and about 3 percent at small hub and nonhub airports, respectively. In addition, this April, we testified before this Committee that air service to small communities has declined since 2007 due, in part, to higher fuel costs, airline consolidation, and reduced demand both from declining populations in those communities and as a result of some passengers' opting to drive to larger markets with more attractive service (i.e., larger airports in larger cities). A 2013 Massachusetts Institute of Technology (MIT) study of domestic air service trends reported similar results and found that the prolonged economic downturn, high fuel prices, and capacity restraint contributed to a reduction in service. The study also concluded that airlines have been cutting back on capacity to medium hub and small hub airports far more than at the nation's large hub airports. Kamala I. Shetty and R. John Hansman, Current and Historical Trends in General Aviation in the United States, Massachusetts Institute of Technology International Center for Air Transportation (Aug. 2012). FAA estimates that the annual costs of planned airport development projects that are eligible for AIP grants will average about $8.5 billion (2011 dollars) from fiscal years 2013 to 2017. In 2012, FAA estimated $42.5 billion (2011 dollars) in total 5-year costs of eligible development for fiscal years 2013-2017. This figure was down 18 percent from the estimated $52.3 billion (2009 dollars) costs for fiscal years 2011--2015 or $10.5 billion annually. FAA attributed the decline to several factors, including airport sponsors choosing to defer projects due to reductions in aviation activity, having identified other funding sources for projects, and projects' having been completed. In developing the estimate, FAA reviewed approximately 23,000 existing projects at the five categories of commercial airports, GA airports, reliever airports, and new airports and adjusted, deferred, or removed from consideration approximately 3,700 projects (16 percent). FAA estimated that eligible development costs for all airport categories decreased between the two time periods, with the largest nominal decreases for large hubs ($2.7 billion, a 15 percent decrease) and medium hubs ($2.3 billion, a 31 percent decrease) (see fig. 3). Based on FAA's estimates, the largest category of eligible planned development is to bring existing airports up to current design standards (28 percent), followed by reconstruction (replacement or rehabilitation of airport facilities, mostly pavement and lighting systems) (25 percent), and increasing airfield capacity (23 percent). Compared to fiscal years 2011- 2015, FAA's estimates of planned development for fiscal years 2013- 2017 decreased across every development category except capacity, which saw a slight increase of 2.5 percent (see fig. 4). While large hubs were the only airport category that experienced an increase in the cost of planned capacity projects (from about $6.8 billion to about $8.1 billion, a 19 percent increase), this increase was greater than the corresponding decrease for all other airport categories (from about $2.7 billion to about $1.7 billion, a 37 percent decrease). FAA is currently compiling the estimated planned development costs for the fiscal years 2015-2019 period, due to be published in fall 2014. ACI-NA also estimated airports' costs of planned development for the fiscal years 2013-2017 period for projects eligible for federal funding as well as those not eligible. The total estimated costs of planned development for fiscal years 2013-2017 are $68.2 billion (2012 dollars) or approximately $13.6 billion per year on average. This is about a 10 percent decline from ACI-NA's prior estimate of $75.6 billion (2010 dollars) for the prior fiscal years 2011-2015 estimating period. ACI-NA attributed the decline to several factors, including the recent recession and challenging economic conditions, airline consolidation and capacity reductions, and projects' having been completed or postponed beyond 2017. ACI-NA's estimates of eligible development decreased between the two time periods for all airport categories except medium hubs, which saw a 5 percent increase. The largest decreases were for large hubs ($2.3 billion, a 6 percent decrease) and small hubs ($2.1 billion, a 27 percent decrease). In addition, there are other differences in the way FAA and ACI-NA estimate airport planned development costs. First, while FAA's estimates cover projects for every airport in the national system, ACI-NA surveyed its member airports in the U.S. (117 of which responded, consisting mostly of large, medium, and small hub airports) and then extrapolates a total based on cost-per-boarding calculations for large, medium, and small hub airports that did not respond. Second, FAA data are based on planned project information taken from airport master plans and state system plans, minus projects that already have an identified funding source, while ACI-NA includes all projects, whether funding has been identified or not. Third, FAA data includes only the portion of a project that is eligible for AIP, while ACI-NA estimates the total value project cost. Fourth, ACI-NA and FAA estimated planned development costs for the same 5-year time period, but the estimates were made at different times--the ACI-NA survey was completed in 2012, while FAA's estimate is based on information available through 2011. Lastly, FAA's estimates use 2011 dollars, whereas ACI-NA's estimates use 2012 dollars. ACI-NA's estimates for these categories of airports are drawn directly from FAA's estimate. Regarding AIP grants, annual appropriations decreased from about $3.5 billion for fiscal years 2007 through 2011 to about $3.4 billion for fiscal years 2012 through 2014. In addition, the actual amount of AIP grants awarded annually has decreased 9.6 percent since 2007 from $3.3 billion in fiscal year 2007 to $3 billion in fiscal year 2013. Excluding grants to GA airports, AIP grants on a per-passenger basis have also decreased, from $3.80 per passenger in 2007 to $3.40 per passenger in 2012. Since then Congress transferred $253 million in unobligated funds from AIP to FAA operations to reduce furloughs for air traffic controllers in legislation passed in March 2014. Airport association representatives told us that these funds had been reserved for airport development. The President's 2015 Budget calls for a reduction in AIP appropriations to $2.9 billion. The Wendell H. Ford Aviation Investment and Reform Act for the 21st Century of 2000 legislates that if AIP appropriations fall below $3.2 billion and that provision is not changed, AIP entitlement grants will be reduced by half; the funds from the entitlement grant reductions would instead flow to AIP discretionary grants giving FAA greater decision-making over which airport projects receive funding. With regard to PFCs, the federal PFC cap of $4.50 has not increased since 2000 and thus has not kept pace with inflation. According to FAA data, PFCs collections peaked in 2006 at $2.93 billion and then fell during the recession before rebounding to $2.81 billion in 2013. According to FAA, as of (April 2014, 388 commercial service airports (including of the largest 100 airports by passenger boardings) imposed a PFC. According to FAA, more than 90 percent of PFC collections go to large and medium hub airports, but large and medium hub airports collecting PFCs must return a portion of their AIP entitlement grants, which are then redistributed to smaller airports. In addition, we have found that many airports' future PFC collections are already committed to pay off debt for past projects, leaving them little future PFC collections for new development. For example, at least 50 airports have leveraged their PFCs through 2030 or later, according to FAA data. The President's 2015 Budget and airports have requested an increase in the PFC cap to $8--which they say takes into account inflation that has occurred since 2000 and eliminating AIP entitlements for large hub airports. fees, including PFCs, arguing that if an increase in taxes or fees is passed onto the consumers through an increase in ticket prices, it could reduce demand for air travel. For example, in December 2013, Congress approved allowing the Transportation Security Administration to raise the security fee currently applied to each ticket from $2.50 to $5.60 and to eliminate the cap on the number of fees that can be collected on a flight itinerary. Airlines opposed that increase based on concerns that it would hurt travel demand. We concluded in 2012 that a $3.00 increase in the security fee to $5.50 would reduce passenger boardings by about 1 percent based on a review of passenger demand literature. We are currently assessing the impact of increases in the amount of the PFC on passenger demand, airport investment, and aviation users and plan to report our findings later this year. Airport trade associations ACI-NA and the American Association of Airport Executives have made prior proposals to raise the PFC cap to $8.50 with periodic adjustments for inflation. smartphones that could be used to collect PFCs separately from the ticket. We found that none of these alternatives was better than the current method. Specifically, we determined that each of the alternatives negatively affected the passenger experience and the transparency of fees relative to the current method. Although support for airport development from AIP and PFCs has declined in recent years, so have planned development costs. In addition, we have not yet determined how much funding has recently been generated by the other major source of revenues for airport development--municipal bond proceeds, backed primarily by airport revenues. Therefore, the extent to which the gap between airport funding and planned airport development costs has changed since we last reported on this in 2007 is unknown. As discussed above, for the 2013 through 2017 period, the total estimated annual costs for airports' planned development projects is about $13.1 billion, $8.5 billion of which is eligible for AIP grants and PFCs. However, annually only about $6 billion in support has been available from AIP grants and PFC collections. The remaining $7 billion in annual planned development will need to be funded by locally generated revenues or deferred. In 1998, 2003, and 2007, we found a funding gap between the 5-year airport planned development costs and historical funding. In 2007, the total gap was $1 billion annually. This gap has been most acute for smaller airports that We are currently assessing may have less access to capital markets. whether this gap has grown or declined in light of declining federal funding and planned development and will report our findings to this Committee later this year. GAO, Airport Finance: Observations on Planned Airport Development Costs and Funding Levels and the Administration's Proposed Changes in the AIP, GAO-07-885 (Washington, D.C.: June 29, 2007); Airport Finance: Past Funding Levels May Not Be Sufficient to Cover Airports' Planned Capital Development, GAO-03-497T (Washington, D.C.: Feb. 25, 2003); and Airport Financing: Funding Sources for Airport Development, GAO/RCED-98-71 (Washington, D.C.: Mar. 12, 1998). To help fund airport development, some commercial service airports have increasingly relied on non-aviation revenues. According to ACI-NA, non- aviation revenue has grown, on average, over 4 percent each year since 2004, compared to a 1.5 percent increase in passenger boardings over the same period. In 2012, according to FAA data, non-aviation revenue accounted for approximately 45 percent of airports' total operating revenues. Parking and ground transportation accounted for the greatest portion (41 percent) of passenger-related non-aviation revenue, followed by terminal concessions (20 percent) and revenue from rental car facilities (20 percent) (see fig. 5). In addition to traditional commercial activities to generate non-aviation revenue, some airports have developed unique commercial activities with stakeholders from local jurisdictions and the private sector to help develop airport properties into retail, business, and leisure destinations.An increasing range of unique developments on airport property have contributed to non-aviation revenues, including high-end commercial retail and leisure activities, hotels and business centers, medical facilities, and specialized cargo handling and refrigerated storage facilities, among other developments (see fig. 6). For example, Miami International Airport was named one of the world's top-10 airports for retail shopping, and the $1.7 billion international terminal at Los Angeles International Airport, which is currently under construction, will contain 140,000 square feet of premier dining, retail, and club lounges. By acting more like businesses than public utilities, airports have increasingly become more competitive with one another, providing services, including hotels and conference space, to attract and retain business travelers who might otherwise stay in a downtown hotel off airport property. For example, Dallas/Fort Worth International Airport owns a Grand Hyatt hotel inside Terminal D, Denver International Airport is building an attached Westin Hotel, and Hartsfield- Jackson Atlanta International Airport is considering an airport hotel inside or connected to its domestic terminal. Also, in an effort to generate revenue by leasing cold storage space to freight forwarders and businesses that transport low-volume, high-valued goods, including pharmaceuticals, produce, and other time-sensitive or perishable items, airports in Denver, Miami, and Indianapolis have built--or plan to build-- cold storage facilities on airport property. In addition, airports can fund airport improvements with private sector participation. Public-private partnerships, involving airports and developers, have been used to finance airport development projects without increasing the amount of debt already incurred by airports. FAA's noise land disposal program, for example, allows airports to sell or lease land that had been used in the past for noise abatement purposes and is no longer needed for noise abatement. FAA also allows airports with excess available land to use the land for certain types of commercial Airport operators must development, pending approval by the FAA.obtain FAA's concurrence prior to leasing airport land or facilities to private developers to help ensure, among other things, that the developer's plans will be compatible with airport operations and that the airport receives fair market value for the use of its property. The ability to lease airport land has allowed some airport operators to generate revenue through temporary leases of airport property for manufacturing, warehousing, and freight-forwarding operations while also reserving the land for future aviation needs. For example, solar farms have been built on airport land in Indianapolis and Denver; officials at Dallas/Fort Worth International Airport have leased a portion of the airport property for oil extraction; and land at Alliance Airport near Ft. Worth, Texas, has been leased for agricultural uses, such as cattle grazing and a golf course (see fig. 7). In addition, Miami International Airport entered a $512 million public-private partnership to develop 33 acres of airport property. The developer will finance construction and pay rent and a percentage of the revenues to the airport in return for a 50-year lease. Privatization of airports is another option that some public sector airport owners have considered to obtain private capital for airport improvement and development, among other things. However, FAA's Airport Privatization Pilot Program (APPP), which was established in 1996 to reduce barriers to airport privatization has not led to many privatizations. Only one airport--San Juan Luis Munoz Marin International Airport in Puerto Rico -has been privatized, and currently there is only one active applicant in the program. Nonetheless, airports are using the private sector to finance airport development or manage airports outside of the APPP. For example, the Port Authority of New York and New Jersey has recently received responses for its request for proposals for the private sector to demolish old terminal buildings and construct, partially finance, operate, and maintain a new Central Terminal Building for LaGuardia Airport in New York City in return for a share of terminal revenues. In addition, Gary/Chicago International Airport in Gary, Indiana, outside Chicago has entered into a public-private partnership with a private sector firm to both operate the airport and economically develop off-airport property. We are currently examining airport privatization and the APPP and plan to report our findings later this year. In conclusion, this year commemorates one century since the first commercial airline flight, and in that relatively short time span, commercial aviation has grown at an amazing pace to become a ubiquitous and mature industry in the United States. While commercial aviation still has many exciting prospects for its second century, it also faces many challenges, chief among these are ensuring that airports can continue to accommodate millions of flights and hundreds of millions of passengers every year. Maintaining and upgrading this vital infrastructure will require the combined resources of federal, state, and local governments, as well as private companies' capital and expertise. Effectively supporting this development involves focusing federal resources on the FAA's key priorities of maintaining one of the world's safest aviation system and providing adequate system capacity, while allowing maximum flexibility for local airport sponsors to maximize local investment and revenue opportunities. In deciding the best course for future federal investment in our national airport system, key considerations for Congress will be to balance the interests of all aviation stakeholders, including airports, airlines, and most importantly passengers and shippers, to help ensure a safe and vibrant aviation system. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this testimony, please contact Gerald L. Dillingham 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 statement. Key contributors to this testimony include Paul Aussendorf (Assistant Director), Amy Abramowitz, Jessica Bryant-Bertail, Jonathan Carver, Ben Emmel, John Healey, David Goldstein, Greg Hanna, David Hooper, Delwen Jones, Jennifer Kamara, Maureen Luna-Long, Faye Morrison, Eleni Orphanides, Justin Reed, Melissa Swearingen, and Pamela Vines. 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. airports are important contributors to the U.S. economy, providing mobility for people and goods both domestically and internationally and often contributing to the economic success of the communities served. Since 2007 when GAO last reported on airport funding and its sufficiency to meet planned development of airport infrastructure, there have been significant changes in the aviation industry. During this time, federal support for airport development has declined. As deliberations begin in advance of FAA's reauthorization in 2015, Congress will consider the most appropriate type, level, and distribution of federal support for development of the national airport system. This testimony discusses trends in (1) aviation activity at airports since 2007, (2) costs of airports' planned development, and (3) federal funding and airport revenues that may be available to finance development costs. This testimony is based on previous GAO reports on aviation from June 2007 through June 2014, updated through June 2014 with interviews with key FAA and trade association officials and FAA airport funding data from 2005-2013. GAO shared the information it used to prepare this statement with FAA and incorporated its comments as appropriate. Since 2007, economic pressures--including high fuel prices, the financial crisis, and the ensuing recession of 2007-2009--contributed to airline restructuring which has resulted in reductions in the number of commercial flights at airports, especially at medium- and smaller-sized airports. General aviation activity, which includes all forms of aviation except commercial and military, has also declined over the last decade. Because many sources of airport funding, including federal support and locally generated revenue, are tied to aviation activity, for many airports these trends mean less funding available for infrastructure development. According to Federal Aviation Administration's (FAA) estimates, airports' total costs of planned infrastructure development eligible for federal support from FAA's Airport Improvement Program (AIP) grants are about $42.5 billion for the 2013 through 2017 period, or about $8.5 billion per year on average which was down 18 percent from $52.2 billion for the 2011 through 2015 period. FAA attributed the decline to airports' choosing to defer projects due to reductions in aviation activity or having identified other funding sources, among other factors. Airports in the national airport system receive AIP entitlement grants for eligible projects, generally those that enhance capacity, safety, or environmental conditions. The U.S. airport association, Airports Council International--North America, estimated costs of other planned development not eligible for federal support, such as parking structures, totaled $4.6 billion per year for the 2013 through 2017 period. Therefore, the total costs of planned development for the most current period are estimated to be approximately $13.1 billion per year.

Congress created FDIC in 1933 to restore and maintain public confidence in the nation's banking system. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 sought to reform, recapitalize, and consolidate the federal deposit insurance system. The act created the Bank Insurance Fund and the Savings Association Insurance Fund, both of which are responsible for protecting insured bank and thrift depositors. The act also abolished the FSLIC and created the FSLIC Resolution Fund to complete the affairs of the former FSLIC and liquidate the assets and liabilities transferred from the former Resolution Trust Corporation. It also designated FDIC as the administrator of these funds. As part of this function, FDIC has an examination and supervision program to monitor the safety of deposits held in member institutions. FDIC insures deposits in excess of $10 trillion for about 8,900 institutions. Together, the three funds--the Bank Insurance Fund, the Savings Association Insurance Fund, and the FSLIC Resolution Fund--have about $52 billion in assets. FDIC had a budget of about $1.1 billion for calendar year 2004 to support its activities in managing the three funds. For that year, it processed more than 3.8 million financial transactions. FDIC relies extensively on computerized systems to support its financial operations and store the sensitive information it collects. Its local and wide area networks interconnect these systems. To support its financial management functions, it relies on several financial systems to process and track financial transactions that include premiums paid by its member institutions and disbursements made to support operations. In addition, FDIC uses other systems that maintain personnel information for its employees, examination data for financial institutions, and legal information on closed institutions. At the time of our review, about 6,200 individuals were authorized to use FDIC's systems. The corporation's key official for computer security is the Chief Information Officer, who is responsible for establishing, implementing, and overseeing a corporatewide information security program. Information system controls are a critical consideration for any organization that depends on computerized systems and networks to carry out its mission or business. Without proper safeguards, there is risk that individuals and groups with malicious intent may intrude into inadequately protected systems and use this access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. We have reported information security as a governmentwide high-risk area since February 1997. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of federal operations, including those at FDIC, at risk of disruption, fraud, and inappropriate disclosure. Congress and the executive branch have taken action to address the risks associated with persistent information security weaknesses. In December 2002, the Federal Information Security Management Act (FISMA) of 2002, which is intended to strengthen information security, was enacted as Title III of the E-Government Act of 2002. In addition, the administration undertook important actions to improve security, such as integrating information security into the President's Management Agenda Scorecard. Moreover, the Office of Management and Budget and the National Institute of Standards and Technology (NIST) have issued information security guidance to agencies. The objectives of our review were to assess (1) the progress FDIC had made in correcting or mitigating weaknesses reported in connection with our financial statement audits for calendar years 2002 and 2003 and (2) the effectiveness of the corporation's information system controls. Our evaluation was based on (1) our Federal Information System Controls Audit Manual (FISCAM), which contains guidance for reviewing information system controls that affect the integrity, confidentiality, and availability of computerized data and (2) our May 1998 report on security management best practices at leading organizations, which identifies key elements of an effective information security program. Specifically, we evaluated information system controls intended to prevent, limit, and detect electronic access to computer resources (data, programs, and systems), thereby protecting these resources against unauthorized disclosure, modification, and use; provide physical protection of computer facilities and resources from espionage, sabotage, damage, and theft; ensure that work responsibilities for computer functions are segregated so that no one individual controls all key aspects of a computer-related operation and thereby has the ability to conduct unauthorized actions or gain unauthorized access to assets or records without detection by another individual performing assigned responsibilities; prevent the implementation of unauthorized changes to application or ensure recovery of computer process operations and data in case of disaster or other unexpected interruption; and ensure an adequate information security program. To evaluate these controls, we identified and reviewed pertinent FDIC security policies and procedures, guidance, plans, and reports. We also discussed whether information system controls were in place, adequately designed, and operating effectively with key security representatives, system administrators, and management officials. In addition, we conducted tests and observations of controls in operation and reviewed corrective actions taken by the corporation to address vulnerabilities identified in our audits for calendar years 2002 and 2003. FDIC has made significant progress in correcting previously reported information system control weaknesses. Of the 22 weaknesses reported in our 2003 audit, FDIC corrected 19 and is taking action to resolve the 3 that remain. In addition, the corporation corrected the one weakness still open from our 2002 audit. FDIC's actions included resolving weaknesses related to its key access controls, network security, and monitoring capabilities. For example, the corporation restricted user access to critical financial and sensitive data and strengthened security configurations of network devices, including firewalls, routers, switches, and servers; and enhanced its monitoring of security-relevant events by fully implementing its intrusion detection system to monitor its computer network traffic for unusual or suspicious access activities. In addition to addressing previously reported weaknesses, FDIC took other steps to improve information security. For example, the corporation strengthened its oversight of contractor connections to its network by requiring contractors to develop security plans to protect these connections and to perform periodic inspections of contractor facilities to ensure security effectiveness. Further, FDIC established certification and accreditation guidelines that outline requirements for performing this process as part of each system's life cycle and certified and accredited each of its key systems. In addition, the corporation updated its disaster recovery procedures and has been routinely performing different types of tests of its disaster recovery plan. Although FDIC made substantial improvements in its information system controls, we identified 20 additional weaknesses that diminish its ability to effectively protect the integrity, confidentiality, and availability of its financial and sensitive information and information systems. Specifically, we identified weaknesses in electronic access controls, network security, physical security, segregation of computer functions, and application change controls. Although these information system control weaknesses do not pose significant risks to FDIC's financial and sensitive systems, they warrant management's action to decrease the risk of unauthorized modification of data and programs, inappropriate disclosure of sensitive information, or disruption of critical operations. A basic management control objective for any organization is the protection of its information systems and critical data from unauthorized access. Organizations accomplish this objective by granting employees the authority to read, create, or modify only those programs and data that they need to perform their duties. Effective electronic access controls should be designed to restrict access to computer programs and data and detect unauthorized access. These controls include assigning user access rights and permissions and reviewing audit logs to ensure that access privileges are used appropriately. Although FDIC restricted access to programs and information, we found instances in which access was not sufficiently controlled. For example, about 250 users were inadvertently granted access to read, create, or modify critical production programs and data for financial, payroll/personnel, and bank regulatory systems. The risk of weakening security access was further heightened because the access activities of these users were not being logged for review. In addition, emergency access accounts with broad system access to all critical system and security resources intended to be used solely to manage problems or emergencies that interrupt the system's 24-hour-a-day operation were routinely used by four system and operations staff. Further, FDIC did not configure security software to appropriately restrict, log, and monitor access to certain sensitive system software libraries. As a result, increased risk exists that individuals could circumvent security controls to read, create, or modify critical or sensitive programs and data, possibly without detection. In response to these weaknesses, FDIC's Chief Information Officer said that they have taken steps to restrict access to critical financial data and program and related sensitive information. Further, the corporation stated that it has restricted access to sensitive system software libraries and plans to generate monthly audit reports for review and follow-up action as needed. Networks are a series of interconnected devices and software that allow individuals to share data and computer programs. Because sensitive programs and data are stored on network servers or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests and deny unauthorized requests and by limiting the services that are available on the network. Network devices include (1) firewalls designed to prevent unauthorized access to and from the network, (2) routers that filter and forward data along the network, (3) switches that forward information among parts of a network, and (4) servers that host applications and data. Network services consist of protocols for transmitting data between network devices. In addition, effective network controls, such as passwords, should be established to authenticate authorized users who access the network from local and remote locations. Since networks often provide the entry point for access to electronic information assets, failure to secure them increases the risk of unauthorized use of sensitive data and systems. Although FDIC's network controls were generally effective, we identified instances where FDIC did not adequately secure specific network services and devices or protect passwords. For example, database server configurations for some of the corporation's financial applications were not adequately secured. These servers had insecure settings that could have allowed an unauthorized user to gain access without providing authentication. In addition, FDIC did not have controls in place to consistently ensure that data transmitted between network devices were secure. Further, the passwords of local network administrators who had broad system access privileges were not adequately secured. As a result, increased risk exists that a malicious user could gain unauthorized access to some of FDIC's sensitive network systems, read and modify sensitive system data, and disrupt or deny computer processing services to corporation employees. In response to these weaknesses, FDIC's Chief Information Officer said that the corporation had taken steps to improve network security including strengthening server settings, data transmission, and administrator passwords. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls involve restricting physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed and by periodically reviewing access rights granted to ensure that access continues to be appropriate based on criteria established for granting it. At FDIC, physical access control measures (such as guards, badges, and locks, used either alone or in combination) are vital to protecting computing resources and the sensitive data it processes from external and internal threats. Although FDIC had taken numerous actions to strengthen its physical security over its computing environment, certain weaknesses reduced its effectiveness in protecting and controlling physical access to sensitive work areas. For example, 4 employees and contractors had access to the computer data center even though they had changed their job responsibilities and no longer required this access. As a result, there is an increased risk that unauthorized individuals could gain access to sensitive computing resources and data and inadvertently or deliberately misuse or destroy them. In response, FDIC's management plans to update procedures to ensure that physical access to the data center is limited to authorized individuals. Segregation of computer functions refers to the policies, procedures, and organizational structure that helps ensure that one individual cannot independently control all key aspects of a process or computer-related operation and, thereby, gain unauthorized access to assets or records. Often segregation of computer functions is achieved by dividing responsibilities among two or more organizational groups. Dividing duties among two or more individuals or groups diminishes the likelihood that errors and wrongful acts will go undetected because the activities of one individual or group will serve as a check on the activities of the others. Inadequate segregation of computer functions increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. Although computer responsibilities were generally properly segregated at FDIC, we identified one instance in which responsibilities were not adequately segregated: system administrators were also serving as database administrators for systems that maintained FDIC's key financial information. The risk associated with this weakness was further heightened because these administrators could take full control over the financial applications and databases that include audit and reconciliation data. Consequently, there is an increased risk that these individuals could perform unauthorized system activities without being detected. In response to this weakness, FDIC's Chief Information Officer said that the corporation plans to segregate the duties of system and database administrator functions. It is important to ensure that only authorized and fully tested application programs are placed in operation. To ensure that changes to application programs are needed, work as intended, and do not result in the loss of data or program integrity, such changes should be authorized, tested, and independently reviewed. Although FDIC had application change control procedures for its general ledger and accounts payable mainframe applications, it did not have procedures for documenting tests performed or independent reviews made for changes made to other key mainframe and client/server financial applications. In addition, the corporation did not have a process for authorizing changes to Web-based financial applications. Without adequate application change control procedures, changes may be implemented that are not authorized, tested, or independently reviewed. In response, FDIC's Chief Information Officer plans to establish procedures for documenting tests performed and independent reviews made for application software changes made to all mainframe and client/server application software. In addition, the corporation plans to establish a process for authorizing changes to Web-based financial applications. A key reason for FDIC's weaknesses in information system controls is that it had not fully implemented a complete test and evaluation process, which is a key element of a comprehensive agency information security program. Our May 1998 study of security management best practices determined that a comprehensive information security program is essential to ensuring that information system controls work effectively on a continuing basis. Also, FISMA, consistent with our study, requires an agency's information security program to include certain key elements. These elements include a central information security management structure to provide overall security policy and guidance along with oversight to ensure compliance with established policies and reviews of the effectiveness of the information security environment; periodic assessments of the risk and magnitude of the harm that could result from unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems; policies and procedures that (1) are based on risk assessments, (2) cost effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; security awareness training to inform personnel, including contractors and other users of information systems, of information security risks and their responsibilities in complying with agency policies and procedures; and a process of tests and evaluations of the effectiveness of information security policies, procedures, and practices relating to management, operational, and technical controls of every major information system identified in the agency's inventories. FDIC has made substantial progress in establishing a comprehensive information security program. The corporation strengthened its central information security management structure by providing additional staff resources to oversee the program. Further, the corporation initiated a program to routinely perform risk assessments on all major systems. In addition, FDIC updated its overall security policies covering network security, computer center access, and security management and it developed security plans for all key systems. Also, the corporation continued to enhance its security awareness program by adding specialized training for selected technical staff. Although FDIC enhanced its process to test and evaluate its information system controls, it did not ensure that all key control areas supporting the corporation's financial environment were routinely reviewed and tested. These areas included electronic access controls, network security, and audit logging. During the past year, FDIC strengthened its test and evaluation process to cover additional key information system control areas, provide for independent tests of corrective actions, and assess and test newly-identified weaknesses and emerging security threats. Although FDIC established a process to test and evaluate network and mainframe information system controls, its program did not include routine evaluations of network desktop and database application controls. Further, the process did not include comprehensive tests to ensure that electronic access to key financial programs and data (1) were restricted to only those users who need it to perform their job functions and (2) had appropriate audit logs maintained to record security-relevant events for subsequent review. Without routine tests and evaluations of all key information system control areas, FDIC will have limited assurance that its financial and sensitive information is adequately protected. Incorporating these key areas into its test and evaluation process should allow FDIC to better identify and correct security problems, such as those identified in our 2004 audit. Further, the corporation's implementation of new financial systems in the coming year will significantly change the nature of its information systems environment and of the related information systems controls necessary for their effective operation. Consequently, a comprehensive test and evaluation process that includes these areas will be essential to ensure that the corporation's financial and sensitive information will be adequately protected in this new environment. In response, FDIC's Chief Information Officer said that the corporation will continue to take steps to enhance its overall test and evaluation process to ensure an effective security environment. FDIC has made significant progress in correcting the information system control weaknesses we previously identified and has taken other steps to improve information security. Although we identified weaknesses in information system controls involving electronic access, network security, segregation of computer functions, physical security, and application change control, these weaknesses do not pose significant risks to FDIC's financial and sensitive systems. Accordingly, we concluded that weaknesses in information system controls at the corporation no longer constitute a reportable condition, as stated in our audit of the calendar year 2004 financial statements for FDIC's three funds. However, they warrant action by the FDIC management to decrease the risk of unauthorized modification of data and programs, inappropriate disclosure of sensitive information, or disruption of critical operations. A key reason for FDIC's weaknesses in information system controls is that it had not fully implemented a complete test and evaluation process, which is a key element of a comprehensive agency information security program. Although the corporation has made substantial progress in implementing its information security program and enhanced its process to test and evaluate its information system controls, it did not ensure that all key control areas supporting its financial environment were routinely reviewed and tested. These areas included electronic access controls, network security, and audit logging. Until FDIC fully implements a comprehensive test and evaluation process, its ability to maintain adequate information system controls over its financial and sensitive information will be limited. This will be especially crucial as the corporation implements new financial systems in the coming year. To strengthen FDIC's information security program, we recommend that the Chairman direct the Chief Information Officer to broaden its process of tests and evaluations to ensure that all key control areas supporting FDIC's financial environment are routinely reviewed and tested. This process should include routine tests and evaluations of key control areas such as electronic access, network security, and audit logging. We are also making recommendations in a separate report designated for "Limited Official Use Only." These recommendations address actions needed to correct specific information security weaknesses related to electronic access, network security, physical security, segregation of computer functions, and application change controls. In providing written comments on a draft of this report, FDIC's Chief Financial Officer (CFO) agreed with our recommendations. His comments are reprinted in appendix I of this report. Specifically, FDIC plans to correct all weaknesses identified and broaden the testing and evaluation element of its computer management program by February 28, 2006. According to the CFO, significant progress has already been made in addressing the identified weaknesses. We are sending copies of this report to the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member of the House Committee on Financial Services; members of the FDIC Audit Committee; officials in FDIC's divisions of information resources management, administration, and finance; and the FDIC inspector general. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-6244 or David W. Irvin, Assistant Director, at (214) 777-5716. We can also be reached by e-mail at [email protected] and [email protected], respectively. Key contributors to this report are listed in appendix II. In addition to the individual named above, Edward Alexander Jr., Gerald Barnes, Jason Carroll, Lon Chin, Debra Conner, Anh Dang, Kristi Dorsey, Edward Glagola Jr., Nancy Glover, Rosanna Guerrero, David Hayes, Harold Lewis, Leena Mathew, Kevin Metcalfe, Duc Ngo, Eugene Stevens, Charles Vrabel, and Christopher Warweg made key contributions to this report.

The Federal Deposit Insurance Corporation (FDIC) relies extensively on computerized systems to support its financial and mission-related operations. As part of GAO's audit of the calendar year 2004 financial statements for the three funds administered by FDIC, GAO assessed (1) the progress FDIC has made in correcting or mitigating information system control weaknesses identified in our audits for calendar years 2002 and 2003 and (2) the effectiveness of the corporation's information system general controls. FDIC has made significant progress in correcting previously reported information system control weaknesses and has taken other steps to improve information security. Of the 22 weaknesses reported in GAO's 2003 audit, FDIC corrected 19 and is taking action to resolve the 3 that remain. In addition, it corrected the one weakness still open from GAO's 2002 audits. Although FDIC has made substantial improvements in its information system controls, GAO identified additional weaknesses that diminish FDIC's ability to effectively protect the integrity, confidentiality, and availability of its financial and sensitive information systems. These included weaknesses in electronic access controls, network security, segregation of computer functions, physical security, and application change control. Although these do not pose significant risks to FDIC's financial and sensitive systems, they warrant management's action to decrease the risk of unauthorized modification of data and programs, inappropriate disclosure of sensitive information, or disruption of critical operations. A key reason for FDIC's weaknesses in information system controls is that it had not fully implemented a complete test and evaluation process, which is a key element of a comprehensive agency information security program with effective controls. Although FDIC has made substantial progress in implementing its information security program and has enhanced its process to test and evaluate its information system controls, it did not ensure that all key control areas supporting FDIC's financial environment are routinely reviewed and tested. These control areas included electronic access, network security, and audit logging.

The Schedules of Federal Debt including the accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the balances as of September 30, 2006, 2005, and 2004, for Federal Debt Managed by BPD; the related Accrued Interest Payables and Net Unamortized Premiums and Discounts; and the related increases and decreases for the fiscal years ended September 30, 2006 and 2005. BPD maintained, in all material respects, effective internal control relevant to the Schedule of Federal Debt related to financial reporting and compliance with applicable laws and regulations as of September 30, 2006, that provided reasonable assurance that misstatements, losses, or noncompliance material in relation to the Schedule of Federal Debt would be prevented or detected on a timely basis. Our opinion is based on criteria established under 31 U.S.C. SS 3512 (c), (d) (commonly referred to as the Federal Managers' Financial Integrity Act) and the Office of Management and Budget (OMB) Circular A-123, revised December 21, 2004, Management's Responsibility for Internal Control. We found matters involving information security controls that we consider not to be reportable conditions. We will communicate these matters to BPD's management, along with our recommendations for improvement, in a separate letter to be issued at a later date. Our tests for compliance in fiscal year 2006 with selected provisions of laws disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or applicable OMB audit guidance. However, the objective of our audit of the Schedule of Federal Debt for the fiscal year ended September 30, 2006, was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. BPD's Overview on Federal Debt Managed by the Bureau of the Public Debt contains information, some of which is not directly related to the Schedules of Federal Debt. We do not express an opinion on this information. However, we compared this information for consistency with the schedules and discussed the methods of measurement and presentation with BPD officials. Based on this limited work, we found no material inconsistencies with the schedules. Management is responsible for the following: preparing the Schedules of Federal Debt in conformity with U.S. generally accepted accounting principles; establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of the Federal Managers' Financial Integrity Act are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the Schedules of Federal Debt are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles and (2) management maintained effective relevant internal control as of September 30, 2006, the objectives of which are the following: Financial reporting: Transactions are properly recorded, processed, and summarized to permit the preparation of the Schedule of Federal Debt for the fiscal year ended September 30, 2006, in conformity with U.S. generally accepted accounting principles. Compliance with laws and regulations: Transactions related to the Schedule of Federal Debt for the fiscal year ended September 30, 2006, are executed in accordance with laws governing the use of budget authority and with other laws and regulations that could have a direct and material effect on the Schedule of Federal Debt. We are also responsible for testing compliance with selected provisions of laws and regulations that have a direct and material effect on the Schedule of Federal Debt. Further, we are responsible for performing limited procedures with respect to certain other information appearing with the Schedules of Federal Debt. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the Schedules of Federal Debt; assessed the accounting principles used and any significant estimates evaluated the overall presentation of the Schedules of Federal Debt; obtained an understanding of internal control relevant to the Schedule of Federal Debt as of September 30, 2006, related to financial reporting and compliance with laws and regulations (including execution of transactions in accordance with budget authority); tested relevant internal controls over financial reporting and compliance, and evaluated the design and operating effectiveness of internal control relevant to the Schedule of Federal Debt as of September 30, 2006; considered the process for evaluating and reporting on internal control and financial management systems under the Federal Managers' Financial Integrity Act; and tested compliance in fiscal year 2006 with the (1) statutory debt limit (31 U.S.C. SS 3101(b), as amended by Pub. L. No. 107-199, SS 1, 116 Stat. 734 (2002), Pub. L. No. 108-24, 117 Stat. 710 (2003), Pub. L. No. 108-415, SS 1, 118 Stat. 2337 (2004), and Pub. L. No. 109-182, 120 Stat. 289 (2006)); (2) suspension and early redemption of investments from the Civil Service Retirement and Disability Trust Fund (5 U.S.C. SS 8348(j)(k)); and (3) suspension of investments from the G-Fund (5 U.S.C. SS 8438(g)). We did not evaluate all internal controls relevant to operating objectives as broadly described by the Federal Managers' Financial Integrity Act, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We did not test compliance with all laws and regulations applicable to BPD. We limited our tests of compliance to selected provisions of laws that have a direct and material effect on the Schedule of Federal Debt for the fiscal year ended September 30, 2006. We caution that noncompliance may occur and not be detected by these tests and that such testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards and applicable OMB audit guidance. In commenting on a draft of this report, BPD concurred with the conclusions in our report. The comments are reprinted in appendix I. Federal debt managed by the Bureau of the Public Debt (BPD) comprises debt held by the public and debt held by certain federal government accounts, the latter of which is referred to as intragovernmental debt holdings. As of September 30, 2006 and 2005, outstanding gross federal debt managed by the bureau totaled $8,493 and $7,918 billion, respectively. The increase in gross federal debt of $575 billion during fiscal year 2006 was due to an increase in gross intragovernmental debt holdings of $333 billion and an increase in gross debt held by the public of $242 billion. As Figure 1 illustrates, both intragovernmental debt holdings and debt held by the public have steadily increased since fiscal year 2002. The primary reason for the increases in intragovernmental debt holdings is the annual surpluses in the Federal Old-Age and Survivors Insurance Trust Fund, Civil Service Retirement and Disability Fund, Federal Hospital Insurance Trust Fund, Federal Disability Insurance Trust Fund, and Military Retirement Fund. The increases in debt held by the public are due primarily to total federal spending exceeding total federal revenues. As of September 30, 2006, gross debt held by the public totaled $4,843 billion and gross intragovernmental debt holdings totaled $3,650 billion. (in billions) Interest expense incurred during fiscal year 2006 consists of (1) interest accrued and paid on debt held by the public or credited to accounts holding intragovernmental debt during the fiscal year, (2) interest accrued during the fiscal year, but not yet paid on debt held by the public or credited to accounts holding intragovernmental debt, and (3) net amortization of premiums and discounts. The primary components of interest expense are interest paid on the debt held by the public and interest credited to federal government trust funds and other federal government accounts that hold Treasury securities. The interest paid on the debt held by the public affects the current spending of the federal government and represents the burden in servicing its debt (i.e., payments to outside creditors). Interest credited to federal government trust funds and other federal government accounts, on the other hand, does not result in an immediate outlay of the federal government because one part of the government pays the interest and another part receives it. However, this interest represents a claim on future budgetary resources and hence an obligation on future taxpayers. This interest, when reinvested by the trust funds and other federal government accounts, is included in the programs' excess funds not currently needed in operations, which are invested in federal securities. During fiscal year 2006, interest expense incurred totaled $404 billion, interest expense on debt held by the public was $221 billion, and $183 billion was interest incurred for intragovernmental debt holdings. As Figure 2 illustrates, total interest expense decreased from fiscal year 2002 to 2003, but increased in fiscal years 2004 through 2006. Average interest rates on principal balances outstanding as of September 30, 2006 and 2005 are disclosed in the Notes to the Schedules of Federal Debt. (in billions) Debt held by the public reflects how much of the nation's wealth has been absorbed by the federal government to finance prior federal spending in excess of total federal revenues. As of September 30, 2006, and 2005, gross debt held by the public totaled $4,843 billion and $4,601 billion, respectively (see Figure 1), an increase of $242 billion. The borrowings and repayments of debt held by the public decreased from fiscal year 2005 to 2006 primarily due to Treasury's decision to finance current operations using more long-term securities. As of September 30, 2006, $4,284 billion, or 88 percent, of the securities that constitute debt held by the public were marketable, meaning that once the government issues them, they can be resold by whoever owns them. Marketable debt is made up of Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS) with maturity dates ranging from less than 1 year out to 30 years. Of the marketable securities currently held by the public as of September 30, 2006, $2,813 billion or 66 percent will mature within the next 4 years (see Figure 3). As of September 30, 2006 and 2005, notes and TIPS held by the public maturing within the next 10 years totaled $2,709 billion and $2,558 billion, respectively, an increase of $151 billion. Callable securities mature between fiscal years 2012 and 2015, but are reported by their call date. Debt Held by the Public, cont. The government also issues to the public, state and local governments, and foreign governments and central banks nonmarketable securities, which cannot be resold, and have maturity dates from on demand to more than 10 years. As of September 30, 2006, nonmarketable securities totaled $559 billion, or 12 percent of debt held by the public. As of that date, nonmarketable securities primarily consisted of savings securities totaling $204 billion and special securities for state and local governments totaling $239 billion. The Federal Reserve Banks (FRBs) act as fiscal agents for Treasury, as permitted by the Federal Reserve Act. As fiscal agents for Treasury, the FRBs play a significant role in the processing of marketable book-entry securities and paper U.S. savings bonds. For marketable book-entry securities, selected FRBs receive bids, issue book-entry securities to awarded bidders and collect payment on behalf of Treasury, and make interest and redemption payments from Treasury's account to the accounts of security holders. For paper U.S. savings bonds, selected FRBs sell, print, and deliver savings bonds; redeem savings bonds; and handle the related transfers of cash. Intragovernmental debt holdings represent balances of Treasury securities held by over 230 individual federal government accounts with either the authority or the requirement to invest excess receipts in special U.S. Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S. Government. Intragovernmental debt holdings primarily consist of balances in the Social Security, Medicare, Military Retirement, and Civil Service Retirement and Disability trust funds. As of September 30, 2006, such funds accounted for $3,188 billion, or 87 percent, of the $3,650 billion intragovernmental debt holdings balances (see Figure 4). As of September 30, 2006 and 2005, gross intragovernmental debt holdings totaled $3,650 billion and $3,317 billion, respectively (see Figure 1), an increase of $333 The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of par value securities and market-based securities, with terms ranging from on demand out to 30 years. Par value securities are issued and redeemed at par (100 percent of the face value), regardless of current market conditions. Market-based securities, however, can be issued at a premium or discount and are redeemed at par value on the maturity date or at market value if redeemed before the maturity date. Components of Intragovernmental Debt Holdings as of September 30, 2006 The Social Security trust funds consist of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. In addition, the Medicare trust funds are made up of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. From February 16 to March 20, 2006, Treasury faced a period that required it to depart from its normal debt management procedures and to invoke legal authorities to avoid breaching the statutory debt limit. During this period, actions taken by Treasury included suspending investment of receipts of the Government Securities Investment Fund (G-Fund) of the federal employees Thrift Savings Plan, the Exchange Stabilization Fund (ESF), and the Civil Service Retirement and Disability Fund (Civil Service Fund); redeeming Civil Service Fund securities early; and suspending the sales of State and Local Government Series securities. On March 20, 2006, Public Law 109-182 was enacted, which raised the statutory debt ceiling by $781 billion to $8,965 billion. Subsequently, Treasury restored all losses to the G-Fund and Civil Service Fund in accordance with legal authorities provided to the Secretary of the Treasury. Beginning with the October 3, 2005 auction of 13- and 26-week Treasury bills, individuals with TreasuryDirect online accounts were able to purchase marketable Treasury securities (bills, notes, bonds, and TIPS) on a non-competitive basis in TreasuryDirect. With the addition of marketable securities to TreasuryDirect, investors are able to hold the full range of Treasury retail securities in a single account, providing 24/7 convenience for tracking and managing all Treasury consumer securities. In September 2005, BPD defined a comprehensive approach to risk management in TreasuryDirect and established a Risk Management Group (RMG) to identify and monitor patterns of behavior, establish precedents and procedures, and network with private and public sector industry groups. In FY 2006, the RMG reviewed TreasuryDirect reports for unusual activity, watched blogs for TreasuryDirect references and news reports for scams and alerts, and participated in interagency identity theft workgroups. The re-introduction of the regular semi-annual auctions of the thirty-year bond began with the auction on February 9, 2006, followed by a reopening of the thirty-year bond, which was issued on August 15, 2006. Also, during February 2006, the auction and issuance of the monthly 5-year note was shifted to month end to accommodate the re-introduction of the 30-year bond. Beginning in February 2007, Treasury will issue 30-year bonds on a quarterly basis. A quarterly issuance pattern will benefit the Separate Trading of Registered Interest and Principal of Securities (STRIPS) market by creating interest payments for February, May, August and November. Significant Events in FY 2006, cont. Trust Fund - FDIC Merger Prior to June 1, 2006, the Federal Deposit Insurance Corporation (FDIC) maintained three investment funds in the Federal Investments Program. Two of the larger funds, however, were affected by Public Law 109-173 that merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the Deposit Insurance Fund (DIF). On June 1, 2006, the combined balances of BIF and SAIF of $45.7 billion were transferred to the new fund. Since June 1, 2006, all new investment activity has taken place in the DIF. Treasury Hunt®️ is an online application that helps the public identify bonds they may hold that have stopped earning interest. There are nearly 13 million savings bond records with taxpayer identification numbers (TINs) now available for searching in the Treasury Hunt database. This represents over 2.8 million unique TINs. In FY 2006, customers searched the system 840,000 times, with 17,000 possible Series E matured, unredeemed debt matches. In addition, BPD re-mailed 685 bonds, replaced 302 bonds, and released about $3,000 in interest payments. To encourage support for ongoing recovery efforts in areas devastated by last year's hurricanes, Treasury has designated paper Series I Savings Bonds bought through financial institutions from March 29, 2006 through September 30, 2007 as Gulf Coast Recovery Bonds. The bonds contain the special inscription, "Gulf Coast Recovery Bond." The Gulf Opportunity Zone Act of 2005 contained a provision that encouraged Treasury to make this designation. As of September 30, 2006, BPD had issued 930,000 Gulf Coast Recovery Bonds worth $775 million. Federal debt outstanding is one of the largest legally binding obligations of the federal government. Nearly all the federal debt has been issued by the Treasury with a small portion being issued by other federal government agencies. Treasury issues debt securities for two principal reasons, (1) to borrow needed funds to finance the current operations of the federal government and (2) to provide an investment and accounting mechanism for certain federal government accounts' excess receipts, primarily trust funds. Total gross federal debt outstanding has dramatically increased over the past 25 years from $998 billion as of September 30, 1981 to $8,493 billion as of September 30, 2006 (see Figure 5). Large budget deficits emerged during the 1980's due to tax policy decisions and increased outlays for defense and domestic programs. Through fiscal year 1997, annual federal deficits continued to be large and debt continued to grow at a rapid pace. As a result, total federal debt increased more than five fold between 1981 and 1997. Bank. Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) (Note 2) (Note 3) (Discounts) (Discounts) (34,778) (589) (27,521) Accrued Interest (Note 4) (27,521) Net Amortization (Note 4) (26,768) (26,768) (35,531) (48,568) (12,630) Accrued Interest (Note 4) (48,568) (12,630) Net Amortization (Note 4) (43,934) (43,934) ($40,165) ($1,159) The accompanying notes are an integral part of these schedules. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 1. Significant Accounting Policies The Schedules of Federal Debt Managed by the Bureau of the Public Debt (BPD) have been prepared to report fiscal year 2006 and 2005 balances and activity relating to monies borrowed from the public and certain federal government accounts to fund the U.S. government's operations. Permanent, indefinite appropriations are available for the payment of interest on the federal debt and the redemption of Treasury securities. The Constitution empowers the Congress to borrow money on the credit of the United States. The Congress has authorized the Secretary of the Treasury to borrow monies to operate the federal government within a statutory debt limit. Title 31 U.S.C. authorizes Treasury to prescribe the debt instruments and otherwise limit and restrict the amount and composition of the debt. BPD, an organizational entity within the Fiscal Service of the Department of the Treasury, is responsible for issuing Treasury securities in accordance with such authority and to account for the resulting debt. 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. BPD issues and redeems Treasury securities for the trust funds based on data provided by program agencies and other Treasury entities. The schedules were prepared in conformity with U.S. generally accepted accounting principles and from BPD's automated accounting system, Public Debt Accounting and Reporting System. Interest costs are recorded as expenses when incurred, instead of when paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are amortized over the term of the security using an interest method for all long term securities and the straight line method for short term securities. The Department of the Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all Urban Consumers. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 2. Federal Debt Held by the Public As of September 30, 2006 and 2005, Federal Debt Held by the Public consisted of the following: Total Federal Debt Held by the Public Treasury issues marketable bills at a discount and pays the par amount of the security upon maturity. The average interest rate on Treasury bills represents the original issue effective yield on securities outstanding as of September 30, 2006 and 2005, respectively. Treasury bills are issued with a term of one year or less. Treasury issues marketable notes and bonds as long-term securities that pay semi-annual interest based on the securities' stated interest rate. These securities are issued at either par value or at an amount that reflects a discount or a premium. The average interest rate on marketable notes and bonds represents the stated interest rate adjusted by any discount or premium on securities outstanding as of September 30, 2006 and 2005. Treasury notes are issued with a term of 2 - 10 years and Treasury bonds are issued with a term of more than 10 years. Treasury also issues TIPS that have interest and redemption payments, which are tied to the Consumer Price Index, the leading measurement of inflation. TIPS are issued with a term of 5 years or more. At maturity, TIPS are redeemed at the inflation-adjusted principal amount, or the original par value, whichever is greater. TIPS pay a semi-annual fixed rate of interest applied to the inflation-adjusted principal. The TIPS Federal Debt Held by the Public inflation-adjusted principal balance includes inflation of $43,927 million and $29,001 million as of September 30, 2006 and 2005, respectively. Federal Debt Held by the Public includes federal debt held outside of the U. S. government by individuals, corporations, Federal Reserve Banks (FRB), state and local governments, and foreign governments and central banks. The FRB owned $765 billion and $733 billion of Federal Debt Held by the Public as of September 30, 2006 and 2005, respectively. These securities are held in the FRB System Open Market Account (SOMA) for the purpose of conducting monetary policy. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 2. Federal Debt Held by the Public (continued) Treasury issues nonmarketable securities at either par value or at an amount that reflects a discount or a premium. The average interest rate on the nonmarketable securities represents the original issue weighted effective yield on securities outstanding as of September 30, 2006 and 2005. Nonmarketable securities are issued with a term of on demand to more than 10 years. As of September 30, 2006 and 2005, nonmarketable securities consisted of the following: State and Local Government Series Government Account Series (GAS) securities are nonmarketable securities issued to federal government accounts. Federal Debt Held by the Public includes GAS securities issued to certain federal government accounts. One example is the GAS securities held by the Government Securities Investment Fund (G-Fund) of the federal employees' Thrift Savings Plan. Federal employees and retirees who have individual accounts own the GAS securities held by the fund. For this reason, these securities are considered part of the Federal Debt Held by the Public rather than Intragovernmental Debt Holdings. The GAS securities held by the G-Fund consist of overnight investments redeemed one business day after their issue. The net increase in amounts borrowed from the fund during fiscal years 2006 and 2005 are included in the respective Borrowings from the Public amounts reported on the Schedules of Federal Debt. Fiscal year-end September 30, 2006, occurred on a Saturday. As a result $31,656 million of marketable Treasury notes matured but not repaid is included in the balance of the total debt held by the public as of September 30, 2006. Settlement of this debt repayment occurred on Monday, October 2, 2006. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Foreign Service Retirement and Disability Fund National Service Life Insurance Fund Airport and Airway Trust Fund * On June 1, 2006, the Federal Deposit Insurance Corporation (FDIC) merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the Deposit Insurance Fund (DIF). FDIC's Holdings as of September 30, 2005: The Savings Association Insurance Fund Social Security Administration (SSA); Office of Personnel Management (OPM); Department of Health and Human Services (HHS); Department of Defense (DOD); Department of Labor (DOL); Federal Deposit Insurance Corporation (FDIC); Department of Energy (DOE); Department of Housing and Urban Development (HUD); Department of the Treasury (Treasury); Department of State (DOS); Department of Transportation (DOT); Department of Veterans Affairs (VA). Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 3. Intragovernmental Debt Holdings (continued) Intragovernmental Debt Holdings primarily consist of GAS securities. Treasury issues GAS securities at either par value or at an amount that reflects a discount or a premium. The average interest rates for both fiscal years 2006 and 2005 were 5.2 percent. The average interest rate represents the original issue weighted effective yield on securities outstanding as of September 30, 2006 and 2005. GAS securities are issued with a term of on demand to 30 years. GAS securities include TIPS, which are reported at an inflation-adjusted principal balance using the Consumer Price Index. As of September 30, 2006 and 2005 the inflation-adjusted principal balance included inflation of $19,576 million and $8,268 million, respectively. Fiscal year-end September 30, 2006, occurred on a Saturday. As a result $360 million of GAS securities held by Federal Agencies matured but not repaid is included in the balance of the Intragovernmental Holdings as of September 30, 2006. Settlement of this debt repayment occurred on Monday, October 2, 2006. Note 4. Interest Expense Interest expense on Federal Debt Managed by BPD for fiscal years 2006 and 2005 consisted of the Federal Debt Held by the Public Net Amortization of Premiums and Discounts Total Interest Expense on Federal Debt Held by the Public Net Amortization of Premiums and Discounts (3,269) (1,814) Total Interest Expense on Intragovernmental Debt Total Interest Expense on Federal Debt Managed by BPD The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all Urban Consumers. This daily adjustment is an interest expense for the Bureau of the Public Debt. Accrued interest on Federal Debt Held by the Public includes inflation adjustments of $14,512 million and $8,582 million for fiscal years 2006 and 2005, respectively. Accrued interest on Intragovernmental Debt Holdings includes inflation adjustments of $607 million and $419 million for fiscal years 2006 and 2005, respectively. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 5. Fund Balance With Treasury The Fund Balance with Treasury, a non-entity, intragovernmental account, is not included on the Schedules of Federal Debt and is presented for informational purposes. In addition to the individual named above, Dawn B. Simpson, Assistant Director; Cara L. Bauer; Theresa M. Bowman; Erik A. Braun; Dean D. Carpenter; Dennis L. Clarke; Chau L. Dinh; Jennifer L. Henderson; Erik S. Huff; Brent J. LaPointe; Nicole M. McGuire; Jay McTigue; Timothy J. Murray; and Danietta S. Williams made key contributions to this report.

GAO is required to audit the consolidated financial statements of the U.S. government. Due to the significance of the federal debt held by the public to the governmentwide financial statements, GAO has also been auditing the Bureau of the Public Debt's (BPD) Schedules of Federal Debt annually. The audit of these schedules is done to determine whether, in all material respects, (1) the schedules are reliable and (2) BPD management maintained effective internal control relevant to the Schedule of Federal Debt. Further, we test compliance with selected provisions of significant laws related to the Schedule of Federal Debt. Federal debt managed by BPD consists of Treasury securities held by the public and by certain federal government accounts, referred to as intragovernmental debt holdings. The level of debt held by the public reflects how much of the nation's wealth has been absorbed by the federal government to finance prior federal spending in excess of federal revenues. Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds such as Social Security, that typically have an obligation to invest their excess annual receipts over disbursements in federal securities. In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2006 and 2005 were fairly presented in all material respects and BPD maintained effective internal control relevant to the Schedule of Federal Debt as of September 30, 2006. GAO also found no instances of noncompliance in fiscal year 2006 with selected provisions of the statutory debt limit and debt issuance suspension period laws we tested. As of September 30, 2006 and 2005, federal debt managed by BPD totaled about $8,493 billion and $7,918 billion, respectively. At the end of fiscal year 2006, debt held by the public as a percentage of the U.S. economy is estimated at 36.9 percent, compared to 34.1 percent at the end of fiscal year 2002. Further, certain trust funds (e.g., Social Security) continue to run surpluses, resulting in increased intragovernmental debt holdings. These debt holdings are backed by the full faith and credit of the U.S. government and represent a priority call on budgetary resources. As a result, total gross federal debt has increased 37 percent between the end of fiscal years 2002 and 2006. During fiscal year 2006, a debt issuance suspension period was invoked to avoid breaching the statutory debt limit. On March 20, 2006, legislation was enacted to raise the debt limit by $781 billion to $8,965 billion. This was the fourth occurrence since 2002 that the statutory debt limit had to be raised to avoid breaching the statutory debt limit. During that time, the debt limit has increased more than $3 trillion, from $5,950 billion in 2002 to the current limit of $8,965 billion. Total federal debt increased over each of the last 4 fiscal years. Debt held by the public increased during this 4-year period primarily as a result of annual unified budget deficits. Intragovernmental debt holdings steadily increased during this 4-year period primarily due to excess receipts over disbursements in federal trust funds (e.g., Social Security).

For many years, the federal government has taken steps to coordinate geospatial activities both within and outside the federal government. In 1953, the Bureau of the Budget first issued Circular A-16, encouraging expeditious surveying and mapping activities across all levels of government and avoidance of duplicative efforts. In 1990, OMB revised Circular A-16 to, among other things, establish the Federal Geospatial Data Committee (FGDC) within Interior to promote the coordinated use, sharing, and dissemination of geospatial data nationwide. Building on that guidance, in 1994 the President issued Executive Order 12906 for the purpose of addressing wasteful duplication and incompatibility of geospatial information, and assigned FGDC the responsibility to coordinate the development of NSDI. In 2002, OMB again revised Circular A-16 to further describe the components of NSDI; clearly define agency responsibilities for acquiring, maintaining, distributing, using, and preserving geospatial data; and to reaffirm FGDC's role as the interagency coordinating body for NSDI-related activities. The circular established the following five components of NSDI and described how these components were to be implemented. Data themes. Data themes are topics of national significance, such as cadastre, which includes rights and interests in real property and surveys and land use/land cover, which includes land surface features and use. OMB Circular A-16 currently identifies 34 data themes and identifies the "lead" agency or agencies for each theme. Each data theme is to be comprised of one or more electronic data records, known as a dataset. Of the 34 themes, 9 are identified as a "framework" theme --that is, a theme identified in Circular A-16 as being critical for any geospatial application. Standards. Geospatial standards provide common and repeatable rules or guidelines for the development, documentation, and exchange of geospatial datasets. Metadata. Metadata are information about datasets, such as content, source, accuracy, method of collection, and point-of-contact. Metadata are used to facilitate the search of and access to datasets within a data library or clearinghouse, and enable potential users to determine the data's applicability for their use. National Spatial Data Clearinghouse. The clearinghouse is intended to be a centralized geospatial metadata repository that contains geospatial metadata records from federal agencies, state and local governments, and academic and private sector organizations that can be searched to determine whether needed geospatial data exist and can be shared. Federal agencies are required to identify their existing and planned geospatial investments in the clearinghouse, and search the clearinghouse for cost-saving opportunities before acquiring geospatial data. In 2003, FGDC created the Geospatial One-Stop to provide "one-stop" access to geospatial metadata from a centralized database and search function. In October 2011, the Geospatial One- Stop was retired, and FGDC initiated a pilot project, known as the Geospatial Platform, which was envisioned to provide shared and trusted geospatial data, services, and applications for use by government agencies, their partners, and the public. According to Interior officials, Interior is the managing partner of the Geospatial Platform. As of August 2012, there were approximately 835,000 geospatial metadata records in the central repository, of which about 373,000 were from federal sources. Partnerships. Partnerships are efforts aimed at involving all stakeholders (e.g., federal, tribal, state, local government, and academic institutions) in the development of NSDI. In November 2010, OMB issued supplemental guidance specifically regarding how agencies are to manage data themes.guidance expands upon and clarifies some of the language and responsibilities contained in OMB Circular A-16 in order to facilitate the adoption and implementation of a geospatial asset management capability. To fulfill its responsibilities, FGDC is governed by a steering committee-- an interagency decision making body that provides leadership and policy direction in support of the development of NSDI. The Secretary of the Interior chairs the committee; the Vice-Chair is the Chief Architect of the Office of E-Government and Information Technology of OMB. All departments or agencies responsible for geospatial data themes, or that have activities in geographic information or geospatial data collection or use, are required to be members of FGDC. Thirty-two agencies are members of the Steering Committee and are to be represented by their senior agency officials for geospatial information.officials are responsible for overseeing, coordinating, and facilitating their respective agency's implementation of geospatial requirements, policies, and activities. FGDC is supported by the Office of the Secretariat, which consists of about 10 people located in U.S. Geological Survey (USGS) who do the day-to-day work of supporting, managing, and coordinating the activities of FGDC. The Secretary created the committee as a federal advisory committee under the Federal Advisory Committee Act. services to citizens, to business partners, to employees, and among all levels of government. The act also requires OMB to report annually to Congress on the status of e-government initiatives. In these reports, OMB is to describe the administration's use of e-government principles to improve government performance and the delivery of information and services to the public. OMB subsequently began initiatives to fulfill the requirements established by these laws: In February 2002, OMB established the Federal Enterprise Architecture, which is intended to facilitate governmentwide improvement through cross-agency analysis and identification of duplicative investments, gaps, and opportunities for collaboration, interoperability, and integration within and across agency programs. The Federal Enterprise Architecture is composed of five "reference models" describing the federal government's (1) business (or mission) processes and functions, independent of the agencies that perform them; (2) performance goals and outcome measures; (3) means of service delivery; (4) information and data definitions; and (5) technology standards. In March 2004, OMB established multiple "lines of business" to consolidate redundant IT investments and business processes across the federal government. Later, in March 2006, OMB established the Geospatial Line of Business. Each line of business is led by an individual agency and supported by other relevant agencies. Interior is the managing partner for the Geospatial Line of Business and the FGDC Secretariat provides project management support. OMB reports to Congress each year on the costs and benefits of these initiatives. Over the past few years, we have issued a series of reports that have identified federal programs and functional areas where unnecessary duplication, overlap, or fragmentation exists; the actions needed to address such conditions; and the potential financial and other benefits of In particular, we identified opportunities to reduce duplication doing so.and the cost of government operations in several critical IT areas. In our most recent duplication report, we reported that better coordination among federal agencies that collect, maintain, and use geospatial information could help reduce duplication of geospatial investments and provide the opportunity for potential savings of millions of dollars. The duplication report reiterated the need for action among several federal agencies, FGDC, and OMB. While the FGDC had made progress in some areas to improve coordination in geospatial activities, our November 2012 report identified a number of areas in which little progress had been made. For example, FGDC had developed a metadata standard that included descriptive information about a dataset--such as the framework theme to which it relates, the time frame of when the data was collected, and who to contact for more information that facilitates the sharing of geospatial data. FGDC had also established a clearinghouse that allowed users to determine whether the geospatial data (including planned data) they are seeking exist. As noted previously, the clearinghouse consists of a centralized repository that contains geospatial metadatafederal agencies, state and local governments, academic and private- sector organizations; and multiple web-based portals from which the metadata can be searched. However, despite this progress, we found that FGDC had not fully implemented key aspects of activities needed for coordinating investments in geospatial data. First, although the clearinghouse was reported to have been modified in May 2012 to allow agencies to identify their planned investments, as of September 2012, there were no federal agencies using this function because FGDC had not yet completed and shared guidance with agencies on how to do so. Second, FGDC had not fully planned for or implemented a portfolio management approach per OMB guidance. Specifically, we found that FGDC had evaluated the 34 data themes identified in OMB Circular A-16 to determine whether any changes were needed; in August 2011, the Steering Committee proposed consolidating the 34 data themes into 17 themes; FGDC Secretariat officials subsequently stated that FGDC agencies were proposing to eliminate one more theme for a total of 16. We reported that officials further stated that, as of August 2012, lead agencies had been identified for each of the 16 themes. However, at the time, the data themes, lead agencies, and datasets had neither been finalized nor approved, and FGDC had yet to provide guidance to agencies about how to implement the portfolio management approach. While Secretariat officials stated that they had developed a draft implementation plan in November 2011, when we issued our November 2012 report, the plan had not been finalized or approved, and FGDC Secretariat officials were unable, on behalf of FGDC agencies, to provide a time frame for doing so. Third, FGDC's strategic plan was missing key components and had not been kept up-to-date. Specifically, we found that FGDC's current plan had been issued in 2004 and included OMB-required components such as (1) a vision statement, (2) three outcome-oriented goals and 13 objectives to be accomplished between 2005 and 2008, and (3) a high-level description of how all but 1 of the 13 objectives were to be achieved. However, the plan did not include components such as needed resources, performance measures for 9 of the 13 objectives, or external factors that could affect the achievement of the plan's goals and objectives. Further, the plan did not reflect significant initiatives that the FGDC Steering Committee had engaged in--such as the Geospatial Platform--and the time frames for the goals were outdated. As we reported in November 2012, according to FGDC officials, they had not yet fully implemented policies and procedures for coordinating geospatial investments because these efforts had not been made a priority. Instead, FGDC officials had been primarily focused on the development of the Geospatial Platform. As a result, we determined in 2012 that efforts to acquire data were uncoordinated and the federal government acquired duplicative geospatial data. For example, a National Geospatial Advisory Committee representative told us that, at that time, a commercial provider was leasing the same proprietary parcel data to six federal agencies; the Department of Housing and Urban Development, the Department of Homeland Security, the Federal Bureau of Investigation, the Small Business Administration, the Federal Deposit Insurance Corporation, and the Federal Reserve. We concluded that unless FGDC decides that coordinating geospatial investments was a priority, this situation would likely continue. Our November 2012 report also showed that none of the three federal departments in our review--the Departments of Commerce, the Interior, and Transportation--had fully implemented activities needed for effectively coordinating and managing geospatial activities within their respective departments. According to OMB guidance and the executive order, federal departments and agencies that handle geospatial data are to: designate a senior agency official for geospatial information that has departmentwide responsibility, accountability, and authority for geospatial information issues; prepare, maintain, publish, and implement a strategy for advancing geographic information and related geospatial data activities appropriate to their mission, and in support of NSDI strategy; develop a policy that requires them to make their geospatial metadata available on the clearinghouse; make all metadata associated with geospatial data available on the clearinghouse, and use the metadata standard; and adopt internal procedures to ensure that they access the NSDI clearinghouse before they expend funds to collect or produce new geospatial data to determine (1) whether the information has already been collected by others, or (2) whether cooperative efforts to obtain the data are possible. However, while all three of the departments had made their metadata available on the clearinghouse, none of the three federal departments in our review had fully implemented all of the other important activities (see table 1). Department officials stated that the lack of progress in these activities was due, in part, to a lack in designating priorities. This lack of priority had contributed to the acquisition of duplicative geospatial data. For example, three separate federal agencies were independently acquiring road centerline data. We concluded in November 2012 that unless the federal departments decided that completing activities to better coordinate geospatial investments was a priority, this situation would likely continue. The three theme-lead agencies in our review--the National Oceanic and Atmospheric Administration (NOAA), USGS, and the Bureau of Transportation Statistics (BTS) had implemented some but not all of the geospatial activities necessary to ensure the national coverage and stewardship of specific geospatial data themes in our review. According to OMB, theme-lead agencies are to: designate a point of contact who is responsible for the development, maintenance, coordination, and dissemination of data using the clearinghouse; prepare goals relating to the theme that support the NSDI strategy, and as needed, collect and analyze information from user needs and include those needs in the theme-related goals; develop and implement a plan for the nationwide population of the data theme that includes (1) the development of partnership programs with states, tribes, academia, the private sector, other federal agencies, and localities that meet the needs of users; (2) human and financial resource needs; (3) standards, metadata, and the clearinghouse needs; and (4) a timetable for the development for the theme; and create a plan to develop and implement theme standards. However, we found that while all three of the theme-lead agencies had made some progress, none of them had implemented all of these important activities (see table 2). Theme-lead agency officials attributed the lack of progress in implementing these activities to competing priorities, among other things. As a result, efforts to acquire data were uncoordinated and the federal government acquired duplicative geospatial data. For example, according to a National Geospatial Advisory Committee official, several federal agencies collected, purchased, or leased address information in a noncoordinated fashion. We concluded in November 2012 that unless the federal agencies were to decide that completing activities to coordinate geospatial investments was a priority, the potential for duplication would continue to exist. OMB has oversight responsibilities for federal IT systems and acquisition activities--including geographic information systems--to help ensure their efficient and effective use. According to OMB Office of E- Government staff members, OMB relies primarily on the annual budget process to identify potentially duplicative geospatial investments. Specifically, OMB requires federal departments and agencies to provide information related to their IT investments (called exhibit 53s) and capital asset plans and business cases (called exhibit 300s). However, as we reported in November 2012, OMB's Office of E- Government staff members acknowledged that these two sources may not in all cases provide the necessary information to allow OMB to identify potentially duplicative investments or accurately quantify the amount of federal dollars spent on geospatial datasets for three primary reasons. First, according to these staff members some federal agencies may not classify investments in geospatial data as "information technology" (such as satellites), meaning that they would not be captured in exhibit 53s. OMB staff members stated that agencies are to determine what qualifies as an IT investment and stated that there are variations in the way that agencies interpret the definition of IT. Second, agencies do not always appropriately classify geospatial investments as "geospatial services" using the Federal Enterprise Architecture codes. Our analysis of the fiscal year 2013 exhibit 53s for the three departments that we reviewed showed that only 5 of their 24 key datasets--1 of NOAA's 6 geodetic control datasets and 4 of USGS's 7 hydrography datasets--were included in the departments' exhibit 53s. Further, only 1 of these investments was identified with the geospatial services code, as required by OMB's fiscal year 2013 budget formulation guidance. Third, given that the geospatial data may be only one component of an IT investment or capital asset, even if it were included in the agencies' exhibit 53s or 300s, we determined that OMB would have difficulties in identifying the geospatial component, and the associated dollars, without having a detailed discussion with individuals responsible for each investment. OMB staff members stated that, as a result, they did not have a complete picture of how much money is being spent on geospatial investments across the federal government because, as noted, what was being reported may not have captured all geospatial spending, and the data had not been reliable. We also reported in November 2012 that according to OMB, although eliminating duplication in geospatial investments was important, OMB's recent efforts had focused on other commodity IT areas with higher spending and cyber security ramifications. As a result, OMB had not yet established a way to collect complete and reliable information about geospatial investments because this had not been a priority. We concluded that, unless OMB decides that coordinating geospatial investments is designated as a priority, duplicative investments would likely continue. Our November 2012 report made numerous recommendations aimed at improving coordination and reducing duplication of geospatial data. Interior and Commerce generally agreed with our recommendations; Transportation neither agreed nor disagreed. First, we recommended that the Secretary of the Interior, as FGDC Chair, direct the FGDC Steering Committee to: establish a time frame for completing a plan to facilitate the implementation of OMB's November 2010 management guidance, and develop and implement the plan within the established time frame; develop and implement guidance for identifying planned geospatial investments in the Geospatial Platform, and establish a time frame for doing so; and establish a time frame for creating and updating a strategic plan to improve coordination and reduce duplication, and create and implement the plan within the established time frame. The plan, at a minimum, should include (1) a vision statement for the NSDI; (2) outcome-oriented goals and objectives that address all aspects of the NSDI; (3) a description of how the goals and objectives are to be achieved, including a description of the resources needed to achieve the goals and objectives and how FGDC is to work with other agencies to achieve them; (4) performance measures for achieving the stated goals; and (5) external factors that could affect the achievement of the goals and objectives. In addition, we recommended that the Secretaries of Commerce, the Interior, and Transportation implement the relevant executive order requirements and OMB guidance that apply to their departments and agencies: designate a senior agency official with departmentwide accountability, authority, and responsibility for geospatial information issues; prepare, maintain, publish, and implement a strategy for advancing geographic information and related geospatial data activities appropriate to its mission; develop a policy that requires the department to make its geospatial metadata available on the clearinghouse; develop and implement internal procedures to ensure that the department accesses the NSDI clearinghouse before it expends funds to collect or produce new geospatial data to determine (1) whether the information has already been collected by others and (2) whether cooperative efforts to obtain the data are possible; prepare goals relating to all datasets within the relevant theme that develop and implement a plan for the nationwide population of the relevant theme that addresses all datasets within the theme and that includes (1) the development of partnership programs with states, tribes, academia, the private sector, other federal agencies, and localities that meet the needs of users; (2) human and financial resource needs; (3) standards, metadata, and the clearinghouse needs; and (4) a timetable for the development for the theme; and create and implement a plan to develop and implement relevant theme standards. Further, we recommended that the Director of OMB develop a mechanism, or modify existing mechanisms, to identify and report annually on all geospatial-related investments, including dollars invested and the nature of the investment. In the year since our report was issued, FGDC, OMB, and selected agencies have made some progress in addressing recommendations. For example, in September 2013, FGDC issued guidance directing all FGDC departments to identify planned geospatial investments using the Geospatial Platform. In May 2013, OMB issued guidance to agencies on how to document information on the nature of investments, such as using common standards, specifications, and formats developed by the geospatial community, which would allow others to determine the fitness of the data for their needs. However, because the implementation of this new guidance is still dependent on the use of exhibit 53s and 300s for reporting past, present, and future costs, it is unclear the extent to which federal agencies, OMB, or others will effectively be able to identify how much federal funding is being spent on geospatial systems and data. In addition, the federal departments we reviewed have taken some steps to implement our recommendations. For example, the Departments of Commerce, the Interior, and Transportation have all begun preparing, maintaining, publishing, and implementing strategies for advancing geographic information and related geospatial data activities appropriate to their missions. In addition, the three agencies with theme-lead responsibilities that we reviewed have begun implementing our recommendations. For example, NOAA, USGS, and BTS have all taken some steps to create a plan to develop and implement relevant theme standards. However, until a comprehensive national strategy is put in place and federal departments and agencies establish and implement the policies, procedures, and plans to coordinate their geospatial activities as we recommended, the vision of the NSDI to improve the coordination and use of geospatial information will likely not be fully realized and duplicative investments will likely continue. Further, until OMB establishes a way to obtain reliable information about federal geospatial investments as we recommended, OMB will not be able to readily identify potentially duplicative geospatial investments. In summary, it was slightly over a year ago that we reported that the key players in ensuring coordination on geospatial data investments--FGDC, federal departments and agencies, and OMB--had not fully implemented policies and procedures for coordinating geospatial investments because these efforts were not made a priority. As a result, efforts to acquire data were uncoordinated and the federal government was acquiring duplicative geospatial data. At that time, we noted that unless OMB, FGDC, and federal departments and agencies decide that coordinating geospatial investments is a priority, this situation would likely continue. Now, a year later, there has been some progress in improving policies and procedures for coordinating the geospatial investments. However, much remains to be done to implement and enforce the policies and to achieve cost savings to the federal government. Until FGDC, federal departments and agencies, and OMB decide that investments in geospatial information are a priority, these investments will remain uncoordinated, and the federal government will continue to acquire duplicative geospatial information and waste taxpayer dollars. Chairman Lamborn, Ranking Member Holt, 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 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 Colleen Phillips (assistant director), Kaelin Kuhn, Nancy Glover, Jamelyn Payan, and Jessica Waselkow. Description Pertain to, or describe, the dynamic processes, interactions, distributions, and relationships between and among organisms and their environments. Past, current, and future rights and interests in real property including the spatial information necessary to describe geographic extents. Rights and interests are benefits or enjoyment in real property that can be conveyed, transferred, or otherwise allocated to another for economic remuneration. Rights and interests are recorded in land record documents. The spatial information necessary to describe geographic extents includes surveys and legal description frameworks such as the Public Land Survey System, as well as parcel-by-parcel surveys and descriptions. Does not include federal government or military facilities. Meteorological conditions, including temperature, precipitation, and wind, that characteristically prevail in a particular region over a long period of time. Weather is the state of the atmosphere at a given time and place, with respect to variables such as temperature, moisture, wind velocity, and barometric pressure. Features and characteristics of a collection of places of significance in history, architecture, engineering, or society. Includes national monuments and icons. The measured vertical position of the earth surface and other landscape or bathymetric features relative to a reference datum typically related to sea level. These points normally describe bare earth positions but may also describe the top surface of buildings and other objects, vegetation structure, or submerged objects. Elevation data can be stored as a three-dimensional array or as a continuous surface such as a raster, triangulated irregular network, or contours. Elevation data may also be represented in other derivative forms such as slope, aspect, ridge and drainage lines, and shaded relief. Collection of control points that provide a common reference system for establishing coordinates for geographic data. Geographically-referenced data pertaining to the origin, history, composition, structure, features, and processes of the solid Earth, both onshore and offshore. Includes geologic, geophysical, and geochemical maps, stratigraphy, paleontology, geochronology, mineral and energy resources, and natural hazards such as earthquakes, volcanic eruptions, coastal erosion, and landslides. Does not include soils. Political, governmental, and administrative (management) type boundaries that are used to manage people and resources. Includes geopolitical boundaries (county, parish, state, city, etc), tribal boundaries, federal land boundaries and federal regions, international boundaries, governmental administrative units such as congressional districts, international lines of separation, limits, zones, enclaves/exclaves and special areas between States and dependencies as well as all jurisdictional offshore limits within U.S. sovereignty. Boundaries associated with natural resources, demography, and cultural entities are excluded and can be found in the appropriate subject themes. Georeferenced images of the Earth's surface, which have been collected via aerial photography or satellite data. Orthoimagery is prepared through a geometric correction process known as orthorectification to remove image displacements due to relief and sensor characteristics, allowing their use as base maps for digital mapping and analyses in a geographic information system. Specific imagery data sets created through image interpretation and classification, such as a land cover image, can be found under themes specific to the subject matter. Refers collectively to natural and man-made surface features that cover the land (Land Cover) and to the primary ways in which land cover is used by humans (Land Use). Examples of Land Cover may be grass, asphalt, trees, bare ground, water, etc. Examples of Land Use may be urban, agricultural, ranges, and forest areas. Description The spatial representation (location) of real property entities, typically consisting of one or more of the following: unimproved land, a building, a structure, site improvements and the underlying land. Complex real property entities (aka "facilities") are used for a broad spectrum of functions or missions. This theme focuses on spatial representation of real property assets only and does not seek to describe special purpose functions of real property such as those found in the Cultural Resources, Transportation, or Utilities themes. Depicts the geography and attributes of the many kinds of soils found in the landscape at both large and small map scales. A living dynamic resource providing a natural medium for plant growth and habitat for living organisms, soil recycles nutrients and wastes, stores carbon, and purifies water supplies. Soil has distinct layers (called 'horizons') that, in contrast to underlying geologic material, are altered by the interactions of climate, landscape features, and living organisms over time. Means and aids for conveying persons and/or goods. The transportation system includes both physical and non-physical components related to all modes of travel that allow the movement of goods and people between locations. Means, aids, and usage of facilities for producing, conveying, distributing, processing or disposing of public and private commodities including power, energy, communications, natural gas, and water. Includes subthemes for Energy and Communications. Interior hydrologic features and characteristics, including classification, measurements, location, and extent. Includes aquifers, watersheds, wetlands, navigation, water quality, water quantity, and groundwater information. Features and characteristics of salt water bodies (i.e. tides, tidal waves, coastal information, reefs) and features and characteristics that represent the intersection of the land with the water surface (i.e. shorelines), the lines from which the territorial sea and other maritime zones are measured (i.e. baseline maritime) and lands covered by water at any stage of the tide (i.e. outer continental shelf ), as distinguished from tidelands, which are attached to the mainland or an island and cover and uncover with the tide. 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 collects, maintains, and uses geospatial information--information linked to specific geographic locations--to support many functions, including national security and disaster response. In 2012, the Department of the Interior estimated that the federal government was investing billions of dollars on geospatial data annually, and that duplication was common. In November 2012, GAO reported on efforts to reduce duplicative investments in geospatial data, focusing on OMB, FGDC, and three agencies: the Departments of Commerce, the Interior, and Transportation. This statement summarizes the results of that November 2012 report on progress and challenges in coordinating geospatial information and includes updates on the implementation of recommendations made in that report. The President and the Office of Management and Budget (OMB) have established policies and procedures for coordinating investments in geospatial data, however, in November 2012, GAO reported that governmentwide committees and federal departments and agencies had not effectively implemented them. The committee that was established to promote the coordination of geospatial data nationwide--the Federal Geographic Data Committee (FGDC)--had developed and endorsed key standards and had established a clearinghouse of metadata. GAO found that the clearinghouse was not being used by agencies to identify planned geospatial investments to promote coordination and reduce duplication. In addition, the committee had not yet fully planned for or implemented an approach to manage geospatial data as related groups of investments to allow agencies to more effectively plan geospatial data collection efforts and minimize duplicative investments, and its strategic plan was missing key elements. Other shortfalls have impaired progress in coordinating geospatial data. Specifically, none of the three federal departments in GAO's review had fully implemented important activities such as preparing and implementing a strategy for advancing geospatial activities within their respective departments. Moreover, the agencies in GAO's review responsible for governmentwide management of specific geospatial data had implemented some but not all key activities for coordinating the national coverage of specific geospatial data. While OMB has oversight responsibilities for geospatial data, GAO reported in November 2012 that according to OMB staff, the agency did not have complete and reliable information to identify potentially duplicative geospatial investments. GAO also reported that FGDC, federal departments and agencies, and OMB had not yet fully implemented policies and procedures for coordinating geospatial investments because these efforts had not been a priority. As a result, efforts to acquire data were uncoordinated and the federal government acquired duplicative geospatial data. For example, a National Geospatial Advisory Committee representative stated that a commercial provider leases the same proprietary parcel data to six federal agencies. GAO concluded that unless the key entities determined that coordinating geospatial investments was a priority, the federal government would continue to acquire duplicative geospatial information and waste taxpayer dollars. GAO is making no new recommendations in this statement. In November 2012, GAO recommended that to improve coordination and reduce duplication, FGDC develop a national strategy for coordinating geospatial investments; federal agencies follow federal guidance for managing geospatial investments; and OMB develop a mechanism to identify and report on geospatial investments. Since that time, FGDC and several agencies have taken some steps to implement the recommendations. However, additional actions are still needed.

In order for students attending a college to receive Title IV funds, a college must, among other requirements, be (1) licensed or otherwise legally authorized to provide higher education by a state, (2) accredited by an agency recognized for that purpose by the Secretary of the U.S. Department of Education (Education), and (3) deemed eligible and certified to participate in federal student aid programs by Education. This is commonly referred to as the triad. Under the Higher Education Act, Education does not determine the quality of higher-education institutions or their programs; rather, it relies on recognized accrediting agencies to do so. As part of its role in the administration of federal student aid programs, Education determines which institutions of higher education are eligible to participate in Title IV programs. Education is responsible for overseeing college compliance with Title IV laws and regulations and ensuring that only eligible students receive federal student aid. As part of its compliance monitoring, Education relies on department employees and independent auditors of schools to conduct program reviews and audits of colleges. Moreover, for-profit colleges participating in federal student aid programs must enter a program participation agreement with Education that, among other things, requires the college to derive not less than 10 percent of revenues from sources other than federal student aid (known as the "90/10 Rule"). According to Education, over 2,000 for-profit colleges participate in Title IV programs. In August 2009, we reported that students who attended for-profit colleges were more likely to default on federal student loans than were students from other colleges. Additionally, our August 2010 testimony on for-profit college recruiting practices found that some colleges failed to provide clear information about program duration and cost and exaggerated applicants' potential salary after graduation, and made other deceptive statements. The Stafford Loans are the largest source of federal financial aid available to postsecondary students. In academic year 2009-10, 35 percent of undergraduate students participated in the program, which provided an estimated $56.1 billion dollars to eligible students through subsidized and unsubsidized loans. To qualify for a subsidized loan, students must have a financial need as determined under federal law. A student's financial aid need is determined by a formula that subtracts a student's expected family contribution (EFC) and certain other estimated financial assistance from their total cost of attendance. In contrast to subsidized loans, students can receive unsubsidized loans to pay for educational expenses regardless of their financial need. Depending on their educational expenses and level of financial need, a student may be eligible to receive both subsidized and unsubsidized loans, which is generally referred to as a combined loan. Student eligibility for grants and subsidized student loans is based on student financial need. In addition, in order for a student to be eligible for Title IV funds, the college must ensure that the student meets the following requirements, among others: (1) has a high-school diploma or a recognized equivalent (such as a General Educational Development certification), or completes a secondary-school education in a home-school setting as recognized under state law, or is determined to have an "ability-to-benefit" from the education by a method approved by Education or a state, or the college; (2) is working toward a degree or certificate in an eligible program; and (3) is maintaining satisfactory academic progress once in college. Completion of the Free Application for Federal Student Aid (FAFSA) is the first step in securing federal financial assistance. After Education processes an applicant's FAFSA, a report is sent to the applicant or made available online. This report includes the applicant's EFC, the types of federal aid for which the applicant qualifies, and information about any errors--such as questions the applicant did not complete--that Education identified during FAFSA processing. Colleges send applicants award letters after admission, providing students with types and amounts of federal, state, and institutional aid, should the student decide to enroll. As required by law, a college must make available upon request to prospective and enrolled students a statement of any refund policy with which the college must comply; the requirements for the treatment of Title IV funds when a student withdraws; and the requirements and procedures for officially withdrawing from the college. In addition, Education guidance states that a student should be able to estimate how much federal student aid he or she will retain and how much he or she will return upon withdrawing. Finally, a student or prospective student should be informed that if he or she withdraws, charges that were previously paid by federal student aid funds might become a debt that the student will be responsible for paying. Once students have completed or withdrawn from colleges, the Higher Education Act requires that schools provide exit counseling (which may be provided electronically), typically within 30 days, for all students with federally guaranteed loans. According to Education, this counseling is a critical requirement in explaining to borrowers both their rights and responsibilities. In requiring students to be advised of both the wide array of repayment options available and the negative consequences of default, such as adverse credit reports, delinquent debt collection, and litigation, the law seeks to facilitate repayment and prevent defaults. In addition, during the exit interview, colleges must require that the student submit to the institution the following information: the borrower's expected permanent address; the name and address of the borrower's expected employer; the address of the borrower's next of kin; and any corrections needed in the institution's records relating to the borrower's name, address, social security number, references, and driver's license number. The experience of each of our undercover students is unique and cannot be generalized to other students taking courses offered by the for-profit colleges we tested or to other for-profit or nonprofit colleges. During the course of our testing at the selected colleges, we documented our observations related to the following phases of the student experience: enrollment, cost, financial aid, course structure, substandard student performance, withdrawal, and exit counseling. In addition, on the basis of our observations for the courses we tested, 8 of the 15 colleges appeared to follow existing policies related to academic dishonesty, exit counseling, and course grading standards. At the 7 remaining colleges, we found mixed results. For example, at least one issue was identified in which college staff or an instructor appeared to act in a manner inconsistent with college policies, federal regulations, or course grading standards; whereas others acted in a manner consistent with such policies. Of the 7 colleges, as discussed below, instructors at 2 colleges appeared to act in a manner inconsistent with college policies regarding academic dishonesty, instructors at 4 colleges appeared to act in a manner inconsistent with course grading standards, and 3 colleges appeared to act in a manner inconsistent with federal regulations on exit counseling. More specific details on Colleges 1 through 15 can be found in table 2. Enrollment: We attempted to enroll undercover students at 15 colleges, and were successful in enrolling at 12. Two colleges (Colleges 13 and 14) declined our student's request for enrollment based on insufficient proof of high-school graduation. In both cases, we attempted to enroll using a fictitious home-school diploma, but were told that the college would not accept our home-school credentials. We also attempted to apply using a fictitious diploma from a closed high school, but were rejected becausethe school was considered to lack accreditation. College 15 stated that it did not accept any home-school credentials but accepted our fictitious closed-school diploma and allowed us to begin class, but rescinded our acceptance after 1 week of classes, stating a lack of high-school accreditation as the reason for expulsion. We were not billed for the 1 week of class that we finished, nor did the school appear to receive any student loans on our behalf. In all 3 instances where our fictitious students were ultimately rejected, we were encouraged to pursue a GED in order to be allowed to enroll at the college. At College 10, our student requested part-time enrollment, meaning that the student would take two courses per term. However, we found three courses that were fully accessible to our student through the school's online student portal website over our single enrollment term. The third class was clearly noted in our activity and grade report as being scheduled for completion during that term. Once our student had completed the class, we were informed by college staff that by accessing the class, the student had effectively converted to being a full-time student. We were further told that our student would be charged for full- time attendance, although the school had only processed financial aid paperwork for the student as a part-time student. All 12 accepted students did not select any elective coursework during their enrollment period. Students were automatically enrolled in courses selected by the school by their schools' administrative staff and were informed of course start and end dates as they were enrolled. However, College 4 scheduled self-paced courses for our student on a revolving enrollment basis, wherein the student was enrolled in as many as four courses concurrently with the requirement that all coursework be completed and submitted prior to the specific course end date. College personnel stated that they could not provide us with an advance schedule including course start and end dates; they could only provide us with the start and end dates for those courses in which we were currently enrolled or a list of the courses that are required to complete a portion of our selected degree program (without start and end dates). For one class in which we enrolled at this college, the student's advisor provided us with an incorrect course end date, which resulted in our student missing a key deadline to submit assignments. Cost and Financial Aid: All of our students were eligible for federal student aid in the form of subsidized and unsubsidized student loans and submitted the appropriate documentation to the school in support of this (i.e., FAFSA). Only 10 of our students actually received federal loan disbursements, according to documentation we received; the other 2 students were expelled without the college requesting or receiving any federal student aid funds (Colleges 3 and 12). In 8 of these 10 instances (Colleges 1, 2, 4, 5, 6, 9, 10, and 11), we observed that the colleges received at least one student aid disbursement, of which all or a portion was refunded to Education upon our early withdrawal from our program of study. In the remaining 2 instances (Colleges 7 and 8), the student aid disbursements were fully kept by the school and applied toward the student's cost of attendance. In no instances did we observe that a college collected federal student aid funds after the withdrawal date of any of our students (that was not fully refunded immediately). However, one college (College 4) told our student that they had not ever received any financial aid funding, even though the student was eligible and had received documentation from their lender indicating that the school had drawn down several thousand dollars of aid. The college did not respond to inquiries regarding this discrepancy, nor did they respond to requests for detailed information regarding the student's overall cost of attendance. Our students took 31 classes in total at an average cost of $1,287 per class. These costs included such items as tuition, books, and technology fees. Because our students withdrew early from their programs of study, the cost per course may not reflect what the average cost per course would be if the student had completed the full program. Some costs, such as technology fees, may be charged to the student as a lump sum at the start of the program, rather than spread over its lifetime. In addition, one college (College 7) provides a laptop for each student at the time of enrollment, the cost of which is charged to the student. When we specifically told our enrollment advisor that we did not want the college to provide us with a laptop, we were asked to fill out the "laptop agreement form" anyway. When we did, our student was shipped a laptop without further notification or explanation prior to shipping. When we asked about returning it and expressed concern about potentially expensive shipping costs associated with the return, we did not receive a response. One of the colleges we tested (College 6) did not require our undercover student to pay any out-of-pocket costs; all our coursework at this college was covered by student loans. Table 1 contains information on the total costs incurred by each student during their attendance period, made up of subsidized student loans, unsubsidized student loans, and out-of-pocket costs. Total costs of attendance for individual students ranged from $45 to $5,412. Subsidized and unsubsidized student loan amounts represent the total loan amounts accepted by the college on each student's behalf after any refunds associated with our early withdrawal. Course Structure: The assignments and course structure were similar at all 12 tested schools. Since our students were just starting their respective programs, most classes were introductory in nature, such as Introduction to Business, Introduction to Computer Software, Keyboarding, and Learning Strategies and Techniques. Individual courses ranged in length from 4 weeks to 11 weeks, and our students took from 1 to 4 courses concurrently. Since we attended online courses only, most, if not all, interaction with instructors and other students occurred through the school's online student portal software, including submission of coursework and later receipt of related feedback. Coursework generally consisted of (1) online discussion forum postings, both responses to original questions posed by the instructor and responses to fellow students; (2) written assignments, generally essays of varying lengths on course-specific topics; (3) skills exercises, such as keyboarding tests or specific computer-application exercises; and (4) multiple-choice quizzes and exams. Some courses also included a "participation" grade, which often included considerations for attendance, completion of ungraded exercises, and attendance at real-time chats or seminars. These real-time chats and seminars, when they occurred, were conducted either through written or audio chats, and allowed for full interaction between the student, the instructor, and peers. At the beginning of all classes, the student was provided with a course syllabus, which outlined the basic purpose and structure of the course, as well as some grading information and course expectations. During enrollment, instructors interacted with our students through mechanisms such as providing postings in the course's online discussion forums, providing direct feedback on specific assignments through the course e- mail system or gradebook, and providing reminders of assignment due dates or other assignment-related guidance to all students through the course e-mail system. Substandard Performance: While all 12 enrolled students engaged in behaviors consistent with substandard academic performance, each instructor in each class responded to such substandard performance differently. The behaviors our students engaged in included a combination of the following: a failure to attend class and submit assignments, submission of incorrect or unresponsive assignments, or both, and plagiarism. Detailed information on the substandard performance can be found in table 2, but highlights include the following: Examples of Instructor or College Behavior in Accordance with Policies or Standards At College 1, our undercover student logged in to class but did not submit any assignments or participate in discussions. Her instructor repeatedly tried to contact the student through class and personal contact information to provide help and allow for submission of missed assignments. When the student refused to commit to completing assignments, the instructor locked the student out of class. One instructor at College 5 awarded our undercover student a failing grade on an assignment due to a technological failure which prevented the instructor from seeing the student's correctly submitted assignment. However, when contacted by the student about the discrepancy, the instructor promptly regraded all affected assignments and provided new feedback. College 3 had a conditional admittance policy stating that students will be expelled by the school, with no financial obligation, for failing to maintain a 65 percent average during the first 5 weeks of the program. Our student did not meet the conditional admittance criteria, as her grades were below the 65 percent average at the 5-week mark, and was expelled by the college in accordance with this policy. Examples of Instructor or College Behavior Not in Accordance with Policies or Standards At College 4, our student submitted work in one class that did not meet the requirements of the assignment (such as photos of political figures and celebrities in lieu of essay question responses). The student further failed to participate in required real-time chat sessions. The instructor did not respond to requests for grade details and some substandard submissions appeared to have no effect on the student's grade, which ultimately resulted in the student passing the class. According to College 6's policies, students caught cheating will receive no credit on the first dishonest assignment and will be removed from class on a second. Our undercover student consistently submitted plagiarized material, such as articles clearly copied from online sources or text copied verbatim from a class textbook. For the first plagiarized assignment, the instructor told the student to paraphrase, but gave full credit. The instructor gave no credit on two additional plagiarized assignments. The student continued to submit plagiarized work, but the instructor did not note the plagiarism and gave credit for the work. The student received a failing grade for the class, but no action appeared to have been taken by the instructor or college related to the academic misconduct, which appeared to be inconsistent with the college policy on academic dishonesty. Our undercover student at College 10 took two classes in which she was awarded points for assignments that she did not complete, in violation of grading standards for the class. In one class, the student submitted only 2 of 3 required components of the final project, but received full credit for the assignment, resulting in an overall passing grade for the class. In the second class, the student received full credit for assignments that failed to meet technical requirements, including (1) submission length, (2) use of proper software tools, or (3) citation format and accuracy. The student also received full credit for an assignment which had already been submitted in another class and contained a clear notation that it was prepared for the other class. However, the student received a failing grade for this class on the basis of total grades received on all assignments. Withdrawal: Generally, our students who were not expelled for performance or attendance reasons were able to withdraw from their respective colleges without incident. At 3 of the tested schools (Schools 3, 8, and 12), our students were expelled for failure to meet college policies; once for failure to meet conditional acceptance criteria, once for nonattendance, and once for academic performance issues. At the remaining 9 colleges, we requested to be withdrawn. At 8 of the 9 colleges, this withdrawal request was handled without incident. However, one college (College 4) never acknowledged our request to withdraw and instead eventually expelled us for nonattendance nearly a month later. Such a delay may violate federal regulations, which require that the college use the date that the student began the withdrawal process or provided notification or intent to withdraw as the official withdrawal date. One college (College 10) provided our student's information to a collections agency before providing us with a final bill. When we inquired, college personnel stated that this is how they handle all student accounts. Exit Counseling: Most of our students that received student loans received exit counseling in a timely manner in accordance with federal law. Federal law and regulations dictate that after a student with federal loans has completed or withdrawn from a college, the college must provide exit counseling, typically within 30 days. Students with federal loans that withdraw or are expelled prior to their expected graduation date may receive a disbursement of student loans that would need to be refunded by the college to Education in accordance with the school's stated Title IV Refund Policy. Two of our three expelled students received no federal student loans and therefore their colleges were not required to provide federally mandated exit counseling (Colleges 3 and 12). Two additional students received disbursements of student loans that were fully refunded to Education. Although it is unclear from statute whether exit counseling is required in this situation, one college provided exit counseling (College 1) and one did not (College 4). Of the 8 students who received disbursements of federal student aid that were applied toward their educational expenses, 5 received the federally mandated exit counseling from their colleges in a timely manner, generally in the form of a website or a short written document. Two of these colleges (Colleges 5 and 7) provided additional follow-up letters in the months following the original exit counseling. The remaining 3 students (Colleges 6, 10, and 11) received no exit counseling. When we inquired with one of these schools (College 10) about exit counseling, school staff told us that the exit counseling had been provided during the entrance interview. Because the regulations concerning exit counseling specifically state that it must be conducted shortly before or after withdrawal, this practice would be inconsistent with federal law. We have referred the names of the colleges that did not provide exit counseling to the Department of Education. Table 2 contains details about our undercover testing at the 15 colleges that we tested. Specifically, for each college, the table includes information about the program in which the student was enrolled; the time frame for attendance; the student's final eligibility for student aid; the student's substandard behavior scenario(s); observations on college responses to substandard behavior scenario(s); final grades; exit counseling; and any college policies specifically relevant to the college's actions. The names of the classes each student took have been generalized to protect the identities of the 15 tested schools. A "D-minus" is considered the minimum passing grade for each class. 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 relevant congressional committees and the Department of Education. This report will also be available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report or need additional information, please contact me at (202) 512- 6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. Because of your interest in the student experience at for-profit colleges, we agreed to conduct undercover testing by enrolling in online classes under degree-granting programs. We selected 15 for-profit colleges and, once enrolled, engaged in behaviors consistent with substandard academic performance. As part of an undercover investigation, our tests were designed to obtain observations from entities that were unaware of our true identities. However, there exists a possibility that tested entities were able to determine that our students were fictitious and therefore altered their behavior based on the assumption that they were under observation. In order to determine the population of colleges eligible for selection, we queried the publicly available Integrated Postsecondary Education Data System (IPEDS), the core postsecondary education data collection program for the National Center for Education Statistics (NCES) to identify schools meeting the following characteristics: (1) U.S. only; (2) Title IV Participating; and (3) 4-year or above private for-profit, 2-year or above private for-profit, or less than 2-year private for-profit. From this query, we identified 2,770 institutions at which 1,804,246 students were enrolled in fall 2008. Because IPEDS data are sometimes reported on a per-campus basis, it is possible for a parent college to have multiple listings, and therefore these 2,770 records do not represent 2,770 different colleges. To identify the parent college, we used a 15-character name-based summarization, resulting in 1,346 parent colleges. To conduct our work, we tested 15 colleges, selected in three stages. In determining which colleges to test, we used the following enrollment and program logistical requirements: (1) the selected college must allow students to complete online-only courses in pursuit of an associate's or bachelor's degree; (2) the expected enrollment period (one term, as defined by the college) needed to be limited in length to no more than 10 weeks; and (3) the selected college must allow students to enroll over the phone or Internet. Since, IPEDS does not contain information on these college characteristics, during each stage of the selection, allowances were made to take into account the possibility of selecting a college that could not be tested. A determination as to whether the college offers online courses in pursuit of a degree was made based on queries of the respective colleges' websites. Identification of the colleges' expected enrollment period was done through online or telephone inquiries. Determination as to whether the college allowed phone or Internet enrollment was made by attempting to enroll. First, we selected the 5 largest for-profit colleges, by student population, based on student enrollments for fall 2008. For this purpose, we used the parent college-level summarization of campus-level data. In total, these 5 colleges represented 654,312 of the 1,804,246 students (36 percent) and 325 of the 2,770 campuses reporting for fall 2008 (12 percent). All 5 colleges were further found to offer online-only coursework in pursuit of a degree, with limited enrollment period lengths and online and telephone enrollments, and were therefore fully eligible for testing. Next, we selected 1 for-profit college based on unsolicited allegations received by GAO. We received 94 unique unsolicited allegations of misconduct at for-profit colleges between June 10, 2010, and October 30, 2010. We selected the college that had the most specific allegations of misconduct that had not already been selected under the first part of this selection methodology. This college met all the logistical requirements for selection. We considered 1 other for-profit college based on allegations received, but did not select it for testing due to logistical issues we identified as an impediment to testing (i.e., lack of online-only coursework). Finally, we selected the remaining 9 for-profit colleges using a systematic selection process. Although the selection in each of the first two stages was done at the college level, the selection in the third stage was done at the campus level. For the selection of the remaining 9 colleges, we randomly sampled from the population of 2,770 campuses that were neither selected nor eliminated due to known logistical issues through the previous two selection methods and had Fall 2008 enrollment of at least one student, and in which the campus (as reported to IPEDS), served as the selection unit. Because of the potential that colleges selected randomly would not meet logistical requirements, we selected a sample of 150 campuses to increase the likelihood that 9 testable colleges would be selected. Of the 150 campuses, only 24 were found to offer online-only coursework in pursuit of a degree. Each of these 24 campuses was associated with a different parent college. Additional phone-based research was conducted on these 24 to verify conformity with logistical requirements. Based on that research, a further 8 colleges were removed for reasons including: (1) term length in excess of 10 weeks; (2) physical classroom attendance requirements; (3) college would not provide required logistical information without in-person interviews; (4) infeasible program start date; and (5) requirement for prospective students to submit field-specific certification credentials. To select the 9 colleges from the remaining 16, we contacted all 16 colleges on November 23, 2010, to determine the next available start date for an online-only degree-granting program. We then selected the 9 colleges with the soonest start dates. During the course of testing, 2 of these selected colleges were replaced with the next available schools (by start date) as a logistical consideration. At each of the 15 selected colleges, we attempted to enroll using fictitious identities and one or two possible fictitious pieces of evidence of high- school graduation-a home-school diploma or a diploma from a closed high school. If the student's application at any particular school was denied using both pieces of fictitious graduation documentation, we took no further action. We attempted to enroll in degree-granting programs that were expected to include objectively-graded coursework (such as multiple-choice tests), such as business, medical billing, and paralegal studies programs. All fictitious students we successfully enrolled in for- profit colleges participated in degree programs that did not allow for elective course selection during the first term; our fictitious students took whatever classes the college required. We enrolled in each college for approximately one term, as defined by the college. To engage in behaviors consistent with substandard academic performance, we used one or more of the following strategies for each student: (1) failure to attend class, (2) failure to submit assignments, (3) submission of objectively incorrect assignments (e.g, submitting incorrect answers on multiple-choice quizzes), (4) submission of unresponsive assignments (e.g., submitting pictures when prompted to submit an essay), and (5) submission of plagiarized assignments. We documented the college's and instructor's response to these behaviors (as applicable), including any failure to follow established college policies as related to academic performance or academic misconduct. We did not evaluate the relative academic rigor of courses or any other degree program materials, nor did we evaluate the statements or behaviors of enrollment officials, except in such instances that affected the student experience in the classroom setting. As applicable, we documented the colleges' withdrawal procedures and whether the colleges provided required exit counseling for students that received financial aid. We tested each college once. The experience of each of our undercover students is unique and cannot be generalized to other students taking courses offered by the for-profit colleges we tested or to other for-profit or nonprofit colleges. Our investigative work, conducted from October 2010 through October 2011, was performed in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency.

Once comprised of local, sole-proprietor ownership, the nation's for-profit institutions now range from small, privately owned schools to publicly traded corporations. Enrollment in such colleges has grown far faster than in traditional higher-education institutions. Moreover, during the 2009-2010 school year, for-profit colleges received almost $32 billion in grants and loans provided to students under federal student aid programs, as authorized under Title IV of the Higher Education Act of 1965, as amended. Because of interest in the student experience at for-profit colleges, GAO was asked to conduct undercover testing by enrolling in online classes under degree-granting programs. To conduct this testing, GAO selected 15 for-profit colleges using a selection process that included the 5 largest colleges and a random sample and attempted to enroll using fictitious identities. Once enrolled, each fictitious student engaged in behaviors consistent with substandard academic performance. Each fictitious identity enrolled for approximately one term, as defined by the college. The experience of each of GAO's undercover students is unique and cannot be generalized to other students taking courses offered by the for-profit colleges we tested or to other for-profit or nonprofit colleges. GAO intended to test colleges that were unaware of its true identity. However, there exists a possibility that these colleges identified GAO's fictitious students and altered their behavior based on the assumption that they were under observation. This product contains no recommendations. Where applicable, GAO referred information to the Department of Education for further investigation. During the course of undercover testing, GAO documented its observations related to enrollment, cost, financial aid, course structure, substandard student performance, withdrawal, and exit counseling. Overall, GAO observed that 8 of the 15 colleges appeared to follow existing policies related to academic dishonesty, exit counseling, and course grading standards. At the 7 remaining colleges, GAO found mixed results. For example, one or more staff at these colleges appeared to act in conflict with school policies regarding academic dishonesty or course grading standards, or federal regulations pertaining to exit counseling for student loans, while other staff acted consistent with such policies. Enrollment: GAO attempted to enroll its students using fictitious evidence of high-school graduation--either a home-school diploma or a diploma from a closed high school--at all 15 colleges and successfully enrolled in 12. Two declined GAO's request for enrollment based on insufficient proof of high-school graduation. Another allowed GAO's student to begin class, but rescinded acceptance after 1 week, citing lack of high-school accreditation. Cost and Financial Aid: GAO's students took 31 classes in total at an average cost of $1,287 per class. These costs included such items as tuition, books, and technology fees. All 12 students were eligible for federal student aid, but only 10 actually received disbursements; the other students were expelled without receiving disbursements. We did not observe that a college collected federal student aid funds after the withdrawal date of any of our students (that was not fully refunded immediately). Course Structure: GAO's students were enrolled in introductory classes, such as Introduction to Computer Software and Learning Strategies and Techniques. Courses ranged in length from 4 to 11 weeks, and students took from one to four courses concurrently. Courses generally consisted of online discussion forum postings; writing assignments; multiple-choice quizzes and exams; and skills exercises, such as keyboarding tests or computer exercises. Substandard Academic Performance: GAO's students engaged in substandard academic performance by using one or more of the following tactics: failure to attend class, failure to submit assignments, submission of objectively incorrect assignments, submission of unresponsive assignments, and plagiarism. At 6 colleges, instructors acted in a manner consistent with school policies in this area, and in some cases attempted to contact students to provide help outside of class. One or more instructors at 2 colleges repeatedly noted that the students were submitting plagiarized work, but no action was taken to remove the student. One or more instructors at the 4 remaining colleges did not adhere to grading standards. For example, one student submitted photos of celebrities and political figures in lieu of essay question responses but still earned a passing grade. Withdrawal and Exit Counseling: Three of GAO's students were expelled for performance or nonattendance. Eight of the 9 students withdrew from their respective colleges without incident. At the remaining school, GAO's request to withdraw was never acknowledged and the student was eventually expelled for nonattendance. 3 students did not receive federally mandated exit counseling, advising students of repayment options and the consequences of default.

In response to a congressional request in 2005, the National Academies gathered a group of business, government, and academic leaders to identify steps the leaders thought would ensure that the United States is a leader in science and engineering and can compete, prosper, and be secure in the twenty-first century. The resulting 2007 report, entitled Rising above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, recommended a number of specific actions to address these goals.increasing federal investment in long-term basic and cross-disciplinary scientific research, creating an agency within DOE to support transformational energy research that might be high risk but could also provide dramatic benefits for the nation, increasing the number and skills of science and mathematics teachers in primary and secondary schools, and investing in higher education with the goal of increasing the number of undergraduate and graduate students with degrees in science, engineering, and mathematics fields. The COMPETES Acts addressed some of the actions in these areas. For example, COMPETES 2007 authorized creation of the Advanced Research Projects Agency-Energy in DOE to overcome long-term and high-risk technological barriers in developing energy technologies, and it authorized programs in Education and NSF to train teachers in STEM fields. Among other things, the report advocated Investments in scientific research have led to significant advances such as the development of the Internet, satellites, aircraft, and the mapping of the human genome, while investments in STEM education have provided multiple forms of support for developing a highly qualified STEM workforce. However, evaluations of such investments face inherent challenges, such as those related to the long-term nature of many scientific research projects, an inability to predict certain outcomes, and difficulty tying specific investments to direct outcomes. As we reported in 2012, evaluations of STEM education programs may be hindered by inconsistent collection of output data, such as the number of institutions or students directly served by programs.effectiveness of investments in scientific research and STEM education in improving U.S. competitiveness--the overall goal of the COMPETES Acts--are complicated by a number of factors. For example, it is difficult to measure competitiveness. The Council on Competitiveness, a group of business, academic, and labor leaders focused on ensuring U.S. prosperity, reported that traditional measures of competitiveness, such as trade balances, levels of foreign direct investment, employment, or wages Further, efforts to evaluate the may not fully capture a nation's competitiveness because of the complexities brought about by multinational corporations competing in constantly shifting global networks. Further, complications arise from ambiguities surrounding the term competitiveness, which has multiple definitions. Efforts are under way to address some of these challenges. For example, STAR Metrics--Science and Technology for America's Reinvestment: Measuring the Effect of Research on Innovation, Competitiveness, and Science--is a partnership between science agencies and research institutions to consistently document the outcomes of federally funded science investments. In addition, the National Science and Technology Committee on STEM Education within the Office of Science and Technology Policy collects and maintains information on how investments in STEM education are distributed across agencies, programs, and target groups. The committee compiled a comprehensive inventory of STEM education programs across the federal government in 2011 and released a 5-year federal STEM education plan in May 2013 to establish a strategy for focusing federal STEM education investments so they have the most significant impact possible on national priorities. As we reported in 2010 when we reviewed COMPETES 2007, agencies collect data and use different approaches to evaluate their progress NSF, DOE, Commerce, and Education use toward long-term outcomes.several tools--which may either broadly assess agency-wide activities or focus on program-level activities--to evaluate their scientific research and STEM education activities. Such tools include the following: advisory committees, such as NSF's committees that exist for each directorate--for example, the Education and Human Resources Advisory Committee provides advice, guidance, and recommendations concerning NSF's science and engineering education programs; performance reviews, such as Commerce's Annual Performance and Accountability Reports, which provide data on performance measures for NIST including the number of publications produced, or the Advanced Research Projects Agency-Energy's (ARPA-E) quarterly technical milestone reviews of funded projects, which help reviewers decide if project funding should be continued; Committees of Visitors, such as those used by NSF, Science and NIST, which are groups of external experts that assess the overall quality of program operations and, in some cases, program outcomes; and formal program evaluations, which are systematic, empirical studies used by agencies to assess how well a particular program or component of a program is working. Of the $62.2 billion authorized under the COMPETES Acts in fiscal years 2008 through 2012, $52.4 billion was appropriated, including $51.9 billion for the entire budgets of NSF, Science, and NIST. Funding for these three entities accounts for more than 99 percent of the funding appropriated under the COMPETES Acts during this period. (See fig. 1.) Appropriations for NSF, Science, and NIST generally increased in fiscal years 2008 through 2012 but did not reach authorized levels. For example, NSF's appropriations increased from about $5.9 billion in fiscal year 2007--the last year before its appropriation was authorized under the COMPETES Acts--to about $7 billion in fiscal year 2012, when it was authorized to receive $7.8 billion. Appropriations for Science, which were authorized under the COMPETES Acts starting in fiscal year 2010, increased from $4.8 billion in fiscal year 2009 to about $4.9 billion in fiscal year 2012, when Science was authorized to receive $5.6 billion. Likewise, funding for NIST increased but not to authorized levels: in fiscal year 2007, before its appropriation was authorized under the COMPETES Acts, it received about $680 million, compared with $750 million in fiscal year 2012, when NIST was authorized to receive about $970 million. In addition, the American Recovery and Reinvestment Act of 2009 (Recovery Act) appropriated about $5.2 billion to these entities in fiscal year 2009. The majority of the Recovery Act appropriations--over $3 billion--went to NSF. Figure 2 shows the amounts authorized under the COMPETES Acts for NSF, Science, and NIST, as compared with the amounts appropriated, including Recovery Act appropriations. The COMPETES Acts also specifically authorized funding for 40 individual programs, including some programs within and some outside of NSF, Science, and NIST. (See app. II.) For example, in addition to authorizing $22.1 billion for the entire budget of NSF in fiscal years 2008 through 2010, COMPETES 2007 specifically authorized $345 million of that total for NSF's Robert Noyce Teacher Scholarship Program in fiscal years 2008 through 2010. The programs not within NSF, Science, or NIST fell elsewhere within the Departments of Commerce and Energy, or in Education. Among the 40 programs for which the COMPETES Acts specifically authorized funding, the 12 programs that existed before the acts all received appropriations and continue to operate. Six of the 28 newly authorized programs also received appropriations. Of these 6 programs, 1--ARPA-E--is continuing operations, 3 did not receive appropriations in fiscal year 2012, and 2 are in the process of being implemented as of May 2013. More specifically, according to officials NSF's Science Master's Program, NIST's Technology Innovation Program, and Education's Teachers for a Competitive Tomorrow did not receive appropriations in fiscal year 2012. Officials told us the Science Master's Program and the Technology Innovation Program are in the process of shutting down, and Teachers for a Competitive Tomorrow has not awarded new grants since fiscal year 2010. Further, Commerce's Loan Guarantees for Science Park Infrastructure and Federal Loan Guarantees for Innovative Technologies in Manufacturing are in the process of being implemented, according to Commerce officials; these programs first received appropriations in fiscal year 2012. Twenty-two of the 28 newly authorized programs did not receive appropriations, including 9 programs that were newly authorized in COMPETES 2007 but repealed in COMPETES 2010. In total, 16 of the 40 programs for which the COMPETES Acts specifically authorized funding have been implemented, including the 12 previously existing programs, ARPA-E, and the 3 newly authorized programs that did not receive appropriations in fiscal year 2012. As noted previously, two other newly authorized programs that received appropriations are in the process of being implemented. As shown in figure 3, the implemented programs generally focus on five areas: (1) research and development programs focus on activities aimed at enhancing scientific research and development,(2) manufacturing performance programs focus on supporting innovation among U.S. manufacturers and other organizations,(3) STEM teacher training programs focus on education and professional development for prospective or existing STEM teachers, (4) STEM undergraduate programs focus on encouraging or improving undergraduate STEM education, and (5) STEM graduate programs focus on supporting graduate students training for careers in research or education in STEM disciplines. With few exceptions, agency officials told us they did not include funding requests in their budget submissions for the programs that did not receive funding. Agencies did include funding requests in their budget submissions for 4 of the 22 newly authorized programs that did not receive funding. Specifically, Education requested appropriations for the Math Now program in fiscal years 2008 and 2009 and for the Foreign Language Partnership and Advanced Placement and International Baccalaureate programs in fiscal year 2009, while Commerce requested appropriations in fiscal year 2012 for the Regional Innovation Program. For the other 18 programs, officials most often told us they did not request appropriations because their agencies already had similar programs under way or could work within current programs to carry out similar activities. For example, Science officials told us the office did not request appropriations for the Discovery Science and Engineering Innovation Institutes because the program's implementation would have duplicated existing activities. Commerce officials told us that the department's Economic Development Administration implemented certain aspects of the Regional Innovation Program (RIP) through the existing Economic Adjustment Assistance program when RIP did not receive appropriations. However, the officials also noted that by implementing aspects of RIP in this manner they have reduced funding available to other worthwhile aspects of the Economic Adjustment Assistance program. In other cases, officials told us they did not request appropriations because the programs did not fit into the agency mission or because the agencies prioritized other programs in light of limited resources or other factors. Recent evaluations that we identified have generally suggested positive results for the fully implemented programs for which the COMPETES Acts specifically authorized funding; some of the evaluations have also recommended ways to improve the programs. Recent evaluations have been conducted for 15 of 16 fully implemented programs. According to NSF officials, no evaluation of the Science Master's Program was published during 2008-2012, which is the time frame of evaluations included in our review. These evaluations have provided information on how well programs--or aspects of programs--were working in each of the five areas on which the programs focus. Many studies have also made recommendations for program improvement. Following are examples of selected evaluations and key findings for programs in the five focus areas: Research and development. Studies for these programs found that they were generally producing positive results and noted areas for continued improvement. For example, one study used econometric modeling to examine the effects of the Experimental Program to Stimulate Competitive Research, which aims to improve the research and development capacity of participating states. The results suggested participating states have been effective in growing federal financial support for science and engineering at a faster rate compared with nonparticipating states. However, the authors noted that while the effect they found was statistically significant, it was a small effect. They concluded that more enhanced and innovative efforts are needed to sustainably build states' research and development capacity. In another example, our 2012 review of ARPA- E found that it successfully funded projects that would not have been funded solely by private investors, in keeping with its goals. Manufacturing Extension Partnership, Delivering Measurable Results to Manufacturing Clients: Fiscal Year 2009 Results (Washington, D.C.: March, 2011). These findings were based on MEP surveys of program clients; fewer than 50 percent of respondents reported that MEP had an impact on sales, investment levels, jobs created, or jobs retained. A majority of client respondents did report cost savings in areas such as labor, materials, inventory, and energy. Jennifer Carney et al., Evaluation of the National Science Foundation's Integrative Graduate Education and Research Traineeship Program (IGERT): Follow-Up Study of IGERT Graduates (Arlington, VA: February 2011). experience positively contributed to their ability to finish their PhDs. A majority of respondents (94 percent) also reported that the IGERT experience helped them obtain their current work positions. An exploratory analysis comparing IGERT graduates with non-IGERT graduates from similar academic departments found no significant difference between the graduates in securing employment, but they did find that IGERT graduates reported a greater interest in interdisciplinary education or research training. We provided a draft of this report to Commerce, DOE, Education, and NSF for comment. Commerce's Economic Development Administration did not have any comments on the draft. Commerce's NIST provided written comments, which are reproduced in appendix III, along with our response. On behalf of NIST, the Secretary of Commerce stated that the draft, as scoped, does not fully capture the significant positive impact that the COMPETES Acts have had on NIST. As noted in our response in appendix III, the scope of our review is based on a mandate in COMPETES 2010 that calls for GAO to evaluate the extent to which programs authorized under the law have been funded, implemented, and are contributing to achieving the goals of the act. Our report addresses the total appropriations to NIST in fiscal years 2008 through 2012 in objective 1. To satisfy the needs of our congressional clients, we focused our review on programs for which the COMPETES Acts specifically authorized funding. DOE provided technical comments, which we incorporated as appropriate. Education did not have any comments on the draft. NSF provided technical comments, which we incorporated, as appropriate. We are sending copies of this report to the Secretaries of Commerce, Education, and Energy; the Director of NSF; the appropriate congressional committees; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To inform our objectives, we reviewed our October 2010 report on agency obligations under the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (COMPETES 2007) and the steps agencies were taking to evaluate implemented programs under COMPETES 2007. We also reviewed relevant laws, including COMPETES 2007 and the COMPETES Reauthorization Act of 2010 (COMPETES 2010), and we interviewed agency officials from the National Science Foundation (NSF); the Department of Energy (DOE), including the Office of Science (Science) and the Advanced Research Projects Agency-Energy (ARPA-E); the Department of Commerce (Commerce), including the National Institute of Standards and Technology (NIST) and the Economic Development Administration; and the Department of Education (Education). To determine the extent to which funding was appropriated under the authorization of the COMPETES Acts, we reviewed the laws and identified the entities and programs for which the acts specifically authorized funding. To determine the extent to which funding was actually provided to such entities and programs, we reviewed annual appropriations data in Congressional Research Service reports and agency budget justification documents, and confirmed these data with agency officials. Agency officials were not able to provide complete appropriations data at the program level. Complete final appropriations data for fiscal year 2013 were also not available. We interviewed agency officials to learn about the status of programs that received funding. We also asked agency officials which programs were included in annual budget requests and why other programs were not included in those requests. To examine what the results of evaluations suggest about how the programs for which the COMPETES Acts specifically authorized funding are working, we identified and reviewed a selection of recent studies that evaluated these programs. To identify these evaluations, we conducted a literature review and interviewed agency officials. Specifically, we conducted a literature search in databases such as ProQuest, SciSearch, and Academic One to search for recent reports or publications that evaluated programs authorized by the COMPETES Acts. We conducted an initial review of the summaries of the reports or publications returned in our literature search and provided by agencies, and we excluded those that did not appear to evaluate how well programs were working and were not published in 2008-2012. We included studies published from 2008 through 2012; in some cases, these studies included data on program activities that occurred before 2008. We reviewed the methodology of the identified studies and reported on the results of those we determined to be methodologically sound and reliable for the purposes of our report. We included the results of 21 studies covering 13 programs in our review. We reported findings on a select number of programs and evaluations based on the following criteria: (1) we included programs that received federal funding in fiscal year 2012 and are continuing operations as of May 2013 and (2) for each focus area, we chose programs with the most recent evaluations and included up to two of the most recent studies for those programs. Some agencies provided us with performance reviews and other reports containing performance measurements that we did not include in our review of evaluations. When drafting our report, we provided agency officials with information on the studies to be included. We determined focus areas for implemented programs based on agency information about the purposes and goals of those programs. We also interviewed officials from departments, agencies, and program offices with authorized funding under the COMPETES Acts, including representatives from NSF's Education and Human Resources Directorate, Engineering Directorate, and Office of Integrative Activities; Energy's Science and ARPA-E; Commerce's NIST and Economic Development Administration; and Education's Office of Postsecondary Education. We conducted this performance audit from October 2012 to July 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Figure 4 below shows the 40 programs for which the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science (COMPETES) Act of 2007 or the COMPETES Reauthorization Act of 2010 specifically authorized funding. 1. The scope of our review is based on a mandate in the America COMPETES Reauthorization Act of 2010 (COMPETES 2010) that calls for GAO to evaluate the extent to which programs authorized under the law have been funded, implemented, and are contributing to achieving the goals of the act. Our report addresses the total appropriations to NIST in fiscal years 2008 through 2012 in our first objective. To satisfy the needs of our congressional clients, we focused our review on programs for which COMPETES 2010 and the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (COMPETES 2007) specifically authorized funding. 2. Our draft report notes that the Baldrige Performance Excellence Program is currently operating using private funds, according to agency officials. We clarified in our footnote that the program remains authorized to receive funding. We did not include information about funding for fiscal year 2013 because that is beyond the scope of our review. 3. The scope of our review includes program evaluations published from 2008 through 2012. The draft report includes the findings from the Manufacturing Extension Partnership's (MEP) fiscal year 2009 client impact survey, which was the most recent survey published in our time frame. The results of the MEP 2011 client impact survey, which was published in March 2013, were outside the scope of our review. 4. To identify the evaluations we included in our analysis, as described in appendix I, we conducted a literature search and asked the agencies to provide evaluations of the programs that were published from 2008 through 2012. We conducted an initial review of the summaries of the reports or publications identified and excluded those that did not appear to evaluate how well programs were working. Based on the summary of the publication cited in NIST's letter, we concluded it was not in our scope, and it was not included in the selection of studies we reported on. When drafting our report, we provided agency officials with information on the studies to be included, and Commerce officials did not bring this publication to our attention at that time. However, upon receiving NIST's comments, we reviewed our criteria for identifying studies, and we continue to believe that our approach to identifying and selecting studies was appropriate. 5. We believe figure 4 clearly communicates the authorization of funding for the Technology Innovation Program (TIP) under COMPETES 2007. Figure 4 also shows that TIP did not receive appropriations in fiscal year 2012, and that the program is not currently operating. Further, in the body of our report, we say that according to agency officials TIP is in the process of shutting down. We do not provide information about fiscal year 2014 because that is outside the scope of our review. In addition to the individual named above, Karla Springer (Assistant Director), Nicole Dery, Cindy Gilbert, Michael Kendix, Cynthia Norris, Marietta Mayfield Revesz, and Barbara Timmerman made key contributions to this report.

Scientific and technological innovation and a workforce educated in STEM fields are critical to long-term U.S. economic competitiveness. Leaders in government, business, and education have expressed concern about the nation's ability to compete with other technologically advanced countries in these fields. In this context, Congress passed COMPETES 2007 and reauthorized the act with COMPETES 2010, each with the overall goal of investing in research and development to improve U.S. competitiveness. Among other things, the acts specifically authorized funding for certain programs. COMPETES 2010 mandated GAO to evaluate the status of authorized programs. GAO examined (1) the extent to which funding was appropriated under the authorization of COMPETES 2007 and COMPETES 2010 and (2) what recent evaluations suggest about how programs for which the acts specifically authorized funding are working. To answer these questions, GAO reviewed relevant federal laws, interviewed agency officials, and reviewed program evaluations for quality and content. This report contains no recommendations. In fiscal years 2008-2012, $52.4 billion was appropriated out of the $62.2 billion authorized under the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (COMPETES 2007) and the America COMPETES Reauthorization Act of 2010 (COMPETES 2010). Almost all of these funds went to the entire budgets of three existing research entities--the National Science Foundation (NSF), the National Institute of Standards and Technology (NIST), and the Department of Energy's (DOE) Office of Science (Science)--including all of the programs and activities the entities carry out. Appropriations for NSF, NIST, and Science generally increased under the acts but did not reach levels authorized by the acts. In addition to authorizing the budgets of these entities, COMPETES 2007 and COMPETES 2010 specifically authorized funding for 40 individual programs, including some programs within and some outside of these entities. Among those 40 programs, the 12 programs that existed before COMPETES 2007 received appropriations and continue to operate. Six of 28 newly authorized programs were also funded. Of these 6 programs, 1--DOE's Advanced Research Projects Agency-Energy, set up to develop new energy technologies--is continuing operations, 3 were not funded in fiscal year 2012, and 2 were not fully implemented as of May 2013. For the 22 programs that were not funded, agency officials generally said that they did not request funding in their budget submissions; most often this was because agencies had similar programs under way or could pursue similar objectives within current programs. For example, Science said it did not request funding for the Discovery Science and Engineering Innovation Institutes because it would have duplicated other Science programs. For the fully implemented programs for which the COMPETES Acts specifically authorized funding, recent evaluations generally reported positive results, and some evaluations provided suggestions for improvements. Recent evaluations have been conducted for almost all of the programs that were implemented, or for aspects of those programs. For example, studies of the Robert Noyce Teacher Scholarship Program found that the program has increased the number of qualified science, technology, engineering, and mathematics (STEM) teachers, but also suggested that retention of teachers in high-need schools could be improved.

As the largest civilian contracting agency in the federal government, DOE relies primarily on contractors to carry out its diverse missions and operate its laboratories and other facilities. About 90 percent of DOE's budget is spent on contracts and large capital asset projects. DOE's fiscal year 2015 discretionary budget request totaled almost $28 billion, with NNSA accounting for a substantial share--more than 40 percent. With three projects under way as of August 2012 that are expected to cost upwards of $17 billion, and with a history of significant cost growth and schedule delays, we designated NNSA's contract and project management for contracts and projects with values of at least $750 million as high risk due to vulnerabilities to fraud, waste, abuse, and mismanagement. NNSA, a separately organized agency within DOE, is responsible for the management and security of the nation's nuclear weapons programs. NNSA articulates its strategy for managing the nuclear weapons infrastructure in its annually updated Stockpile Stewardship and Management Plan. The plan includes information on NNSA's eight government-owned, contractor-operated sites that comprise its nuclear security enterprise--formerly known as the nuclear security complex. These include three national nuclear weapons design laboratories-- Lawrence Livermore National Laboratory in California, Los Alamos National Laboratory in New Mexico, and Sandia National Laboratories in New Mexico and California; four nuclear weapons production plants--the Pantex Plant in Texas, the Y-12 National Security Complex in Tennessee, the Kansas City Plant in Missouri, and tritium operations at DOE's Savannah River Site in South Carolina; and the Nevada National Security Site, formerly known as the Nevada Test Site. These sites carry out, among other things, the Stockpile Stewardship Program, which helps ensure a U.S. nuclear deterrent without full-scale nuclear testing. Activities under this program include dismantlement and disposition of nuclear weapons, as well as long-range planning to modernize NNSA's nuclear security enterprise. The National Defense Authorization Act for Fiscal Year 2012 required NNSA to submit a report to congressional defense committees (1) assessing the role of the nuclear security complex in supporting key activities and (2) identifying any opportunities for efficiencies and cost savings in the complex. More specifically, section 3123 of the act required the report to include the following: an assessment of the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the nation; an identification of opportunities for efficiencies within the nuclear security complex and an assessment of how those efficiencies could contribute to cost savings and strengthening safety and security; an assessment of duplicative functions within the nuclear security complex and a description of which duplicative functions remain necessary and why; an analysis of the potential for shared use or development of high explosives research and development capacity, supercomputing platforms, and infrastructure maintained for the Work for Others program, if the Administrator determines it appropriate; and a description of the long-term strategic plan for the nuclear security complex. The act required that NNSA's report to congressional defense committees include an assessment of the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the nation. NNSA's report, however, does not include such an assessment. Instead, the NNSA report describes activities of the nuclear security enterprise such as (1) certifying annually that the nuclear weapons stockpile is safe, secure, and reliable; (2) extending the life of existing weapons; (3) dismantling some nuclear weapons to reduce their quantity; and (4) developing and deploying technologies, approaches, and monitoring tools to ensure compliance with international agreements. In addition, NNSA's report states that the 2014 Stockpile Stewardship and Management Plan, issued in June 2013, provides supplemental information on the role of the nuclear security enterprise. NNSA officials told us that that they did not think the act required them to submit an updated assessment of the nuclear security enterprise and stated that carrying out such an assessment would have taken more time to complete than the 14 months provided under the act. NNSA officials also said that a 2008 report that assessed the role of the nuclear security enterprise sites is still valid. NNSA officials said that a new analysis of the role of the nuclear security enterprise sites may be warranted in the future if circumstances change sufficiently. Officials acknowledged that, since 2008, characteristics of some large capital asset projects have changed in the face of increasing costs, fiscal constraints, and technical difficulties, including plans to construct a Chemistry and Metallurgy Research Replacement Nuclear Facility at Los Alamos National Laboratory, and plans to construct a Pit Disassembly and Conversion Facility at Savannah River. Notwithstanding such changes across the nuclear security enterprise, NNSA officials said that the fundamental role that each site plays in supporting the nuclear security enterprise is consistent with the assessment included in the 2008 report. We did not evaluate NNSA's 2008 report, but given the report is more than 5 years old, it raises questions about the assessment still being relevant. Moreover, we note that NNSA's report to Congress did not cite the 2008 report as support and, as discussed previously, NNSA did not provide an assessment of the role of the nuclear security complex sites in supporting key NNSA activities, as required by the act. In March 2014, NNSA decided to evaluate alternative plutonium disposition technologies that it believes can achieve a safe and secure solution more quickly and cost effectively. Office of Management and Budget, Fiscal Year 2015 Budget of the United States (Washington, D.C.: Mar. 4, 2014). Plan, issued in June 2013, constitutes its 25-year strategic plan for the nuclear security enterprise. NNSA's report to Congress identifies opportunities for efficiencies and assesses duplicative functions. It does not, however, (1) assess how identified efficiencies could contribute to cost savings and strengthen safety and security, as required by the National Defense Authorization Act for Fiscal Year 2012, (2) or analyze the potential for shared use of facilities, which was a task the act stated should be included if the Administrator determines it to be appropriate. NNSA's report identifies seven efficiency opportunities. The opportunities included in the report are a summary of efficiency opportunities included in the 2014 Stockpile Stewardship and Management Plan, issued in June 2013, as well as some infrastructure and research and development initiatives. Specifically, NNSA's report discusses efficiency opportunities that may result from (1) establishing the Office of Acquisition and Project Management in 2011; (2) establishing the Office of Infrastructure and Operations in fiscal year 2013; (3) consolidating the management and operating contracts for Y-12 National Security Complex and the Pantex Plant; (4) efficiencies in the nuclear weapons research and development portfolio, such as refurbishing facilities to reduce downtime between experiments; (5) improving the planning process for High Energy Density activities; (6) reducing the size of the Kansas City Plant; and (7) achieving projected benefits from the new Uranium Processing Facility. NNSA's report also includes an assessment of duplicative functions-- which determined that most duplication has been eliminated over the past 25 years, and the duplicative activities that remain are essential to operations. For example, the report states that the nuclear security enterprise does maintain duplicative weapons design, certification, and surveillance functions but that it is an intended redundancy. Los Alamos National Laboratory and Lawrence Livermore National Laboratory both act as design agents for scientific matters pertaining to the weapon physics package. But, according to the report, the intellectual diversity that results from competing physics design laboratories is important to fulfill the requirement of stockpile stewardship. As discussed above, NNSA's report identifies seven efficiency opportunities. The act, however, required NNSA to submit a report to congressional defense committees that included not only an identification of efficiency opportunities, but also an assessment of how those efficiencies could contribute to cost savings and strengthen safety and security. NNSA's report does not provide an assessment of how the efficiencies identified could contribute to cost savings and strengthen safety and security, as required by the act. For example, NNSA's report cites the establishment of two new offices--the Office of Acquisition and Project Management in 2011 and the Office of Infrastructure and Operations in 2013--as efficiency opportunities, but it does not provide an assessment of how these offices have contributed or will contribute to cost savings. Similarly, the report cites efficiencies achieved in recent years related to experiments and simulations conducted in support of nuclear weapons research and development, but it does not include information about how these efficiencies might lead to cost savings. These and other efficiencies described in NNSA's report also do not include an assessment of how the efficiencies will strengthen safety and security. In addition, three of the efficiency initiatives included in NNSA's report involve projects or strategies that, in prior reviews, we have found face challenges, which, if not addressed, may impact NNSA's ability both to achieve cost savings and strengthen safety and security. Consolidating the Y-12 and Pantex management and operations contracts to integrate finance systems and streamline management support services. We previously concluded that it is unclear how cost savings from this consolidation could be achieved and whether it would produce as much in savings as NNSA has anticipated. NNSA's report does not address these previously raised concerns. Constructing a new Uranium Processing Facility at the Y-12 National Security Complex: NNSA stated that the new facility would include engineered controls that will provide improved safety, security, and reliability of enriched uranium operations, among other things. But, NNSA's report contains no other information regarding how the new facility will improve safety and security and, as NNSA itself has acknowledged, challenges inherent in this project are being addressed, and the features of the facility have undergone significant changes. We have previously reported, in 2012, project costs had increased almost 6 times NNSA's initial estimates. Accordingly, as a result of the increased cost estimate for this project, how or whether it can lead to cost savings remains unclear. Moving Kansas City operations to a smaller, nearby leased facility. This move began in 2013 and is scheduled for completion in August 2014. In October 2009, however, we found the potential cost efficiencies gained from this leasing arrangement may have been overstated because the methodology used to estimate savings eliminated potentially less costly alternatives. NNSA's report does not address these previously raised concerns or address how efficiencies gained from this move will lead to improved safety and security. GAO, VA Health Care: Methodology for Estimating and Process for Tracking Savings Need Improvement, GAO-12-305 (Washington, D.C.: Feb. 27, 2012); Defense Management: Opportunities Exist to Improve Information Used in Monitoring Status of Efficiency Initiatives, GAO-13-105R (Washington, D.C.: Dec. 4, 2012); and Veterans Affairs: Limited Support for Reported Health Care Management Savings, GAO-06-359R (Washington, D.C.: Feb. 1, 2006). estimates, and a detailed process for tracking actual savings resulting from improvements. Consistent with our prior recommendations, we derived several key principles for preparing cost savings estimates from federal budgeting and cost estimating guidance. These principles include preparing an appropriate level of detailed documentation so that a reasonably informed person can easily recreate, update, or understand the cost savings estimate; identifying key assumptions used in preparing the estimate; assessing the reliability of data used to develop the estimate; and verifying or validating the accuracy of the calculations performed. NNSA's recent experience with previously identified cost savings targets underscores the importance of assessing whether cost savings can in fact be achieved. As discussed previously, the Office of Management and Budget directed NNSA to include cost savings to be achieved through management efficiencies and workforce prioritization savings in its 2014 future budget estimates so that the overall estimate could be reduced. NNSA incorporated these cost savings into its budget estimates before assessing how it could achieve the savings, thereby limiting the credibility of savings for budgetary purposes. In November 2013, NNSA determined that savings anticipated from workforce prioritization would not be feasible. NNSA officials told us, in March 2014, that they are assessing whether and how it might still achieve the management efficiency savings incorporated in its budget estimates, but that they have not yet determined when the assessment will be completed. NNSA's report does not provide an analysis of the potential for shared use of facilities. The National Defense Authorization Act for 2012 required NNSA, if the Administrator determined it appropriate, to provide an analysis of the potential for shared use or development of high explosives research and development capacity, supercomputing platforms, and infrastructure maintained for the Work for Others program. NNSA's report does not discuss the Administrator's determination regarding whether such an analysis is appropriate. Nonetheless, NNSA includes in its report a section entitled potential for shared use of selected facilities. The information contained in the report, however, focuses on existing, not potential, shared use opportunities. Specifically, NNSA's report includes two examples of sites that operate Work for Others programs and three examples where they use facilities not owned by the nuclear security enterprise to execute its missions. The report states that NNSA leverages the costs saving and benefits of time-sharing and collaboration at these facilities, but it provides no additional information on the potential for new opportunities to supplement those efforts the agency has already put into practice. Like other federal agencies, NNSA is being asked to find ways to operate more efficiently and reduce costs. Modernizing the nuclear security enterprise to ensure a safe, secure, and reliable nuclear deterrent will involve billions of dollars and take many years to accomplish. NNSA has identified several opportunities to achieve efficiencies across the nuclear security enterprise, but it is not clear whether cost savings will result because NNSA did not assess how these opportunities would create savings, how much could be saved, and in what time frame. Some of the opportunities NNSA proposes are associated with projects or activities for which NNSA has had difficulties accurately estimating costs and schedules or which are currently in flux. Without a sound methodology for assessing efficiency opportunities--a methodology that includes the basis of any assumptions included in the savings estimates, an assessment of the reliability of data used to develop the estimate, and verification or validation of the accuracy of savings calculations performed, as well as a process for tracking actual savings--NNSA cannot provide reasonable assurance that the efficiency opportunities it has identified will result in savings. Without such information, Congress does not have critical information to make the budgetary and policy choices that best balance long-term spending and nuclear security goals. To ensure Congress receives reliable information regarding budgetary savings, we recommend that the Administrator of NNSA, when reporting on efficiency and savings opportunities in the future, develop a methodology that includes details on how savings from each operational improvement will be achieved; the basis of any assumptions included in the savings estimates; an assessment of the reliability of data used to develop the estimate; verification or validation of the accuracy of savings calculations performed; and a process for tracking actual savings resulting from operational improvements. We provided a draft of this report to NNSA for its review and comment. NNSA provided written comments, which are presented in appendix I. NNSA also provided technical comments on our draft report, which we incorporated as appropriate. In its written comments, NNSA disagreed with our findings and our recommendation. Specifically, in its comments, NNSA stated that it was concerned that our report reflects an interpretation of the National Defense Authorization Act for Fiscal Year 2012 that differs from NNSA's, resulting in potentially misleading conclusions. NNSA further stated that the report incorrectly concludes that the NNSA report to Congress did not provide an assessment of the roles of Nuclear Security Enterprise sites in performing certain missions as required and that the basis for our conclusion that the assessment was not provided is unclear. We disagree. The act required NNSA to provide a report to congressional defense committees "assessing the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the United States." As we noted in our report, NNSA described the activities of the nuclear security enterprise in its report to Congress, but it did not provide an assessment. A description is not an assessment. In its comments, NNSA stated that the 2008 Complex Transformation Supplemental Programmatic Environmental Impact Statement that underlies its report to Congress, is still operative, and there have been no substantive transformations of the Nuclear Security Enterprise since. As we note in our report, however, NNSA did not cite this assessment in its report to congressional defense committees. Moreover, the 2008 Complex Transformation Supplemental Programmatic Environmental Impact Statement is more than 5 years old, which raises questions about its continued relevance. Notably, key elements of that document, such as the construction of the Chemistry and Metallurgy Research Replacement Nuclear Facility and the Uranium Processing Facility, have not been constructed and NNSA is reconsidering its approach on how to address these critical needs. NNSA also states in its comments that we appear to have interpreted the act as requiring NNSA to causally and quantitatively link its cost efficiency initiatives to specific cost savings when the congressional language does not make any reference to linking the two. We disagree because the act does link efficiencies and cost savings. Specifically, the act states that the NNSA report must identify "opportunities for efficiencies within the nuclear security complex and an assessment of how those efficiencies could contribute to cost savings and strengthening safety and security." As we stated in our report, NNSA's report to congressional defense committees identifies opportunities for efficiencies. It does not, however, assess how identified efficiencies could contribute to cost savings and strengthen safety and security, as required by the act. For example, in its report NNSA cites efficiencies achieved in recent years related to experiments and simulations conducted in support of nuclear weapons research and development but does not include information about how these efficiencies might lead to cost savings. Finally, NNSA did not concur with GAO's recommendation that future reporting on efficiencies and cost savings should include a methodology for estimating the savings derived from potential efficiencies and track savings resulting from new efficiency efforts. NNSA stated that it would not have reliable information to accurately develop cost estimates directly linked to the efficiencies and that the congressional language does not make any reference to linking the two. NNSA states that it believes doing so would be speculative and result in unreliable information. We disagree. We have previously reported in evaluations of other agencies' cost savings efforts that a sound methodology for estimating savings helps ensure that proposed savings can be achieved. Though such an effort may present analytical and other challenges, it is nonetheless important to do so. As we noted in our report, a methodology that includes the basis of any assumptions included in the savings estimates, assessing the data reliability of the estimate, validating savings calculations, and tracking actual savings achieved will help NNSA provide Congress the information it needs to make important budgetary and policy choices that best balance long-term spending and nuclear security goals. Thus, we continue to believe that NNSA should take action to fully address this recommendation. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected] . Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other GAO staff who made key contributions to this report are Diane LoFaro, Assistant Director; Delwen Jones; Jeanette Soares; and Ginny Vanderlinde. Modernizing the Nuclear Security Enterprise: NNSA's Budget Estimates Do Not Fully Align with Plans. GAO-14-45. Washington, D.C.: December 11, 2013. Modernizing the National Security Enterprise: Observations on NNSA's Options for Meeting Its Plutonium Research Needs. GAO-13-533. Washington, D.C., September 11, 2013. Nuclear Weapons: Factors Leading to Cost Increases with the Uranium Processing Facility. GAO-13-686R. Washington, D.C.: July 12, 2013. Defense Management: Opportunities Exist to Improve Information Used in Monitoring Status of Efficiency Initiatives. GAO-13-105R. Washington, D.C.: December 4, 2012. VA Health Care: Methodology for Estimating and Process for Tracking Savings Need Improvement. GAO-12-305. Washington, D.C.: February 27, 2012. Modernizing the Nuclear Security Enterprise: The National Nuclear Security Administration's Proposed Acquisition Strategy Needs Further Clarification and Assessment. GAO-11-848. Washington, D.C.: September 20, 2011. Nuclear Weapons: National Nuclear Security Administration's Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness. GAO-11-103. Washington, D.C.: November 19, 2010. Nuclear Weapons: National Nuclear Security Administration Needs to Better Manage Risks Associated with Modernization of Its Kansas City Plant. GAO-10-115. Washington, D.C.: October 23, 2009. Veterans Affairs: Limited Support for Reported Health Care Management Efficiency Savings. GAO-06-359R. Washington, D.C.: February 1, 2006.

Nuclear weapons are an essential part of the nation's defense strategy, and NNSA is charged with performing key activities in support of this strategy. Like other agencies, however, NNSA is being asked to find ways to operate more efficiently and reduce costs. The National Defense Authorization Act for Fiscal Year 2012 mandated that NNSA submit a report to congressional defense committees that, among other things, includes an assessment of the role of the nuclear security complex sites, as well as opportunities for efficiencies at these sites and how these efficiencies may contribute to cost savings and help strengthen safety and security. The act required that NNSA's report include certain topics and mandated that GAO assess the report submitted by NNSA. This report evaluates the extent to which the NNSA report (1) assessed the role of nuclear security complex sites in supporting key NNSA activities and (2) identified opportunities for efficiencies and cost savings within the nuclear security complex. GAO analyzed NNSA's statutory reporting requirements, the agency's report to congressional committees and supporting documentation, and interviewed NNSA officials. The National Nuclear Security Administration's (NNSA) report to congressional defense committees describes, but does not assess, the role of the nuclear security complex sites. The act required that NNSA's report include an assessment of the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the nation--which GAO refers to in this report as key NNSA activities. NNSA's report does not include such an assessment. Instead, the report describes activities such as certifying annually that the nuclear weapons stockpile is safe, secure, and reliable. NNSA officials told GAO that a prior 2008 report that assessed the role of the nuclear security complex is still valid and said that they did not think the act required them to update it. GAO notes, however, that NNSA's report to Congress does not cite the 2008 report as support for its assessment and provides no other information that would constitute an assessment. NNSA officials said that a new analysis of the role of the nuclear security complex sites may be warranted in the future if circumstances change. Officials acknowledged that characteristics of some major projects--such as the Chemistry and Metallurgical Research Replacement Nuclear Facility in New Mexico--have changed recently due to technical and fiscal challenges, but that such changes do not alter the fundamental role each site plays. NNSA's report to congressional defense committees identified seven opportunities for efficiency, but it did not, as required by the act, provide an assessment of how these efficiencies could contribute to cost savings or strengthening safety and security. For example, NNSA's report cites the establishment of two new offices--the Office of Acquisition and Project Management in 2011 and the Office of Infrastructure and Operations in 2013--as efficiency opportunities but does not provide an assessment of how these offices have contributed or will contribute to cost savings or improved safety and security. In addition, some efficiency opportunities noted in NNSA's report--such as the capabilities provided by the new Uranium Processing Facility at the Y-12 National Security Complex--involve projects or strategies that GAO has previously reported face challenges, which, if not addressed, may impact NNSA's ability both to achieve cost savings and strengthen safety and security. Key principles for preparing savings estimates include a methodology that identifies the basis of any assumptions included in the savings estimates and a process for tracking actual savings. Such a methodology could help ensure that savings from proposed efficiencies can be achieved. Because NNSA did not assess how these efficiencies would lead to savings, however, it is not clear whether any cost savings will result. GAO recommends that, when reporting on efficiencies and cost savings in the future, NNSA establish a methodology for estimating the savings derived from potential efficiencies and track savings resulting from efforts. NNSA disagreed, stating that the act did not require, as GAO recommends, that efficiencies be linked to cost savings. GAO believes its recommendation remains valid.

RCRA requires EPA to establish regulations governing the treatment, storage, transportation, and disposal of hazardous waste. Facilities that blend fuels derived from hazardous waste are subject to RCRA's treatment, storage, and disposal regulations. Furthermore, because EPA classifies cement production facilities as industrial furnaces, such facilities that burn hazardous waste fuels must comply with special regulations--known as the boiler and industrial furnace rule--developed under RCRA in 1991 to regulate the combustion of hazardous waste. Both sets of regulations require facilities to meet standards for emissions and other environmental requirements. The principal regulations applying to the fuel blending and cement production facilities that burn hazardous waste fuels are discussed in greater detail in appendixes I and II, respectively. EPA is primarily responsible for inspecting hazardous waste management facilities and taking enforcement actions as necessary against the owners and operators of facilities that are not complying with RCRA's requirements. Under RCRA, however, EPA may authorize a state to administer its own hazardous waste program if its program is consistent with the federal program established by EPA and other authorized state programs. An authorized state assumes the primary responsibility for implementing and enforcing RCRA's hazardous waste regulations while EPA oversees the state's activities. EPA has authorized the five states included in our review to implement their own treatment, storage, and disposal program in lieu of the federal RCRA program, but it has authorized only one of the five states--Texas--to implement the boiler and industrial furnace program. RCRA requires that hazardous waste management facilities requiring a permit, including fuel blenders and cement production facilities burning hazardous waste fuels, be inspected periodically. In conducting their inspections, EPA and the five authorized states do not classify violations as minor or significant. However, these officials told us that, generally, they consider a violation to be minor if it does not pose a serious threat to human health or the environment and the facility agrees to correct it promptly. An action or deficiency that poses a serious threat to human health or the environment or a persistent minor violation is considered to be significant. Although RCRA's regulations establish general operating practices and procedures with which fuel blending facilities must comply, they place few restrictions on the types of hazardous waste that can be blended. According to EPA officials, facilities can blend wastes that are not reactive providing safety standards are met. In addition, some states prohibit the blending of certain wastes, such as those containing pesticides and polychlorinated biphenyls (PCB) into fuel. Beyond these restrictions, the specifications for the hazardous wastes that are blended into fuels are primarily determined by the cement producers, whose operations must meet the regulations' standards for emissions and other requirements. RCRA's boiler and industrial furnace rule places limits on cement kilns' emissions. These limits are implemented by restricting the types of hazardous waste that are blended into fuels. Cement producers can burn only waste blends that allow them to meet the established limits on the amounts of regulated constituents--such as metals--that can be fed into the kiln. Furthermore, EPA does not permit the burning of certain inorganic hazardous wastes that contain metals and have a low heating value. In addition, under the Toxic Substances Control Act, a cement producer must obtain EPA's approval to burn fuel containing PCBs. As of early 1996, nationwide 142 fuel blenders were processing fuels derived from hazardous waste and 22 cement production facilities were burning such fuels in their kilns. Collectively, the five states included in our review account nationwide for about a quarter of the fuel blenders and about half of the cement producers that burn hazardous waste fuels. To verify that fuel blenders are complying with RCRA's treatment, storage, and disposal requirements, state hazardous waste management officials inspect these facilities regularly. Although RCRA requires that these facilities be inspected at least every 2 years, the five states we reviewed conducted more frequent inspections. While Missouri inspected these facilities quarterly, Kansas, Ohio, Pennsylvania, and Texas inspected them at least once a year. Officials inspected the 34 fuel blending facilities in the five states included in our review most recently between April 1995 and May 1996. (App. III summarizes the results of these inspections for each of the five states.) As table 1 shows, the most recent RCRA inspections of fuel blending facilities in the five states identified at least one minor violation of treatment, storage, and disposal regulations at 23 of the 34 facilities. Minor violations were found at facilities in each state. These violations included, among others, inadequately labeling hazardous waste storage containers, having incomplete records for training and equipment inspections, and failing to submit estimates of the costs of closing facilities and maintaining sites. According to state officials, these types of violations generally are corrected at the time of the inspection or shortly thereafter. The following examples illustrate the types of minor treatment, storage, and disposal violations identified and their resolution: Kansas officials inspected the state's two fuel blending facilities most recently between October 1995 and April 1996. These inspections identified minor violations at both facilities, including inadequately labeling hazardous waste storage containers and having an inaccurate emergency coordination list. The facilities' operators have corrected most of these violations and are working with state officials to resolve the remaining problems. Pennsylvania officials last inspected the state's two fuel blending facilities in early 1996. These inspections identified no violations at one facility and only minor violations at the other, including inadequately labeling hazardous waste storage containers. The facility's operator has corrected these violations. In addition, the most recent RCRA inspections of these fuel blending facilities identified significant violations of treatment, storage, and disposal regulations at 11 facilities in Kansas, Missouri, Ohio, and Texas. The significant violations included having waste containers in poor condition, storing waste that was not approved under the facility's operating permit, and having inadequate backup systems for containing leaks of hazardous waste. According to hazardous waste management officials in these states, some violations, which would normally be considered minor, would be classified as significant because they either recurred at the same facility or had not been corrected since the previous inspection. State officials told us that the facilities' operators have corrected some of the identified problems, are addressing others, and are negotiating settlements with the state on still other violations. The following examples illustrate the types of significant treatment, storage, and disposal violations identified at fuel blending facilities in the five states and their resolution: Ohio officials inspected the state's 12 fuel blending facilities most recently between May 1995 and May 1996. They identified significant violations at 4 of the 12 facilities, including not minimizing the possibility of a fire, explosion, or release of hazardous waste at the site and not evaluating the waste as required. State officials are working with the facilities' operators to resolve the identified problems. Missouri officials inspected the state's eight fuel blending facilities most recently between November 1995 and March 1996. The significant violations they identified included using storage containers in poor condition, storing hazardous waste in excess of approved capacity, and inadequately analyzing waste. State officials also considered recurring minor violations identified at one facility to be significant. State officials are working with the facilities' operators to resolve the identified problems. State officials identified no violations of RCRA's treatment, storage, and disposal regulations at eight fuel blending facilities in Ohio, Pennsylvania, and Texas. EPA officials inspect each cement production facility burning hazardous waste fuels in Kansas, Missouri, Ohio, and Pennsylvania about once a year to ensure compliance with RCRA's boiler and industrial furnace requirements. However, according to EPA officials, facilities with a poor compliance record are inspected more often. Texas, the only one of the five states that EPA has authorized to implement the boiler and industrial furnace program, also inspects cement production facilities annually. The 11 cement production facilities that burn hazardous waste fuels in the five states we reviewed were most recently inspected between May 1995 and June 1996. However, information on only three of these facilities is available because EPA officials are still reviewing data from the inspections of the remaining eight. (App. IV summarizes the results of these inspections, as available, for each of the five states we reviewed.) As table 2 shows, the inspections of the 11 cement production facilities identified no violations at 2 facilities in Missouri and Texas. However, violations were identified at one facility in Kansas, including not conducting several audits of emission control equipment as required. Without classifying these violations as minor or significant, EPA officials sent the facility a notice of violation. We provided copies of a draft of this report to EPA for its review and comment. We met with EPA officials, including the Chief, Permits Branch, Office of Solid Waste, to obtain the agency's comments. These officials agreed with the information presented in the report but made a number of suggestions for clarifying our discussion. We have incorporated these suggestions into the appropriate sections of the report. To provide information on the extent to which fuel blending and cement production facilities have been complying with EPA's and the states' principal regulations governing the blending and burning of fuel derived from hazardous waste, we obtained inspection and compliance data for facilities in five judgmentally selected states: Kansas, Missouri, Ohio, Pennsylvania, and Texas. We selected these states for our review because they collectively account for about half of the nation's cement production facilities that burn hazardous waste fuels and almost a quarter of the nation's fuel blenders. Furthermore, these five states are included in 4 of EPA's 10 regions. To provide information on whether fuel blenders in the five states have been complying with RCRA's treatment, storage, and disposal regulations, we obtained inspection data from state hazardous waste officials responsible for implementing the regulations. To provide information on whether cement producers have been complying with RCRA's boiler and industrial furnace regulations, we reviewed compliance documents and interviewed officials in EPA's Office of Enforcement and Compliance Assurance, Waste Management Division, as well as officials in EPA regions III, V, and VII. We also interviewed state officials in Kansas, Missouri, Ohio, Pennsylvania, and Texas who are responsible for issuing permits to and inspecting cement production facilities, and we reviewed pertinent compliance and enforcement documents. To provide information on the nature and severity of the violations of RCRA's treatment, storage, and disposal and boiler and industrial furnace regulations by fuel blenders and cement producers, we asked state and EPA regional officials to (1) describe or provide examples of any violations that were identified during the most recent inspections of the fuel blending and cement production facilities and (2) characterize these violations as either minor or significant on the basis of each state's or EPA region's criteria for making such determinations or, in lieu of such criteria, their professional judgment. In conducting our review, we visited two fuel blending facilities in Texas and three cement production facilities in Kansas and Texas, and we interviewed officials at these facilities. We conducted our review from September 1995 through August 1996 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this report. At that time, we will send copies to the Administrator, EPA, and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please call me at (202) 512-6111 if you or your staff have any questions. Other major contributors to this report are included in appendix V. As facilities that store and treat hazardous waste, fuel blenders are subject to the Resource Conservation and Recovery Act's (RCRA) hazardous waste regulations and, therefore, are required to obtain an operating permit, must be inspected to ensure that they are complying with these regulations, and are subject to enforcement action if they violate the regulations. RCRA established two categories of facilities that treat, store, and/or dispose of hazardous waste: "interim status" facilities, which have not yet obtained an operating permit, and facilities with a permit. Of the 34 fuel blending facilities in the five states included in our review, 11 are operating under interim status requirements and 23 have a final operating permit. Table I.1 shows the number of fuel blending facilities in the five selected states, by the status of their operations. The Environmental Protection Agency (EPA) developed separate sets of regulations for facilities operating in interim status and with a final operating permit. The standards for facilities operating in interim statusconsist primarily of practices that owners and operators must follow to properly manage hazardous waste before they obtain an operating permit. The interim status standards include general administrative and nontechnical requirements for securing a site, training personnel, ensuring construction quality, testing and maintaining equipment, and keeping records. In addition, the interim status standards include certain technical requirements that are intended to minimize the potential for threats to the environment and public health. These technical requirements include general standards that apply to several types of facilities, including those for (1) monitoring groundwater, (2) closing a facility and managing the site after the facility is closed, and (3) providing financial assurance. The requirements also include specific standards that apply to each waste management method, including requirements for waste analysis, monitoring and inspection and general operating requirements. The standards for facilities with an operating permit consist of performance standards and design and operating criteria that are included in the permit for each facility. These standards include administrative and nontechnical requirements. In addition, facilities with a permit must comply with detailed technical requirements. Each permit must include conditions that are necessary for the facility to comply with RCRA and its regulations. The facility's compliance with RCRA is measured against the conditions included in the permit. The permit may incorporate these requirements by referring to RCRA and EPA's implementing regulations, or it may include specific requirements based on the act and regulations. For example, each facility's permit specifies the hazardous substances that must be monitored in the groundwater near the facility. Groundwater-monitoring requirements are included in the regulations, but many aspects of the monitoring program depend on the site and, therefore, are developed for each facility's permit. To ensure compliance with their requirements for operating in interim status or with a permit, RCRA requires treatment, storage, and disposal facilities to be inspected at least once every 2 years. EPA classifies cement production facilities that burn hazardous waste fuel as industrial furnaces. As such, they are subject to the agency's boiler and industrial furnace regulations under RCRA, which took effect on August 21, 1991. These regulations control emissions of hazardous organic compounds, toxic metals, hydrogen chloride, chlorine gas, and particulate matter from boilers and industrial furnaces burning hazardous waste. In addition, the rule subjects the owners and operators of these facilities to the standards that govern hazardous waste treatment, storage, and disposal facilities in general. Facilities that were using or had committed themselves to using hazardous waste as a supplemental fuel before the effective date of the rule were allowed to obtain "interim status." This status allows them to continue burning hazardous waste fuels while obtaining the permit required under the rule. In addition to applying for a permit, the owners and operators of interim status facilities were required to submit (1) by August 21, 1991, a report (certification of precompliance) providing information and certifying that emissions of individual metals, hydrogen chloride, chlorine gas, and particulate matter were not likely to exceed allowable levels and (2) by August 21, 1992, a report (certification of compliance) certifying, on the basis of testing, that emissions of individual metals; hydrogen chloride, chlorine gas, and particulate matter; carbon monoxide; and where applicable, hydrocarbons, dioxins, and certain other chemicals did not exceed allowable levels. During interim status, limits on a facility's operating parameters are established and, after submitting the required certifications, the owner or operator must comply with these limits. To demonstrate compliance, the owner or operator must monitor specified operating parameters of the combustion unit and the nature of the hazardous waste burned, as well as maintain records. Cement production facilities must repeat this testing every 3 years or until they receive their permit. Of the 11 cement production facilities burning hazardous waste fuels in the five states included in our review, 10 are operating under interim status requirements and only 1 has received its final operating permit. Table II.1 shows the operating status of the cement production facilities burning hazardous waste fuels in the five states included in our review. In addition to meeting emission standards, facilities operating both in interim status and with a permit must meet general standards and requirements for preparedness for and prevention of releases of hazardous substances, contingency planning and developing contingency procedures, recordkeeping and reporting, facility closure and postclosure care, and financial assurance. Facilities with a permit must also meet corrective action requirements and demonstrate that they can destroy and remove at least 99.99 percent of the principal organic hazardous constituents in the waste stream. This means that out of 1 ton of such elements put into the system, less than 4 ounces can actually be emitted in the stack gas. EPA makes information from compliance tests by facilities operating both in interim status and with a permit available to the public. Public notification is not required for compliance testing conducted by interim status facilities as part of their periodic certification of compliance with emission standards. However, an EPA regulation that became effective on June 11, 1996, generally requires that the public be notified of a new or interim status facility's trial burn. A trial burn is a test conducted as part of the permitting process to determine the limits on a facility's operating parameters. Because a cement production facility typically recycles cement kiln dust and feeds it back into the kiln, the concentration of toxic metals in the dust and the total amounts of toxic metals entering the kiln could increase over time. Therefore, the rule requires that the facility take steps, either by monitoring stack emissions or by other means, to ensure that the metals' concentration during certification testing does not change over time and is representative of the highest concentration of metals being fed into the kiln at any time. In addition, a cement production facility in interim status must feed hazardous waste directly into the kiln to ensure the complete destruction of the waste. Cement kiln dust produced by a kiln burning hazardous waste as fuel may be considered hazardous waste unless the kiln owner or operator demonstrates that the levels of hazardous constituents in the dust are either (1) similar to those found in the dust from kilns that burn conventional fuels or (2) within specified health-based limits. To ensure compliance with its requirements for operating in interim status or with a permit, RCRA requires hazardous waste treatment, storage, and disposal facilities--including cement production facilities burning hazardous waste fuels--to be inspected periodically. According to EPA officials, one of the primary deficiencies that the agency noted during nationwide inspections of cement production facilities burning hazardous waste fuels from 1991 through 1995 was the facilities' inadequate analysis of hazardous waste. To assist the facilities in analyzing their waste, EPA is preparing guidance for incinerators, boilers, and industrial furnaces, which explains in more detail sampling techniques that the facilities can use to analyze their hazardous waste. In early August 1996, EPA was internally reviewing the draft guidance, and EPA officials expected to make the final guidance available to the public by the end of the month. On April 19, 1996, EPA published a proposed rule in the Federal Register that would set more stringent emission limits for hazardous waste incinerators, lightweight aggregate kilns, and cement production facilities burning hazardous waste fuels. According to EPA, the new standards are designed to reduce dioxin and furan emissions from these sources by 98 percent, mercury emissions by 80 percent, and lead and cadmium emissions by 95 percent. The proposed rule would also place stringent limits on the amounts of hydrochloric acid, chlorine, certain toxic metals, particulate matter, carbon monoxide, and hydrocarbons that facilities burning hazardous waste fuels can emit. The proposal would exempt cement kilns from the new emission standards if their hazardous waste fuels are similar in composition to fossil fuels and pose no greater risks. It would also require the monitoring of emissions. The proposed rule had a 60-day comment period. In May 1996, EPA extended the comment period another 60 days, until August 19, 1996. Kansas officials inspected the state's two fuel blending facilities most recently between October 1995 and April 1996. These inspections identified minor RCRA violations at both facilities, including inadequately labeling waste storage containers and having an inaccurate emergency coordination list. The inspections also identified significant violations at one of the facilities. The facilities' operators have corrected most of these violations and are negotiating with state officials to resolve the remaining issues. Missouri officials inspected the state's eight fuel blending facilities most recently between November 1995 and March 1996. These inspections identified a number of minor RCRA violations at six facilities, including inadequately labeling waste storage containers and documenting inspections. According to state officials, the facilities' operators have corrected many of the identified problems. State inspections also identified significant violations at five facilities, including using storage containers in poor condition, storing hazardous waste in excess of allowed capacity, and inadequately analyzing waste. State officials are working with the facilities' operators to resolve these problems. Ohio officials inspected the state's 12 fuel blending facilities most recently between May 1995 and May 1996. They identified minor violations of RCRA's regulations at eight facilities, including, among others, inadequately labeling waste storage containers and documenting inspections and failing to submit cost estimates for closing facilities and maintaining sites after closure. In addition, they identified significant violations at four facilities, including failing to minimize the possibility of a fire, explosion, or release of waste and not evaluating waste as required. State officials are working with the facilities' operators to resolve the identified problems. Pennsylvania officials last inspected the state's two fuel blending facilities in early 1996. These inspections identified no violations of RCRA's treatment, storage, and disposal regulations at one fuel blending facility and only minor violations at the second facility, including the inadequate labeling of waste storage containers. The facility's operator has corrected these violations. Texas officials last inspected the state's 10 fuel blending facilities between April 1995 and May 1996. While no violations were detected at four of these facilities, the inspectors identified minor RCRA violations at the remaining six facilities, including not submitting all required copies of contingency plans and not conducting all required daily inspections of equipment. These violations have been corrected or are being corrected. The inspections also identified significant violations at one facility, including having deteriorating backup systems for containing hazardous waste leaks. State officials are working with the facilities' operators to resolve these issues. The state's three cement production facilities burning hazardous waste fuels were most recently inspected by EPA regional officials between October 1995 and April 1996. Potential violations of the boiler and industrial furnace regulations identified at two of the facilities are under review by EPA regional officials. At the third facility, EPA found that several daily and quarterly audits of emission control equipment had not been conducted as required. EPA sent a notice of violation to this facility. Inspections completed between May 1995 and June 1996 identified potential violations at three of the state's four cement production facilities that burn hazardous waste fuels. EPA officials are reviewing the results of these inspections and related information to determine whether violations occurred. An inspection of the remaining facility in the state identified no violations. The report on the April 1996 inspection of the one cement production facility in Ohio that burns hazardous waste fuels has not yet been finalized; therefore, an EPA official told us that the agency could not provide us with information on the inspection's results. According to this official, the report of EPA's inspection of this facility in 1995 is under review by EPA regional staff. EPA officials are currently reviewing information from a December 1995 inspection of one of Pennsylvania's two cement production facilities that burn hazardous waste fuels. The results of a May 1996 inspection of the state's other facility were not available as of July 1996. However, a July 1995 inspection of this facility identified a number of violations, including (1) not conducting required tests of the system that automatically shuts off the flow of hazardous waste fuels into the kiln, (2) not properly operating a system that is to continuously monitor emissions while burning hazardous wastes, and (3) not controlling escaping emissions. EPA has issued a notice of violation to this facility and is negotiating with the facility's operator to resolve these issues. Texas officials' most recent inspection in April 1996 of the state's only cement production facility burning hazardous waste fuels identified no violations of the boiler and industrial furnace regulations. Richard P. Johnson, Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO provided information on five states' cement production facility inspections, focusing on their compliance with various Resource Conservation and Recovery Act regulations for processing hazardous waste fuels. GAO found that: (1) there was at least one minor violation of treatment, storage, and disposal regulations at 23 of the cement production facilities reviewed; (2) these violations included the inadequate labeling of hazardous waste storage containers, incomplete records of training and equipment inspections, and failure to submit cost estimates for facility maintenance and operation; (3) these violations were generally corrected at the time of inspection or shortly thereafter; (4) significant violations occurred at 11 hazardous waste fuel burning facilities; (5) these facilities had storage containers in poor condition, stored waste in excess of allowed capacity, and used inadequate backup systems for hazardous waste leaks; (6) one of the facilities reviewed had violated boiler and industrial furnace regulations; and (7) the results of these inspections are incomplete, since the Environmental Protection Agency is still reviewing relevant data from the most recent inspections.

The DTV transition will require citizens to understand the transition and the actions that some might have to take to maintain television service. For those households with subscription video service on all televisions or with all televisions capable of processing a digital signal, no action is required. However, households with analog televisions that rely solely on over-the-air television signals received through rooftop or indoor antennas must take action to be able to view digital broadcast signals after analog broadcasting ceases. The Digital Television Transition and Public Safety Act of 2005 addresses the responsibilities of two federal agencies--FCC and NTIA--related to the DTV transition. The act directs FCC to require full-power television stations to cease analog broadcasting after February 17, 2009. The act also directed NTIA to establish a $1.5 billion subsidy program through which households can obtain coupons towards the purchase of digital-to-analog converter boxes. In August 2007, NTIA selected International Business Machines Corporation (IBM) as the contractor to provide certain services for the program. On January 1, 2008, NTIA, in conjunction with IBM and in accordance with the act, began accepting applications for up to two $40 coupons per household that can apply toward the purchase of eligible digital-to-analog converter boxes and, in mid-February 2008, began mailing the coupons. Initially, during the first phase of the program any household is eligible to request and receive the coupons, but once $890 million worth of coupons has been redeemed, and issued but not expired, NTIA must certify to Congress that the program's initial allocation of funds is insufficient to fulfill coupon requests. NTIA will then receive $510 million in additional program funds, but households requesting coupons during this second phase must certify that they do not receive cable, satellite, or any other pay television service. As of June 24, 2008, in response to NTIA's statement certifying that the initial allocation of funds would be insufficient, all appropriated coupon funds were made available to the program. Consumers can request coupons up to March 31, 2009, and coupons can be redeemed through July 9, 2009. As required by law, all coupons expire 90 days after issuance. As unredeemed coupons expire, the funds obligated for those coupons are returned to the converter box subsidy program. Retailer participation in the converter box subsidy program is voluntary, but participating retailers are required to follow specific program rules to ensure the proper use and processing of converter box coupons. Retailers are obligated to, among other things, establish systems capable of electronically processing coupons for redemption and payment and tracking transactions. Retailers must also train their employees on the purpose and operation of the subsidy program. According to NTIA officials, NTIA initially explored the idea of setting requirements for training content, but decided to allow retailers the flexibility of developing their own training programs and provided retailers with sample training materials. Certification requires retailers to have completed an application form by March 31, 2008, and to attest that they have been engaged in the consumer electronics retail business for at least 1 year. Retailers must also register in the government's Central Contractor Registration database, have systems or procedures that can be easily audited and that can provide adequate data to minimize fraud and abuse, agree to be audited at any time, and provide data tracking each coupon with a corresponding converter box purchase. NTIA may revoke retailers' certification if they fail to comply with these regulations or if any of their actions are deemed inconsistent with the subsidy program. Converter boxes can also be purchased by telephone or online and be shipped directly to a customer's home from participating retailers. At the time of our review, 29 online retailers were participating in the converter box subsidy program. Additionally, 13 telephone retailers were listed as participating in the program, 2 of which are associated with national retailers. Private sector stakeholders, such as broadcasters and cable providers, have undertaken various education efforts to increase public awareness about the DTV transition. The NAB and the National Cable and Telecommunications Association initiated DTV transition consumer education campaigns in late 2007 at an estimated value of $1.4 billion combined. NAB has produced six versions of a public service announcement, including 15-second and 30-second versions in both English and Spanish and close-captioned versions. Private sector stakeholders have also produced DTV transition educational programs for broadcast and distribution, developed Web sites that provide information on the transition, and engaged in various other forms of outreach to raise awareness. Additionally, most of the national retailers participating in the NTIA converter box subsidy program are providing materials to help inform their customers of the DTV transition and the subsidy program. Examples of these materials include informational brochures in English and Spanish, educational videos and in-store displays in English and Spanish, informational content on retailer Web sites, and information provided in retailer advertising in Sunday circulars. FCC and NTIA also have ongoing DTV consumer education efforts, which target populations most likely to be affected by the DTV transition. Specifically, they focused their efforts on 45 areas of the country that have at least 1 of the following population groups: (1) more than 150,000 over- the-air households, (2) more than 20 percent of all households relying on over-the-air broadcasts, or (3) a top 10 city of residence for the largest target demographic groups. The target demographic groups include seniors, low-income, minority and non-English speaking, rural households, and persons with disabilities. According to NTIA, its consumer education efforts will specifically target these 45 areas by leveraging partnerships and earned media spots (such as news stories or opinion editorials) to better reach the targeted populations. FCC indicated that while its outreach efforts focus on the targeted hard-to-reach populations, the only effort specifically targeting the 45 locations has been to place billboards in these communities. According to FCC, contracts exist for billboards in 26 of the 45 markets, and it is working to place billboards in the other 19 markets. Furthermore, FCC and NTIA have developed partnerships with some federal, state, and local organizations that serve the targeted hard-to- reach populations. NTIA has processed and issued coupons to millions of consumers, but a sharp increase in demand might affect NTIA's ability to respond to coupon requests in a timely manner. NTIA and its contractors have implemented systems (1) to process coupon applications, (2) to produce and distribute coupons to consumers, and (3) for retailers to process coupons and receive reimbursement for the coupons from the government. Millions of consumers have requested converter box coupons and most of the requested coupons have been issued. Through August 2008, households had requested approximately 26 million coupons. NTIA had issued over 94 percent of all coupon requests, for more than 24million coupons. Of those coupons issued, about 9.5 million (39 percent) had been redeemed and 31 percent had expired. After an initial spike at the beginning of the program, coupon requests have remained steady and have averaged over 105,000 requests per day. Coupon redemptions, since coupons were first issued in February 2008, have averaged over 48,000 per day. In our consumer survey, we found that 35 percent of U.S. households are at risk of losing some television service because they have at least one television not connected to a subscription service, such as cable or satellite. However, through August 2008, only 13 percent of U.S. households had requested converter box coupons, and less than 5 percent had redeemed these coupons. As the transition date nears, there is the potential that many affected households that have not taken action might begin requesting coupons. Our consumer survey found that of those at risk of losing some television service and intending to purchase a converter box, most will likely request a coupon. In fact, in households relying solely on over-the-air broadcasts (approximately 15 percent), of those who intend to purchase a converter box, 100 percent of survey respondents said they were likely to request a coupon. Consumers have incurred significant wait times in the processing of their coupon requests, but the processing time from receiving requests to issuing coupons is improving. NTIA requires that 98 percent of all coupon requests be issued within 10 days, and the remainder be issued within 15 days. From February 17 through August 31, 2008, our analysis shows that the average duration between coupon request and issuance was over 16 days. In aggregate, 53 percent of all coupon requests had been issued within 10 days, and 39 percent of all coupon requests had been issued more than 15 days after being requested. From May 1 through August 31, 2008, the average processing time from coupon request to issuance was 9 days. Given the processing time required in issuing coupons, NTIA's preparedness to handle volatility in coupon demand is unclear. Fluctuation in coupon requests, including the potential for a spike in requests as the transition date approaches, could adversely affect consumers. When NTIA faced a deluge of coupon requests in the early days of the converter box subsidy program, it took weeks to bring down the deficit of coupons issued to coupons requested. According to NTIA, it expects a similar increase in requests around the transition date, and such an increase may cause a delay in issuing coupons. As a result, consumers might incur significant wait time before they receive their coupons and might lose television service during the time they are waiting for the coupons. While NTIA and its contractors have demonstrated the capacity to process and issue large numbers of coupon requests over short periods, they have yet to establish specific plans to manage a potential spike or a sustained increase in demand leading up to the transition. We analyzed data to compare areas of the country that comprise predominantly minority and elderly populations with the rest of the U.S. population and found some differences in the coupon request, redemption, and expiration rates for Hispanic, black, and senior households compared with the rest of the U.S. population. For example, zip codes with a high concentration of Latino or Hispanic households had noticeably higher request rates (28 percent) when compared with non-Latino or non- Hispanic zip codes (12 percent). However, households in predominantly black and Latino or Hispanic zip codes were less likely, compared with households outside these areas, to redeem their coupons once they received them. As shown in table 1, the overall rate of redemption for the converter box subsidy program is 39 percent. Approximately 37 percent of coupons have been redeemed in predominantly Latino or Hispanic areas. In predominantly black areas, 32 percent of coupons have been redeemed. We found that in areas of the country with a high concentration of seniors, fewer coupons were requested (9 percent) compared with areas of the country that did not have a high concentration of seniors (13 percent). Redemption rates for the senior population were lower than the redemption rates in the rest of the country. Regarding coupon expirations, we found that the areas comprising Latino or Hispanic households allowed 27 percent of their coupons to expire, while areas with predominantly senior populations allowed 43 percent of their coupons to expire. To determine participation in the converter box subsidy program in the 45 areas of the country receiving targeted outreach by NTIA and FCC, we analyzed NTIA coupon data (including requests, redemptions, and expirations) in the 45 areas compared to the rest of the country not targeted by NTIA and FCC. We found participation levels were about the same in the targeted areas when compared to the rest of the country. For example, we found in the 45 targeted areas, 12.2 percent of households have requested coupons compared with 12.8 percent for the rest of the country not targeted by NTIA and FCC. According to NTIA, similarities in request, redemption, and expiration rates between the 45 targeted areas and the rest of the country is viewed as a success. As the sellers of the converter boxes, retailers play a crucial role in the converter box subsidy program and are counted on to inform consumers about it. At the time of our review, seven national retailers were certified to participate in the subsidy program. Participating retailers are obligated to, among other things, train employees on the purpose and operation of the subsidy program. All of the retailers with whom we spoke told us they were training employees on the DTV transition and the subsidy program, although the retailers varied in which staff must complete training. As part of our work, we conducted a "mystery shopper" study by visiting 132 randomly selected retail locations in 12 cities across the United States that were listed as participating in the converter box subsidy program. We did not alert retailers that we were visiting their stores or identify ourselves as government employees. During our visits, we engaged the retailers in conversation about the DTV transition and the subsidy program to determine whether the information they were providing to customers was accurate and whether individual stores had coupon-eligible converter boxes available. While not required to do so, some stores we visited had informational material available and others had signs describing the DTV transition and the subsidy program. We also determined whether the information that retailers were providing to customers was accurate and whether individual stores had coupon-eligible converter boxes available. At most retailers (118) we visited, a representative was able to correctly identify that the DTV transition would occur in February 2009. Additionally, nearly all (126) retailers identified a coupon-eligible converter box as an option available to consumers to continue watching television after the transition. Besides coupon eligible converter boxes, representatives identified other options to continue viewing television after the transition, including purchasing a digital television (67) or subscribing to cable or satellite service (77). However, in rare instances, we heard erroneous information from the retailers, including one representative who told us that an option for continuing to watch television after the transition was to obtain a "cable converter box" from a cable company and another representative who recommended buying an "HD tuner." Since participating retailers are obligated to train their employees on the purpose and operation of the subsidy program, we observed whether the representative was able to explain various aspects about the subsidy program. A vast majority of the representatives were able to explain how to receive or apply for a coupon and the value of the coupon. Although we could obtain information from the majority of the stores that we visited and that were listed as participating in the subsidy program, in a few instances, we were not able to ask questions and observe whether the information provided was accurate. In two instances, there was no retailer at the store location listed as a participating retailer on NTIA's Web site (https://www.dtv2009.gov/VendorSearch.aspx). In another instance, the location listed was under construction and had not yet opened. In two additional instances, the locations listed were private residences--one was an in-home electronics store, and the other was a satellite television installer working from a house. We asked NTIA how it ensured the accuracy of the list of participating retailers on its Web site, and according to NTIA, ensuring the accuracy of the list is the responsibility of the retailers. NTIA said it provides a list of locations to each retailer prior to placing the list on the Web site, and retailers can update addresses or add new listings as warranted. NTIA estimates that it will see a large increase in the number of coupon requests in the first quarter of 2009 and our analysis confirms that, as the transition nears, a spike in coupon requests is likely. However, NTIA has not developed a plan for managing that potential spike or sustained increase in coupon demand. The time required for processing coupons has improved since consumers incurred significant wait times to receive their coupons at the beginning of the program, but until recently NTIA fell short of its requirement for processing coupons within 10 to 15 days. Given the relatively low participation rates to date and the amount of time it took to process the spike in coupon requests in the early days of the program, NTIA's ability to handle volatility in coupon demand without a plan is uncertain. Consequently, consumers face potential risks that they might not receive their coupons before the transition and might lose their television service. To help NTIA prepare for a potential increase in demand for converter box coupons and so that consumers are not left waiting a lengthy amount of time for requested coupons, the report we issued September 16, 2008, recommended that the Secretary of Commerce direct the Administrator of the NTIA to develop a plan to manage volatility in coupon requests so that coupons will be processed and mailed within 10-15 days from the day the coupon applications are approved, per NTIA's stated requirement. In reviewing a draft of the report, the Department of Commerce (which contains NTIA) did not state whether it agreed or disagreed with our recommendation, but did say the Department shares our concern about an increase in coupon demand as the transition nears. Further, its letter stated it is committed to doing all that it can within its statutory authority and existing resources to ensure that all Americans are ready for the DTV transition. In its letter, FCC noted consumer outreach efforts it has taken related to the DTV transition. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information about this testimony, please contact Mark L. Goldstein at (202) 512-2834. Individuals making key contributions to this testimony included Colin Fallon, Simon Galed, Eric Hudson, Bert Japikse, Aaron Kaminsky, Sally Moino, Michael Pose, and Andrew Stavisky. 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 Digital Television Transition and Public Safety Act of 2005 requires all full-power television stations in the United States to cease analog broadcasting after February 17, 2009, known as the digital television (DTV) transition. The National Telecommunications and Information Administration (NTIA) is responsible for implementing a subsidy program to provide households with up to two $40 coupons toward the purchase of converter boxes. In this testimony, which is principally based on a recently issued report, GAO examines (1) what consumer education efforts have been undertaken by private and federal stakeholders and (2) how effective NTIA has been in implementing the converter box subsidy program, and to what extent consumers are participating in the program. To address these issues, GAO analyzed data from NTIA and reviewed legal, agency, and industry documents. Also, GAO interviewed a variety of stakeholders involved with the DTV transition. Private sector and federal stakeholders have undertaken various consumer education efforts to raise awareness about the DTV transition. For example, the National Association of Broadcasters and the National Cable and Telecommunications Association have committed over $1.4 billion to educate consumers about the transition. This funding has supported the development of public service announcements, education programs for broadcast, Web sites, and other activities. The Federal Communications Commission (FCC) and NTIA have consumer education plans that target those populations most likely to be affected by the DTV transition. Specifically, they identified 45 areas of the country as high risk that included areas with at least 1 of the following population groups: (1) more than 150,000 over-the-air households, (2) more than 20 percent of all households relying on over-the-air broadcasts, or (3) a top 10 city of residence for the largest target demographic groups. The target demographic groups include seniors, low-income, minority and non-English speaking, rural households, and persons with disabilities. In addition to targeting these 45 areas of the country, FCC and NTIA developed partnerships with organizations that serve these hard-to-reach populations. NTIA is effectively implementing the converter box subsidy program, but its plans to address the likely increase in coupon demand as the transition nears remain unclear. As of August 31, 2008, NTIA had issued almost 24 million coupons and as of that date approximately 13 percent of U.S. households had requested coupons. As found in GAO's recent consumer survey, up to 35 percent of U.S. households could be affected by the transition because they have at least one television not connected to a subscription service, such as cable or satellite. In U.S. households relying solely on over-the-air broadcasts (approximately 15 percent), of those who intend to purchase a converter box, 100 percent of survey respondents said they were likely to request a coupon. With a spike in demand likely as the transition date nears, NTIA has no specific plans to address an increase in demand; therefore, consumers might incur significant wait time to receive their coupons and might lose television service if their wait time lasts beyond February 17, 2009. In terms of participation in the converter box subsidy program, GAO analyzed coupon data in areas of the country comprising predominantly minority and senior populations and found that households in both predominantly black and Hispanic or Latino areas were less likely to redeem their coupons compared with households outside these areas. Additionally, GAO analyzed participation in the converter box subsidy program in the 45 areas of the country on which NTIA and FCC focused their consumer education efforts and found coupon requests to be roughly the same for zip codes within the 45 targeted areas compared with areas that were not targeted. Retailers play an integral role in the converter box subsidy program by selling the converter boxes and helping to inform their customers about the DTV transition. GAO visited 132 randomly selected retail stores in 12 cities. Store representatives at a majority of the retailers GAO visited were able to correctly state that the DTV transition would occur in February 2009 and how to apply for a converter box coupon.

The MODA program started in Afghanistan in July 2010. DOD developed it as a result of operational requirements in Afghanistan and an increased U.S. government emphasis on civilian-led capacity building at the ministerial level. According to DOD, the program was created to address past concerns relating to advisory services, including that they were often carried out on an ad hoc basis, utilizing uniformed or contract personnel whose functional expertise and advisory skills were not always well-matched to the socio-cultural working environment. Since 2010, DOD has deployed over 200 advisors to the Afghanistan Ministries of Defense and Interior, including about 50 advisors in fiscal year 2014. DOD has typically deployed these advisors for 1- to 2-year assignments. DOD plans to deploy about 90 additional advisors to Afghanistan in fiscal year 2015. Section 1081 of the NDAA for Fiscal Year 2012, as amended by Section 1094 of the NDAA for Fiscal Year 2014, provided DOD authority to carry out a program to assign DOD civilian employees as advisors to the ministries of defense of foreign countries. Using this authority, DOD created the Global MODA program. The NDAA for Fiscal Year 2014 extended the program's authority through fiscal year 2017. DOD's Defense Security Cooperation Agency (DSCA) administers the MODA program, with support and oversight from the Office of the Under Secretary of Defense for Policy. The law authorizes DOD's civilian advisors to (1) provide institutional, ministerial-level advice, and other training to personnel of the ministry to which they are assigned in support of stabilization or post-conflict activities, and (2) assist the ministry in building core institutional capacity, competencies, and capabilities to manage defense-related processes. The policy objective of the Global MODA program is to enhance the capabilities and capacity of the partner nation's defense ministry, or the security agency serving a similar defense function. According to DOD, as other DOD security cooperation efforts develop partner nation military units, the institutions required to support them with pay, benefits, and equipment must be developed as well. MODA is designed to forge long- term relationships that strengthen a partner nation's defense ministry. DOD also intends that these efforts support broader U.S. policy goals promoting positive civil-military relations, respect for human dignity and the rule of law, international humanitarian law, and professionalized partner military forces. Funding for the MODA program comes from DOD's Overseas Contingency Operations appropriation and annual appropriations for operations and maintenance. According to DOD officials, the Overseas Contingency Operations funding is used solely for Afghanistan and funding from the annual operations and maintenance appropriation is split between the Afghanistan and Global MODA programs. DOD documentation indicates that the department planned to spend about $3.8 million in fiscal year 2014 on the Global MODA program. This plan included funds for deployments to 10 countries and training and travel for the advisors. DOD provided documentation indicating that it actually obligated about $2.9 million in fiscal year 2014, including just over $573,000 on advisor deployment costs, a little over $2 million on training, and around $240,000 on program management and travel. The process of selecting locations for the Global MODA program and deploying advisors includes seven components--nominations, initial screening, requirement development, State concurrence, DOD formal approval, recruitment, and training and pre-deployment (see fig. 1). While some of these components must occur in a specific order (e.g., DOD must obtain State concurrence before it can deploy an advisor), others may take place concurrently. DSCA operates a number of related defense institution building programs intended to build partner capacity and support institution building, including the Defense Institution Reform Initiative and the Warsaw Initiative Fund. Like the MODA program, the Defense Institution Reform Initiative provides subject-matter experts to work with partner nations to assess organizational weaknesses and share best practices for addressing those shortfalls; according to DOD officials, this may lead to further exchanges on improving institutional processes and management. Teams of subject-matter experts visit a country periodically to carry out long-term projects, such as conducting a strategic review of the defense sector. The Defense Institution Reform Initiative also focuses on ministry- to-ministry engagement; however, it uses a mix of contractor and civilian personnel and provides short-term, periodic interaction, while the MODA program uses only civilians and is intended to provide long-term, daily interaction. Officials noted that the Warsaw Initiative Fund's Defense Institution Building Management Team works with former Soviet bloc partner nations to provide short-term technical support in countries that do not have a Defense Institution Reform Initiative presence. According to DOD officials, the MODA program is intended to complement ongoing work by the Defense Institution Reform Initiative and the Defense Institution Building Management Team in nominated countries, and MODA advisors are expected to work closely with Defense Institution Reform Initiative and Defense Institution Building Management Team counterparts. DOD's actual Global MODA deployments at the end of fiscal year 2014 were significantly less than the goal presented in DOD's most recent budget estimates. In its March 2014 budget estimates, DOD stated that it intended to deploy 12 advisors to countries distributed across the globe (12 countries) by the end of fiscal year 2014. In its previous budget estimates, published in April 2013, DOD planned to have 30 advisors in the field by the end of fiscal year 2014. For most of fiscal year 2014, however, DOD had only 2 advisors abroad in Kosovo and Montenegro for 1-year assignments. By the end of the fiscal year, DOD had deployed 5 advisors for 1-year assignments to 4 European countries--Kosovo, Montenegro, Georgia, and Bosnia and Herzegovina (see table 1). For more information on DOD's first 2 Global MODA deployments, see app. II. In late 2014, DOD began a process to prioritize and allocate resources for defense institution building activities globally, including potential MODA program deployments. As a result of this process and new authority in the fiscal year 2015 NDAA to assign MODA advisors to regional organizations with security missions, DOD has not finalized plans for the locations of future deployments. However, DOD has obtained State concurrence for 4 more countries--Botswana, Indonesia, Ukraine, and Yemen (see fig. 2). Although the program has typically deployed advisors on long-term assignments of a year or more, DOD also sent an advisor to Mongolia in fiscal year 2014 on a 2-week assignment using MODA authority and officials stated they plan to send additional short-term advisors in fiscal year 2015. According to DOD officials, the reasons DOD did not meet its goal of 12 advisors in place by the end of fiscal year 2014 are unique to each of the countries and advisors selected. These officials noted there can be delays in the country approval process, or with the recruitment or training of the advisor. While DOD stated that the process of selecting a country and deploying an advisor should take about 6 months, the process for the first 2 advisors--from the scoping visit to deployment--took over a year. Delays in deployments have occurred at various stages in the process of selecting countries and advisors. See Figure 3 for examples of reasons for delays. The fiscal year 2012 and 2014 NDAAs established requirements for the Global MODA program, including that DOD (1) obtain concurrence from the Secretary of State in assigning advisors to foreign ministries of defense; (2) report annually on activities under the program during the preceding fiscal year and include 6 elements on the status of the program in its reports; and (3) update the policy guidance for the MODA program. DOD met some, but not all, of these requirements. Specifically, DOD obtained concurrence on deployments from the Secretary of State, but its most recent annual report to Congress only included 4 of the 6 required elements for the Global MODA program, and it has not developed a policy for the program. As required in the NDAA for Fiscal Year 2012, DOD officials worked with State to obtain concurrence on MODA deployments. According to State officials, DOD provides State with a concurrence package that typically includes an internal DOD action memo seeking final concurrence. The memo may include an opinion from U.S. officials in the nominated country and may note which approvals have been obtained within DOD, such as from the relevant geographic Combatant Command or from the Joint Staff. The program manager in State's Bureau of Political-Military Affairs then adds an action memo for State reviewers and routes the package to relevant parties within State. State's internal goal is to vet a package within 10 working days, assuming there is policy agreement. However, if questions or policy disagreements arise, the vetting process can take longer. When State concurs, officials will typically send a message to DOD noting this concurrence and explaining whether its concurrence is conditional on any additional requirements or revisions to the package. State officials noted that they are reviewing the concurrence process to determine where problems may arise and incorporate changes to streamline the process. For example, they are considering whether DOD could provide any additional information to facilitate State's concurrence process. Additionally, State officials noted that it will be important to share feedback about existing or completed deployments so that lessons learned can be incorporated into the concurrence process going forward. If, for example, State officials in country raise concerns, it would be important for that feedback to be provided to both DOD and State officials in headquarters. State and DOD officials noted that they have discussed some of these potential changes. In the NDAA for Fiscal Year 2012, Congress required that DOD's annual reports on the status of the MODA program include 6 elements: (1) a list of the defense ministries to which civilian employees were assigned; (2) the number of advisors assigned to these ministries; (3) the duration of the advisors' assignments; (4) a brief description of the activities carried out by advisors; (5) a description of the criteria used to select the foreign defense ministries and civilian advisors for the program; (6) the cost of each assignment. DOD's most recent annual report to Congress on the MODA program-- covering fiscal year 2013--contained 4 of the 6 required elements for the Global MODA program. The report contained two main sections--one on the MODA program in Afghanistan and one on the Global MODA program. The section on Afghanistan contained all 6 elements, but the Global MODA section did not include required information on the cost or assignment duration for the 2 advisors deployed in late fiscal year 2013 (see fig. 4). According to DOD officials, this information was not provided because DOD had not collected it at the time the report was drafted. In its reporting to Congress, DOD has provided limited performance information beyond the required elements in the law. For example, the 2013 annual report listed the number of advisors assigned through the program, but did not include information on how advisor assignments compare with overall program deployment goals or provide reasons why the program has expanded more slowly than anticipated. Additionally, it did not provide information on the extent to which actual costs compared with planned funding allocations. While DOD is not required by law to report on this information, Congress has required DOD to report on the number, duration, and cost of advisors assigned, and additional information in these areas beyond what is required could be useful to Congress. We have previously reported that agencies should consider the differing information needs of various users to ensure that performance information will be both useful and used in decision making. We have also reported that information on a program's progress in meeting its objectives, as well as program-level linkages between resources, strategies, and goals, can be useful to Congress. Such information could assist Congress as it makes future decisions about the program. According to DOD officials, DOD does not currently have a policy for the MODA program. The NDAA for Fiscal Year 2014 required DOD to update its policy for the MODA program. DOD officials stated that DOD plans to meet the requirement by providing a broader directive and instruction on defense institution building, which would include the MODA program. Officials stated that DOD is in the process of staffing this effort. In October 2012, the DOD Inspector General reported that MODA program officials cited the absence of a formal policy on building ministerial capacity as a factor that impeded their ability to establish a performance management framework for the MODA program in Afghanistan. Additionally, in a November 2012 report on the Defense Institution Reform Initiative, the DOD Inspector General stated that the absence of a defense institution building policy created programmatic challenges, including allowing overlapping missions in DOD's defense institution building-related efforts. In June 2012, DOD officials told the Inspector General that they were drafting a policy for developing and maintaining DOD capabilities to assess, support, develop, and advise partner nations. More than 2 years later, the policy still has not been completed. The law did not mandate a date by which DOD should update the policy. However, standard practices in program management include, among other things, developing a plan to execute projects within a specific time frame. DOD has increasingly focused on security cooperation activities such as the Global MODA program to build the defense capacity of foreign partners and allies. It has met most of its legislative requirements for reporting to Congress about the program, except the requirements to include information on the cost and duration of each deployment in its annual reports. Such information could help ensure that Congress can more fully assess the program's efforts and status. Additionally, given that the program's current authority expires at the end of fiscal year 2017, providing a direct linkage between projected and actual advisor assignments and program expansion goals, as well as between projected and actual costs--either in its annual reports or in another form--could increase the transparency of some of the reasons behind the program's slower-than-anticipated start. Such linkage could also ensure that Congress has complete performance information on the status of the program. Finally, as DOD expands the MODA program to new countries, it will be important for the program to be guided by a clearly-defined policy. Given DOD's stated intent to develop such a policy over 2 years ago, clarifying the time frame in which it plans to complete it could help to ensure that it is available for future deployments. To help improve implementation and oversight of the MODA program, we recommend that the Secretary of Defense take the following three actions: Take steps to ensure that DOD includes all required elements, including information on the cost and duration of each Global MODA advisor assignment, in its future annual reports to Congress. Consider providing additional performance information to Congress on the extent to which DOD is achieving its advisor assignments and program expansion relative to its goals. Establish a time frame for updating the required policy for the MODA program. We provided a draft of this product to the Departments of Defense and State for comment. DOD provided written comments, which are reprinted in appendix III. DOD concurred with our recommendations and stated it will take steps to implement them. DOD also provided technical comments, which we incorporated as appropriate. State had no comments. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of State, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7331 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. The National Defense Authorization Act (NDAA) for Fiscal Year 2012, as amended by the NDAA for Fiscal Year 2014, mandated GAO to report on the effectiveness of the advisory services provided by civilian employees under the Department of Defense's (DOD) Ministry of Defense Advisors (MODA) program. This report addresses (1) DOD's progress in expanding the MODA program globally and (2) the extent to which DOD met NDAA requirements. We have also included our observations of the first two global MODA deployments in appendix II. To determine what progress DOD has made toward expanding the MODA program globally, we identified DOD's goals for the Global MODA program--the program outside of Afghanistan--for fiscal years 2013 and 2014, as laid out in DOD's budget estimates, and compared those goals with program results for those 2 years. We interviewed DOD, Department of State (State), and foreign ministry officials in Montenegro and Kosovo, the two overseas locations in which Global MODA advisors were deployed for most of fiscal year 2014; and reviewed DOD documentation including its budget estimates, program guidance, and work plans and monthly progress reports from the first two advisors in the field. We identified the steps DOD took to select a location and deploy an advisor by interviewing DOD and State officials and reviewing DOD and State documentation, including documentation on DOD's nomination and selection process and on State's concurrence process. Based on this information, we outlined the process DOD has used for selecting a location and deploying a Global MODA advisor through its initial deployments. We reviewed DOD information on its planned spending for fiscal years 2014 and 2015 and on actual obligations for fiscal year 2014. With respect to the obligations information, DOD officials noted that it is difficult to determine the precise amount of obligations for Global MODA due to the fact that some costs, such as training costs, may include funding to support the overall MODA program, including the Afghanistan program. Given the difficulty of obtaining complete and accurate information on obligations for Global MODA, we present DOD's identified obligations in background for context and background purposes only. To determine the extent to which DOD met NDAA requirements, we reviewed the fiscal year 2012 and 2014 NDAAs to identify requirements, interviewed DOD and State officials, and reviewed DOD and State documentation, including DOD's annual reports to Congress. To determine whether DOD met the reporting requirements included in the NDAA for Fiscal Year 2012, we reviewed the Global MODA section of DOD's 2013 annual report to Congress. We determined that a requirement was "met" if it was fully addressed in the annual report; we determined a requirement was "partially met" if it was addressed but did not include all elements of a requirement; and we determined a requirement was "not met" if it was not included in the annual report. We conducted this performance audit from June 2014 to February 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As of the end of fiscal year 2014, two Global Ministry of Defense Advisors (MODA) assignments--in Kosovo and Montenegro--were completed. The first Global MODA program advisor went to Kosovo in August 2013 for a 1-year deployment to assist the Ministry for the Kosovo Security Force in the area of force development. The goals of the assistance, as described in the Terms of Reference, included supporting the implementation of recommendations from Kosovo's Strategic Security Sector Review, including restructuring, manning, training, and equipping the Kosovo Security Force. To work toward this goal, the advisor reported various activities, such as developing management databases and formulating force structures for the Kosovo Security Force. In September 2013, Global MODA deployed an advisor to Montenegro to help address capacity gaps in the area of logistics and maintenance that had been identified by a delegation from the Defense Institution Building Management Team. The delegation assisted in a strategic defense review that identified several missing pieces in Montenegro's military command structure, including the absence of a logistics command. The MODA Terms of Reference included assisting the Ministry in developing a national-level maintenance policy and developing a logistics cost forecasting methodology. To assist the Ministry in building logistics capacity, the advisor participated in the formation of a logistics battalion and helped the Ministry to outline an organizational structure for a logistics command. We traveled to both locations and interviewed the advisors, Department of Defense (DOD) and Department of State (State) officials in the U.S. embassy, and the advisor's counterparts at the foreign ministries in Kosovo and Montenegro. We made the following observations of these first two advisor deployments: U.S. and Foreign Ministry Officials Were Generally Satisfied with the First Two Global MODA Advisors: The foreign ministry officials with whom we spoke in Kosovo and Montenegro expressed satisfaction with the advising services and welcomed new advisors to continue the program. Additionally, DOD and State officials in both countries stated that the advisors had a positive impact on the host ministry and that the MODA program complemented other U.S. activities in the country. DOD Adjusted Advisor Reporting Requirements Based on Materials Submitted by First Two Advisors: DOD has adjusted its advisors' reporting requirements based on materials submitted by the first two advisors. Once in country, advisors are required to develop and provide a work plan to MODA program management. These work plans turn broad goals established in the Terms of Reference with the host ministry into specific tasks and objectives. Advisors are also required to report monthly to MODA program management on their progress toward achieving these tasks and objectives. The first two advisors' work plans and monthly reports differed greatly in terms of length and detail regarding objectives and activities completed, making it difficult to measure or assess their performance. To standardize the work plans and reports, DOD has developed and issued guidance that specifies what the documents submitted by each advisor should contain. In addition, DOD officials have said they plan to have subject matter experts from the Defense Institution Reform Initiative or the Defense Institution Building Management Team assist the advisors in developing the work plans, and assess the work plans and reports to ensure that the plans and activities are appropriate to achieve the established goals. It Is Important to Maintain Clear Communication Between Advisors and the U.S. Embassy: Both of the initial advisors were embedded at the foreign ministry, and DOD and State officials noted that maintaining regular communications with the embassy is important to ensure that the advisor's efforts are consistent with U.S. goals in the country. Officials in both countries stated that it took some time to determine how the advisor would work with the U.S. country team. Officials stated that it is important to have clear expectations about how the advisor will be integrated into the country team. Advisors May Be Able to Leverage Other U.S. Security Cooperation Resources: U.S. and foreign officials in Montenegro were complimentary of efforts taken by the advisor to leverage DOD's State Partnership Program. Through that program, Montenegro had an existing relationship with the Maine National Guard. The advisor leveraged that program to organize a logistics training exercise that helped to advance the goal of forming a logistics battalion. The advisor noted that it took some time to understand what resources were available to him and having additional information about other U.S. security cooperation resources upfront could be helpful to future advisors. In addition to the contact named above, Hynek Kalkus (Assistant Director), Kara Marshall (Analyst-in-Charge), Julia Jebo Grant, Ashley Alley, Martin De Alteriis, Karen Deans, Jon Fremont, and Emily Gupta made key contributions to this report.

In 2012, Congress authorized DOD to create a program to assign civilian DOD employees as advisors to foreign ministries of defense. DOD created the Global MODA program, an expansion of a program started in Afghanistan in 2010, which partners DOD civilian experts with foreign defense and security officials to build core competencies in key areas such as strategy and policy, human resources management, acquisition and logistics, and financial management. The NDAA, as amended, required that DOD (1) obtain concurrence on the program from the Secretary of State; (2) provide an annual report to Congress including 6 elements on the status of the program; and (3) update the policy for the program. Congress also required GAO to report on the effectiveness of the program. GAO assessed (1) DOD's progress in expanding MODA globally and (2) the extent to which DOD met NDAA requirements. GAO reviewed MODA program plans, reports, and other documents and interviewed DOD and State officials in Washington, D.C., as well as in Kosovo and Montenegro--the locations to which the first 2 advisors were deployed. The Department of Defense (DOD) has expanded the Global Ministry of Defense Advisors (MODA) program more slowly than planned. It had 2 advisors in the field in Kosovo and Montenegro for most of fiscal year 2014, short of its goal of deploying 12 advisors by the end of fiscal year 2014. DOD deployed advisors to 2 additional countries just before the end of fiscal year 2014 (see figure). According to DOD officials, reasons it has taken longer than expected to expand globally include delays in the country approval process and with advisor recruitment and training. DOD has met most but not all legislative requirements for the MODA program. As required by the National Defense Authorization Act (NDAA) for Fiscal Year 2012, DOD obtained concurrence on its proposed deployments from the Department of State (State). DOD's most recent annual report to Congress included 4 of the 6 required elements, but did not include information on the cost or duration of each Global MODA deployment, which could help Congress assess the value of the program in relation to other capacity-building efforts (see figure). Additionally, DOD has not provided information on the program's performance, such as linking actual performance to goals. Although DOD is not required by law to include this information, GAO has previously reported that such information can be useful to decision makers. Finally, DOD has not updated the policy for the program as required in the NDAA for Fiscal Year 2014. GAO recommends that DOD (1) include all required information in its annual reports to Congress; (2) consider providing Congress with additional information on the program's performance; and (3) develop a time frame for updating the policy for the MODA program. DOD concurred with these recommendations.

The U.S. tax system depends on the principle of voluntary compliance, that is, when taxpayers comply with the law without compulsion or threat. Penalties are intended to encourage compliance by supporting the tax reporting and remittance standards contained in the I.R.C. According to IRS's penalty handbook, in order to advance the fairness and effectiveness of the tax system, penalties should be severe enough to deter noncompliance, encourage noncompliant taxpayers to comply, be objectively proportioned to the offense, and be used to educate taxpayers and encourage their future compliance. Penalties are assessed either automatically by IRS's systems or as a result of audits that reveal the compliance issues. For example, the penalty for filing a tax return late is usually assessed automatically when IRS's computer system detects a return filed after the filing deadline. Penalties such as those assessed against taxpayers involved with abusive tax shelters are assessed as a result of audits. Supervisors must review and approve the results of an audit to assess a penalty. Most penalties can be abated for reasonable cause if IRS determines that the taxpayer exercised ordinary business care and prudence in determining tax obligations but nevertheless was unable to comply with those obligations. Examples of reasonable cause include, but are not limited to, serious illness or an inability to obtain records. Following the release of an IRS Task Force report on civil tax penalties in 1989 Congress made its last major effort to reform the tax penalty regime because of concerns that a piecemeal approach to legislating civil tax penalties over the course of many years resulted in a complex penalty system that was difficult for IRS to administer and the taxpayer to comprehend. The legislation, the Improved Penalty Administration and Compliance Tax Act, was enacted in large part to simplify civil tax penalties. For example, the act consolidated into one part of the I.R.C. all of the generally applicable penalties relating to the accuracy of tax returns and reorganized accuracy penalties to eliminate situations where one infraction could receive more than one penalty. Overall, the act reformed information reporting penalties; accuracy-related penalties; preparer, promoter, and protester penalties; and penalties for failure to file, pay, withhold, and make timely tax deposits. OSP is assigned overall responsibility for IRS's penalty programs. As such, OSP is charged with coordinating policy and procedures concerning the administration of penalty programs, reviewing and analyzing penalty information, researching taxpayer attitudes and opinions, and determining appropriate action to promote voluntary compliance. Current Treasury regulations state that every taxpayer that has participated in a reportable transaction and that is required to file a tax return must attach a disclosure statement to his or her return for the taxable year and send a copy to OTSA. In 2004, the American Jobs Creation Act created a new penalty for failing to disclose reportable transactions with a tax return. The purpose of the reportable transaction penalty is to promote compliance with taxpayers' duty to disclose their participation in transactions IRS has determined to have potential for tax avoidance or evasion. For example, a taxpayer claiming a loss on their tax return of at least $2 million in a single taxable year must separately disclose the transaction to IRS. For most types of reportable transactions, the penalty is $10,000 for an individual taxpayer's return and $50,000 for other returns, such as business returns and returns for benefit plans. For one type of reportable transaction, a listed transaction, the amount of the penalty is increased to $100,000 for individuals and $200,000 for other returns. The Commissioner of Internal Revenue can abate the penalty for a reportable transaction, other than a listed transaction, if abating the penalty would promote compliance with the requirements of the I.R.C. and effective tax administration. The decision to abate must include a record describing the facts and reasons for the action and the amount abated, and any decision to not abate the penalty is not subject to judicial review. Although IRS policies state that IRS should collect information to evaluate the administration of penalties and their impact on voluntary compliance, and IRS is collecting some relevant information, OSP is not comprehensively evaluating penalty administration or penalties' impact on voluntary compliance. According to IRS policies, OSP is to do the following: Administer the penalty statutes in a manner that is fair and impartial to both the government and the taxpayer, is consistent across taxpayers, and ensures the accuracy of the penalty computation. Collect statistical and demographic information to evaluate penalties and penalty administration and to determine the effectiveness of penalties in promoting voluntary compliance. Design, administer, and evaluate penalty programs based on how those programs can most efficiently encourage voluntary compliance. Continually evaluate the impact of the penalty program on compliance and recommend changes when the I.R.C. or penalty administration does not effectively promote voluntary compliance. These policies are consistent with positions expressed in the 1989 IRS Task Force report and by Congress when reforming penalties in 1989 and with more recent views expressed by the National Taxpayer Advocate. All stressed the need for IRS to evaluate the administration of penalties and their impact on voluntary compliance. For example, the task force's report and Congress in the conference report for the act that included the penalty reform recommended that IRS analyze information concerning the administration and impact of penalties for the purpose of suggesting changes in compliance programs, educational programs, penalty design, and penalty administration. The task force also recommended that IRS analyze data to enable IRS, Treasury, and Congress to evaluate how well penalties operate and what impact they have on voluntary compliance. Similarly, in her 2008 annual report, the National Taxpayer Advocate wrote that before serious penalty reform can occur, better data about whether and how penalties promote voluntary compliance is needed. However, OSP generally does not fulfill the responsibilities specified in IRS policy or as envisioned by the 1989 IRS Task Force report, Congress, or the National Taxpayer Advocate. Rather, OSP analysts focus most of their efforts on addressing short-term issues, such as sudden spikes in assessments or abatements. These analyses are useful and should continue, as they could identify emerging problems with how penalties are being administered, but they do not constitute a comprehensive assessment of penalty administration. OSP officials said that they have not done more to evaluate the administration of penalties and their effect on voluntary compliance primarily because of resource constraints both within OSP and IRS's various research units, methodological barriers that impede their ability to research the effect of penalties on voluntary compliance, and limitations in available databases. OSP does not have a plan for fulfilling its responsibilities. The Government Performance and Results Act of 1993 may be a useful resource in developing such a plan as it provides several key management principles needed to effectively guide, monitor, and assess program implementation. These principles include (1) general and long-term goals and objectives, (2) a description of actions to support goals and objectives, (3) performance measures to evaluate specific actions, (4) schedules and milestones for meeting deadlines, (5) identification of resources needed, and (6) evaluation of the program with processes to allow for adjustments and changes. This approach is intended to ensure that agencies have thought through how the activities and initiatives they are undertaking are likely to add up to the meaningful result that their programs are intended to accomplish. A plan would help to identify resource requirements and support resource requests. In developing a plan, OSP would need to identify the key penalty issues on which to focus its efforts, the types of analyses that would best address those key issues, and the type and amount of resources--whether within OSP or elsewhere in IRS--needed to execute the plan. Thus, by focusing on what it is attempting to accomplish by developing a plan, OSP would be better positioned to determine what resources within IRS are available to assist it. Further, a well-developed plan can provide policymakers within the executive branch and Congress a better basis for determining the appropriate level of resources for a program. Although OSP officials' concerns about methodological barriers to determining the effect of penalties on voluntary compliance are valid, relevant analyses likely could be performed. Developing a plan would help OSP officials determine which analyses could be useful for this purpose and possible strategies for furthering the state of knowledge on the effect of penalties on compliance. OSP officials pointed to several examples of the methodological barriers to determining the effect of penalties on voluntary compliance. For example, increases in penalty amounts might be accompanied by other changes in enforcement activities, such as a higher audit rate, and separating the effect of these factors on voluntary compliance is difficult. In addition, a number of issues other than IRS enforcement activities affect a taxpayer's behavior, including income, tax rates, demographics and social factors, and the influence of tax practitioners. Another complication is that a penalty set at a certain amount may effectively encourage voluntary compliance for one type of taxpayer, such as individuals, but not for another type of taxpayer, such as businesses. Our discussions with state officials and review of academic studies raised similar concerns about the methodological barriers. None of the 25 states we contacted evaluate the impact of penalties on voluntary compliance, and FTA was unaware of any states currently doing such evaluations. State officials added that limited resources, political disinterest, and technological barriers further constrain their penalty analysis capacities. Some state officials said that they rely on IRS information and research to establish state enforcement priorities and similarly would look to IRS for penalty research. The academic studies we reviewed concluded, consistent with OSP's view, that measuring the impact of penalties on voluntary compliance is difficult because numerous variables go into determining a taxpayer's decision to voluntarily comply with tax laws. These variables include how risk averse a person is and how likely he or she is to attempt to "get away" with not complying. Nevertheless, some analyses likely would be useful for better understanding the effect of IRS penalties on taxpayers' voluntary compliance. For example, it is widely believed that taxpayers are more likely to comply voluntarily if they believe that the tax code is implemented fairly and consistently across taxpayers. The 1989 IRS Task Force noted that better knowledge of both penalty applications and the perceptions of taxpayers that have been penalized were important in ensuring that taxpayers feel they are being treated fairly. Thus, analyses that determine whether penalties are being consistently applied across IRS so that similarly situated taxpayers receive the same penalties could provide pertinent information. Penalties are also unlikely to have much effect on voluntary compliance if they are not used. Treasury noted the importance of better understanding the relationship between penalty administration and voluntary compliance in its strategic plan for reducing the tax gap. The plan states that Treasury wants penalties to be set at more appropriate levels because some penalties may be too low to change behavior but others may be so high that examiners are reluctant to assess them. The penalties for failure to provide appropriate information returns are an example of penalties that do not appear to be properly calibrated to influence compliance. The instructions for certain information returns require that taxpayers submit the form printed with special ink. Those that fail to do so are subject to a $50 penalty. IRS officials said that this penalty and other format-related penalties are not assessed because the cost of developing and asserting the penalty was not worth it. Instead, IRS officials correct the forms manually. IRS officials said that the penalty would have to be raised substantially to make it worthwhile to assess. The decision to not assess penalties for this error based only on the revenue received from those penalized may have actually undermined voluntary compliance. A version of a popular tax preparation software package informs taxpayers that IRS has accepted forms that are not printed with the special ink. In addition, IRS may be able to do certain longitudinal analyses of whether taxpayers assessed a penalty in one year become more compliant in future years. For example, IRS may be able to determine whether taxpayers that were assessed an underpayment penalty one year were assessed the same penalty in years that followed. Although multiple factors would influence the result, the data might help IRS better understand whether the penalty may have any effect on future compliance. Currently, SB/SE's Research group is working on a project reviewing the First Time Abate policy that may provide some information related to certain penalties' effect on compliance. IRS did not know some information about the results of the policy, including the number of penalties abated under the policy, the amount of money involved, and the number of taxpayers qualifying for the abatement but not receiving it. Additionally, other questions have surfaced, including whether the policy is fair, whether taxpayers receiving the abatement "game" the system by complying for 3 years and then getting the abatement again, and, ultimately, whether the policy should be continued. Results of the project are expected in the summer of 2010. In addition to analyses related to voluntary compliance that could be done internally, by developing a plan, OSP may be able to identify other means of developing information useful to gauging penalties' effect on voluntary compliance. Taxpayer surveys or focus groups, for instance, could provide information on taxpayers' perceptions about the fairness of penalties. IRS could also explore other avenues for supporting research of penalty effectiveness, such as encouraging others to examine the relationship between penalties and voluntary compliance. For example, IRS hosts an annual research conference and 6 forums across the country used to discuss tax administration issues with experts and practitioners. These conferences and forums have been used to discuss compliance issues. At the 2008 IRS Research Conference, papers on measuring or improving tax compliance were presented. These types of studies, done independently, can potentially add valuable thoughts and information to the discussion on how best to encourage and increase taxpayer compliance with tax laws. Finally, in developing a plan, OSP could assess options for overcoming the limitations in available data that officials say impede its ability to both assess the effect of penalties on voluntary compliance and perform more sophisticated reviews of IRS's administration of penalties. The 1989 IRS Task Force report said IRS needed to develop an interactive database available for all management levels to perform ad hoc analysis of penalty administration and voluntary compliance. One of the task force's recommendations was to develop a database that captured the maximum amount of data in order to avoid the expense and delay for special master file extracts. With this database, IRS would evaluate the equitable treatment of taxpayers with respect to all aspects of penalties (e.g., penalty waivers and taxpayer demographic information, such as income). The Enforcement Revenue Information System (ERIS) contains substantial data on all IRS enforcement activities, including penalties. However, ERIS does not meet several of the task force's recommendations. For example, ERIS does not include readily usable information related to taxpayer income or practitioner representation that could be used to determine equitable treatment, develop employee training, or provide taxpayer education outreach. ERIS is not available at all management levels. While the system is used to develop many standard reports, officials say a lack of resources has prevented it from producing additional reports that could increase understanding of penalties. For example, the First Time Abate policy research project is using master file extracts instead of ERIS. In addition, IRS does not routinely use existing penalty data to evaluate the administration of penalties. For example, IRS does not identify penalties with low or high assessment and abatement rates, whether significant differences exist in the abatement rate for high-income taxpayers relative to lower-income taxpayers, whether significant differences exist in penalty size between taxpayers that negotiate an installment agreement relative to those who pay cash, whether returns prepared by a paid preparer are more or less likely to whether penalties are assessed or abated at different rates based on the geographic location where the case is worked, whether individual taxpayers receive more or fewer abatements than businesses for the same penalties, and whether the rate of erroneous penalty assessments is increasing or decreasing. Analyses of trends in penalty data could help IRS identify areas that need further investigation and when penalties may not be applied consistently and fairly. For example, a low assessment rate could indicate that a penalty is effectively deterring noncompliance and that the infrequency of its assessment is appropriate. However, a low assessment rate might also indicate that a penalty has become outdated or is deemed too burdensome to assess. Similarly, a high abatement rate could indicate that IRS officials are hesitant to sustain a penalty because they deem it too harsh for the infraction. IRS changed the process it follows to assess the penalty for an employer's failure to deposit the correct amount of taxes for employees, known as the Failure to Deposit (FTD) penalty, based on a trend analysis done by others. The Taxpayer Advocate Service (TAS) noted in its 2003 report that IRS abated a substantial number of FTD penalties and that the higher the penalty, the more likely the penalty was to be abated. According to IRS, 24 percent of FTD penalties had been abated in 2002 accounting for 62 percent of the assessed dollars. Based in part on TAS's data analysis, IRS changed the procedures it follows to assess the FTD penalty by sending a notice to taxpayers warning them of possible assessment if they did not deposit what they owed. According to a report by the Treasury Inspector General for Tax Administration, this procedural change helped lead to a decrease in penalty assessments and abatements. IRS issued guidance to implement a new penalty for taxpayers that fail to disclose a reportable transaction in a timely manner and began assessing penalties after audits had been conducted. The reportable transaction penalty was effective immediately after its passage in October 2004, making the development of guidance on how IRS would interpret and implement the law important. Within 3 months, in January 2005, IRS issued interim guidance to alert taxpayers and practitioners to the reportable transaction penalty and how IRS planned to implement it. For example, the interim guidance explains the conditions under which IRS would impose the penalty and how it would use the authority to abate the penalty. Officials in the Office of Chief Counsel told us that their criterion for issuing guidance successfully is whether it was released in time to meet their customers' needs. The practitioners we spoke with from two leading practitioner organizations said that issuing the interim guidance in only 3 months was quick and the guidance included the information they needed to understand how IRS would implement the penalty. Those same practitioners were concerned that other practitioners may lack an understanding of all of the requirements for disclosing reportable transactions and suggested that more targeted outreach regarding the reportable transaction penalty was needed, since the penalty is large and the process to get the penalty abated is difficult. As mentioned earlier, the Commissioner of Internal Revenue, or the Commissioner's delegate, can abate the penalty for most types of reportable transactions, but if a taxpayer is penalized for a listed transaction there is no abatement option. These practitioners said that it would be easy to inadvertently violate the provision because taxpayers and practitioners may not realize that transactions that seem reasonable to them and have resulted in no net gain are considered reportable. They noted that if some practitioners or taxpayers are associating this penalty only with abusive tax shelters, they may not realize all of the situations where the requirement to disclose a transaction applies. They added that in the current economic climate there are likely to be many transactions that result in a loss that do not get disclosed on the required form. The practitioners said that they were concerned because taxpayers and other practitioners may not have been in such situations before, and it is likely that IRS will see a significant increase in undisclosed transactions of this nature. In the 2008 Annual Report, TAS also expressed concerns that the reportable transaction penalty is being assessed against taxpayers for which it was not intended and that the penalty is unfairly harsh. According to TAS, the purpose of the penalty is to combat tax shelters by penalizing taxpayers that failed to disclose that they have entered into transactions deemed aggressive by IRS. Because the reportable transaction penalty applies without exception to the failure to include disclosure on a return when required, an improper tax benefit is not required as long as the tax return reflects tax consequences or a tax strategy described in public guidance. IRS officials said they conducted standard educational outreach to the practitioner community regarding the specifics of the reportable transaction penalty. This included sending updates to e-mail groups regarding notices and revenue procedures implementing the new penalty requirements, postings of the latest news to IRS's Web site, and requesting comments on proposed regulations. In addition, officials in OTSA said that they had presented information on the penalty to practitioner groups as part of larger presentations on civil penalties. However, some of the practitioners we spoke with said that in the current substantially altered economic climate, some taxpayers may be caught unaware of the need to disclose a reportable loss transaction and be penalized without a ready avenue for relief. Further, there is little basis to reliably predict which taxpayers might be caught in this situation. IRS officials recognize the need to further raise awareness with taxpayers. They plan to use the National Tax Forums during the summer of 2009 to hold focus groups regarding the reportable transaction penalty. The goal of the focus groups is to reach out to practitioners who may not understand the disclosure requirements and get the thoughts of those who have had experience with the reportable transaction penalty. However, at best, IRS would only reach a small portion of the tax return preparer community in this fashion even though many preparers may end up with clients susceptible to the penalty. Using its standard, low-cost outreach methods to again focus tax preparers and the public's awareness on the disclosure requirements for the reportable loss transaction could reach a wider audience. IRS officials said that the majority of tax returns eligible for assessment of the penalty were not filed until fall 2005, well after the interim guidance had been released, and would not have been audited until 2006. IRS officials said that development of these cases takes time and that IRS could not assess the penalty until there was sufficient basis to believe that a taxpayer had participated in a reportable transaction during a specific taxable year, had a disclosure requirement, and failed to complete the required form. IRS receives the required forms at its Ogden facility but does not assess penalties until after referring cases to an examiner. A penalty is only assessed after an examiner reviews the case because examiners develop related issues that may not be apparent from the face of the form itself. If a taxpayer failed to report participation in a reportable transaction, IRS would not know of the taxpayer's participation until it examined the tax return or investigated the promoter of the transaction. Therefore, the majority of cases for which a penalty may have been appropriate would not have been identified until late 2006 and 2007. According to IRS officials, as of January 2009, IRS had assessed 98 of the penalties for $13.7 million and collected $2.7 million. In addition, 1,188 returns had been assigned to field groups and 50 returns were being reviewed by IRS's Appeals Division. Civil tax penalties play an important role in helping ensure that taxpayers make an honest effort to pay the taxes that they owe. Twenty years after Congress and an IRS Task Force said that IRS needs to conduct more continuous and comprehensive analyses of the penalties it administers and their effect on voluntary compliance, and after having designated an office with those responsibilities, IRS is not meeting this expectation. IRS does not have a plan that identifies how it will carry out these responsibilities and address the resource, methodological, and data limitations that officials say impede its progress. IRS should develop and execute such a plan to better focus its efforts and ensure that penalties are being administered efficiently, effectively, fairly, and consistent with encouraging taxpayers' voluntary compliance. IRS issued guidance for the reportable transaction penalty in a timely manner following its passage in 2004. However, in the current economic climate certain transactions involving losses may subject many unsuspecting taxpayers to a harsh penalty. They may be unaware of reporting requirements because they have never been in such situations before. IRS's planned additional outreach on this penalty is not sufficient. IRS should use its standard, low-cost outreach methods to alert as many tax return preparers and taxpayers as possible about the need to properly report loss transactions to avoid penalties. In order to ensure the most efficient, fair, and consistent administration of civil tax penalties, and that penalties are achieving their purpose of encouraging voluntary compliance, the Commissioner of Internal Revenue should direct OSP to evaluate penalty administration and penalties' effect on voluntary compliance. The Commissioner also should direct OSP to develop and implement a plan to collect and analyze penalty-related data. The plan should address the constraints officials have identified as impeding progress in analyzing penalties. In addition, the Commissioner of Internal Revenue should use IRS's standard, low-cost methods of outreach to again alert as many tax return preparers and taxpayers as possible about the need to properly report loss transactions to avoid penalties. The Deputy Commissioner for Services and Enforcement provided written comments in a May 26, 2009, letter, which is reprinted in appendix I. IRS staff also provided technical comments that we incorporated as appropriate. IRS agreed that OSP will develop a plan to comprehensively evaluate penalty administration and the impact of penalties on voluntary compliance. IRS said that such a plan was important in understanding the relationship between penalty administration and voluntary compliance and in identifying priorities and potential resource needs. Developing a comprehensive plan may take time. In the interim, we believe that the data IRS currently collects can be used to begin useful penalty analyses. For example, IRS could evaluate whether penalties are assessed or abated at different rates based on the geographic location of the office responsible for the case or whether significant differences exist in the abatement rate for high-income taxpayers relative to lower-income taxpayers. Such analyses could be done now and help IRS determine whether penalties are being applied consistently. IRS also agreed to undertake outreach to ensure that taxpayers are again alerted to the situations where disclosure of reportable transactions is needed. 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 Chairman and Ranking Member, House Committee on Ways and Means; the Secretary of the Treasury; the Commissioner of Internal Revenue; and other interested parties. This report also 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 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 report. Key contributors to this report are listed in appendix II. In addition to the contact named above, Jonda R. Van Pelt, Assistant Director; Julia T. Coulter; Benjamin C. Crawford; Alison Hoenk; Ellen M. Rominger; Elwood D. White; and John M. Zombro made key contributions to this report.

Civil tax penalties are an important tool for encouraging compliance with tax laws. It is important that the Internal Revenue Service (IRS) administers penalties properly and determines the effectiveness of penalties in encouraging compliance. In response to a congressional request, GAO determined (1) whether IRS is evaluating penalties in a manner that supports sound penalty administration and voluntary compliance and, if not, how IRS may be able to do so, and (2) whether IRS's guidance for a new penalty for failure to disclose reportable transactions was issued in a timely manner and was useful to affected parties, and whether and how IRS has assessed the penalty. GAO reviewed IRS documents and guidance, and interviewed IRS officials and tax practitioners. The Office of Servicewide Penalties (OSP) does not comprehensively evaluate the administration of civil tax penalties or their impact on voluntary compliance, but a plan could help it do so. OSP has responsibility for administering penalty programs and determining the action necessary to promote voluntary compliance. According to IRS policy, OSP should collect information to evaluate penalties and penalty administration and to determine the effectiveness of penalties in promoting voluntary compliance. This policy is consistent with positions expressed in 1989 by both an IRS Task Force report and by Congress when reforming penalties in 1989, and more recently by the National Taxpayer Advocate. OSP does not fulfill the responsibilities specified in IRS policy. Rather, OSP analysts focus on short-term issues, such as sudden spikes in assessments or abatements. OSP officials said that they have not done more to evaluate the administration of penalties and their effect on voluntary compliance because of resource constraints, methodological barriers, and limitations in available databases. A plan could help IRS focus its efforts and address the constraints to evaluating penalties. In developing a plan, IRS could identify the analyses it should do and the resources needed to do them. OSP could then determine what resources are available to assist it and what additional resources, if any, are needed. A plan also could lay out feasible research for evaluating the effect of penalties on voluntary compliance. For example, fairness is believed to undergird voluntary compliance. Thus, analyses that determine whether penalties are being consistently applied across IRS would provide pertinent information. Data limitations could be addressed in a plan, as well. The Enforcement Revenue Information System (ERIS) contains substantial data on IRS enforcement activities, but does not include all of the information recommended by the 1989 IRS Task Force report. For example, ERIS does not include readily usable information related to taxpayer income that could be used to determine equitable treatment of taxpayers. IRS issued guidance regarding its implementation of a penalty for failure to disclose reportable transactions-- transactions IRS identified as tax avoidance transactions--within 3 months of the provision's passage. IRS officials said that their criterion for issuing timely guidance is whether it was released in time to meet customers' needs. Tax practitioners from two leading practitioner organizations said the guidance was issued timely and included information they needed. However, the practitioners said more targeted outreach about the penalty was needed, specifically regarding reportable loss transactions caused bythe current economic climate in which many taxpayers may experience losses that could trigger the reportable transaction requirements. IRS officials recognize the need to further raise awareness of the penalty, but their planned efforts would reach only a small portion of tax return preparers and taxpayers. As of January 2009, IRS has assessed 98 penalties for $13.7 million.In addition, 1,188 returns had been assigned to field groups.

Under CERCLA, the Environmental Protection Agency (EPA) can compel the parties responsible for hazardous waste contamination to pay to clean up sites. The cleanup costs can be considerable. EPA estimates that the average cost to clean up a site on the National Priorities List (NPL), its list of highly contaminated sites, is $26 million. Although most brownfields are not highly contaminated, cities, lenders, and developers cite the possibility that the liability provisions in CERCLA could be applied to these properties as a major barrier to redeveloping them. Under CERCLA, the responsible parties are strictly liable for cleanup costs--they can be compelled to perform cleanups--and can be subject to "joint and several" liability. Under strict liability, a responsible party is liable regardless of whether the party is at fault. Under joint and several liability, each party can be held responsible for the entire cost of the cleanup. Most states have similar liability laws and develop their own lists of the sites needing cleaning up. EPA defines brownfields as "abandoned, idled or underused industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination." When industries choose to avoid such potential problems by locating on uncontaminated sites rather than on brownfields, they may seek suburban "greenfields." Although these sites may require building additional infrastructure, such as access roads and sewer systems, that brownfield sites would not, the developers may still view greenfields as more cost-effective than the sites requiring a cleanup. When the developers choose greenfields over brownfields, city residents lose employment opportunities, city governments lose tax revenue, and the new development contributes to urban sprawl. Several legislative proposals that would address brownfield issues, including S. 1285, have been introduced. Also, the President recently proposed tax incentives for those who voluntarily clean up brownfield properties. Besides these proposals, other executive agencies have provided funds for brownfield redevelopment. EPA issued a "brownfields action agenda" in 1995, which, among other things, provides 50 grants to local governments to fund a wide variety of 2-year demonstration projects that address brownfield problems. It has also removed nearly 28,000 sites from its list of potential NPL sites, thereby potentially stimulating redevelopment at these sites by reducing the possibility of Superfund liability. Additionally, EPA clarified its enforcement policies toward lenders, property purchasers, and certain property owners to alleviate their concerns and facilitate their involvement in the cleanup and redevelopment of brownfields. The abandoned or idled industrial sites that could be classified as brownfields probably number in the tens of thousands, totaling hundreds of thousands of acres, but no official nationwide count exists. Some of the research and advocacy organizations involved in urban issues have developed estimates, and municipalities have also estimated the potential number of brownfield sites, or acreage, within their borders. However, any estimate of the number of brownfields is likely to be imprecise because the cities and others measuring the number of brownfields often use different techniques and definitions. The researchers at the Urban Land Institute estimated that about 150,000 acres of abandoned or underused industrial land exist in major U.S. cities.This estimate excludes some commercial properties that could also be classified as brownfields; those excluded are sites with underground storage tanks, such as former gas stations, or dry cleaners. Therefore, this estimate represents the lower end of the range of estimates. While the federal government and the states have not identified and listed brownfield properties, several local governments that received grants under EPA's brownfields pilot program have also developed estimates of brownfield acreage within their borders. (See table 1). In addition, the U.S. Conference of Mayors, an organization for local government issues, recently surveyed its member cities about the amount of brownfield acreage in their cities. (See app. I for a summary of the survey results for cities with populations over 100,000.) As with the cities participating in EPA's brownfields program, these estimates varied considerably, from a low of 39 acres in Houston (the estimate was limited to a 20-square-mile area of the city targeted for redevelopment) to a high of 14,000 acres in Cleveland, depending, in part, on how the cities defined and counted their brownfields. The researchers and the cities have used different techniques and definitions in measuring the number of brownfields. For example, the Urban Land Institute's estimate used a relatively narrow definition of a brownfield site because it focused primarily on the industrial corridors in larger cities. The number of brownfield acres could actually be greater than that estimate if it were based on the broader definitions that some local governments used in preparing their own estimates. Table 2 outlines the ways in which brownfield definitions vary. The potential of being held liable under CERCLA for the contamination on brownfield properties is a significant barrier to redevelopment, according to lenders, property purchasers such as developers, and property owners. Most brownfields are not likely to be added to the list of potential NPL sites because they are not severely contaminated. However, these investors still are wary of the cleanup liability provisions of both federal and state legislation because these can apply even at non-NPL sites. As a result, lenders and developers may avoid investing in potentially contaminated properties, and current owners may avoid selling them. To lower the barriers to brownfield redevelopment, S. 1285 would limit the liability of lenders and such property purchasers as developers under certain conditions and also would provide assistance for the state programs that encourage the voluntary cleanup of hazardous waste sites. However, these initiatives will not remove all barriers to brownfield redevelopment, such as the initial cleanup costs or high urban property taxes, that may still make them unattractive to business in comparison with suburban greenfields. The liability for the costly cleanup of environmental contamination is a barrier to brownfield redevelopment because it discourages lenders, developers, and property owners from participating in these projects. Under CERCLA, the owners of property containing hazardous substances are among those who can be held liable for the cleanup costs incurred by EPA, the states, and other responsible parties, regardless of whether the property is currently listed on the NPL. The lenders who hold a security interest in contaminated property may be considered property owners under CERCLA if they participate in the management of the property. The developers who purchase property may also become liable for any contamination later found at the site. Former property owners may also be liable for the cleanup costs if the contamination occurred during their ownership of the property. Thus, even the suspicion of current or prior contamination may make lenders less willing to provide funds, developers less willing to purchase property, and owners less willing to place their property on the real estate market. The Congress and EPA have already taken some steps to limit lenders' liability. Under CERCLA, a party (such as a bank) that holds the evidence of ownership (such as a mortgage) in the property to protect its interest, and does not participate in the management of the property, is not considered a property owner. However, the statute does not define what actions constitute "participation in the management of the contaminated property," and the courts have given varying meaning to this phrase. As a result, many lenders are reluctant to finance the purchase of property they suspect is contaminated, or to foreclose on such property in order to avoid the potential liability for cleanup. In an attempt to clarify these matters, EPA issued a rule in 1992 that outlined the actions a lender could take without becoming subject to liability. However, in 1994 a federal appeals court held that EPA was not authorized to issue the rule. After the rule was invalidated, EPA and the Department of Justice issued a policy stating that they intend to apply the provisions of the rule when deciding whether to take enforcement action against lenders. However, the lenders can still be sued by third parties seeking contributions for the cost of the cleanup. The Senate bill proposes two actions specifically designed to lower CERCLA's liability barriers to redeveloping brownfields. First, the bill would define in detail the circumstances under which a lender who holds a security interest could act to protect that interest without becoming liable for cleanup costs. It also places a cap on the total amount that lenders would have to pay in the event they are liable. Second, the bill would limit the liability of certain purchasers of property, such as developers, if they assess a site for contamination before buying it and find none. Because the Senate bill does not exempt property owners from liability, these owners may continue to avoid selling contaminated properties because they fear drawing attention to the contamination and thus incurring cleanup costs. However, the bill authorizes funds from the Superfund trust fund to be used to help the states develop their voluntary cleanup programs. These programs often provide liability relief from the states' hazardous waste laws to developers or property owners that volunteer to clean up contaminated sites. Resolving CERCLA's liability concerns may not address all of the barriers to redeveloping brownfields. According to representatives of several large banks, the contamination at brownfields still generally makes them risky investments. Because of the potential contamination, developers have difficulty in predicting what the cost to clean up a site will be and when it will be ready for redevelopment; as a consequence, a return on the investment is uncertain in comparison with the potential return on a project on a greenfield site. Lenders, developers, and property owners could also be liable under other federal laws, such as the Resource Conservation and Recovery Act, or the states' hazardous waste laws, potentially increasing costs and slowing down the project. Also, it may still be difficult for some of these urban industrial sites to compete with greenfields even if they are not contaminated. Although brownfield sites have some advantages for developers, such as having the necessary water, power, and road infrastructure in place to support a business, while greenfield sites may lack this infrastructure, some brownfield properties present other problems that can be associated with urban areas, such as higher property taxes caused by a decline in the tax base. These problems may be even more intractable barriers to redevelopment than Superfund. The interest-free loans of $100,000 to $200,000 to municipalities proposed in S. 1285 to fund site assessment activities should be sufficient to cover the average cost at a brownfield site. Before brownfields can be redeveloped, it is necessary to perform a site assessment to determine the nature and extent of the contamination present. Because the site assessment requires research into a site's history and a technical analysis of the site's conditions, a substantial expenditure may be involved. For most brownfield sites, assessment costs could range from an average of $60,000 to $85,000 to more than $200,000; thus, the loan amounts proposed in S. 1285 would cover the costs in most cases. However, the costs could be higher for very large sites or those with complex contamination. Conducting a site assessment is the first step in deciding how to clean up and redevelop a site. The parties conducting these assessments generally use standard processes developed by the American Society for Testing and Materials (ASTM). Under this system, the property owners, investors, or lenders hire a contractor to conduct a Phase I assessment. This phase involves identifying potential contamination by (1) reviewing the site's historical records, (2) interviewing those with knowledge of the former activities at the site, and (3) visually inspecting the site for physical evidence of hazardous waste. If the Phase I assessment turns up any evidence of environmental contamination, a Phase II assessment is necessary. In this phase, environmental professionals identify the nature and location of the contamination through sampling and analyzing materials from the site's structures and environmental media, such as soil and groundwater. As a final stage, the environmental professionals prepare a plan for cleaning up the contamination identified in Phase II. These plans are often subject to review and approval by the local or state government. We interviewed cleanup contractors and city officials that have overseen the assessment and redevelopment of brownfields to determine the costs of assessing a 10- to 20-acre site. These officials told us that developers are typically interested in properties ranging from 10 to 20 acres in size because these would support a substantial new business, such as a manufacturing facility or a business park. Some small commercial sites, such as former gas stations, are often consolidated into larger parcels to be economically viable for redevelopment. See table 3 for a summary of these officials' estimates. On the basis of their experience, these city officials and a contractor concluded that the proposed loan of $100,000 per year would be sufficient to assess a site and prepare a cleanup plan for most sites. Costs in the high range could be encountered at larger properties or sites with complex contamination, such as those with extensive groundwater contamination, which is costly to assess. These sites could require more than the proposed $100,000 per year and could also occasionally exceed the $200,000 loan total. Local officials told us that some flexibility to exceed the $100,000 per year limit and the $200,000 total would be helpful for such sites. We provided a draft of this report to EPA for its review and comment. We met with EPA officials that manage EPA's brownfield initiatives, including the Director of the Outreach and Special Projects Staff in the Office of Solid Waste and Emergency Response, and an attorney with the Office of Enforcement and Compliance Assurance. They generally agreed with the information in the report. However, they pointed out that the estimates of the number of brownfields in the United States vary widely and that the Urban Land Institute's estimate is likely to be conservative. We have provided more details on the sites potentially excluded from this estimate. The officials also explained that the loan program provided for in S. 1285 could be difficult and costly for EPA to administer and instead preferred the provision of grants to local governments. They also noted a number of policies that EPA has issued to help remove some of these liability barriers to brownfield redevelopment. We have recognized some of these policies, as appropriate, throughout the report. To estimate the inventory of brownfields in the United States, we contacted the research organizations attempting to inventory brownfields. We also contacted local officials in five cities that may have developed an inventory as part of their application for a grant under EPA's brownfields pilot program. To identify the difficulties in redeveloping brownfields, we interviewed federal officials involved in EPA's brownfields program, officials of five states' voluntary cleanup programs, local officials with experience in redeveloping brownfields, and representatives of lending institutions. To determine the potential cost of assessing brownfield sites, we contacted city officials in eight cities that have already redeveloped brownfield properties and environmental cleanup contractors with experience in working with brownfields. Because of time constraints, we could not independently survey cities to identify the number of brownfield properties within their boundaries and relied on the information that various cities had already compiled. We also reviewed the existing literature on identifying and redeveloping brownfields. We conducted our review from November 1995 through April 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. Please call me at (202)512-6112 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix II. The U.S. Conference of Mayors, an organization for municipalities, completed a survey of its member cities in January 1996. The survey asked the cities to provide information on the brownfields within their borders. Table I.1 summarizes the survey results for cities with populations over 100,000, for those cities that provided estimates in acres. Population (1992) Eileen Larence Katherine Siggerud Rosa Maria Torres Lerma The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed proposed legislation to redevelop abandoned, urban industrial sites, focusing on: (1) the number of potential sites nationwide; (2) impediments to redeveloping sites posed by the Superfund program; and (3) whether proposed loans to local governments are sufficient for conducting site assessments. GAO found that: (1) researchers estimate that about 150,000 acres of abandoned or underused industrial land exists nationwide; (2) lenders, property buyers, and property owners are reluctant to redevelop these sites because federal and state environmental laws may require expensive cleanups of latent industrial wastes before property improvements can be made; (3) federal law limits the liability of a party that holds ownership in a property but does not manage the property; (4) proposed legislation would limit the amount lenders would have to pay in the event they are liable, limit the liability of property buyers who assess a site for contamination before buying it, and provide assistance for state programs that encourage voluntary cleanup of industrial waste sites; (5) even if the liability of lenders and property buyers is limited, abandoned industrial sites might continue to be viewed as risky investments due to the possibility of contamination; and (6) proposed legislation would provide interest-free loans to localities to conduct site assessments to determine the extent of contamination.

FOIA establishes a legal right of access to government information on the basis of the principles of openness and accountability in government. Before its enactment in 1966, an individual seeking access to federal records faced the burden of establishing a "need to know" before being granted the right to examine a federal record. FOIA established a "right to know" standard, under which an organization or person could receive access to information held by a federal agency without demonstrating a need or reason. The "right to know" standard shifted the burden of proof from the individual to a government agency and required the agency to provide proper justification when denying a request for access to a record. Any person, defined broadly to include attorneys filing on behalf of an individual, corporations, and organizations, can file a FOIA request. For example, an attorney can request labor-related work compensation files on behalf of his or her client, and a commercial requester, such as a data broker that files a request on behalf of another person, may request a copy of a government contract. In response, an agency is required to provide the relevant record(s) in any readily producible form or format specified by the requester unless the record falls within a permitted exemption. Nine specific exemptions can be applied to withhold, for example, classified, confidential commercial, privileged, privacy, and several types of law enforcement information. (See appendix II for an explanation of the nine exemptions.) Since its enactment 50 years ago, FOIA has been amended to increase openness and access to government information. As the overseer of agencies' FOIA implementation, in October and November 2008, Justice issued guidance to assist federal agencies in implementing the FOIA amendments of the 2007 OPEN Government Act. In September 2013, Justice incorporated in the procedural requirements chapter of the Department of Justice Guide to the Freedom of Information Act procedures for agencies to follow when responding to FOIA requests. Specifically, the guidance discusses how requests are to be processed-- from the point of determining whether an entity in receipt of a request is subject to FOIA, to responding to the review of an agency's decision regarding a request on an administrative appeal. Agencies are generally required to make a determination on a FOIA request within 20 working days of receiving a request. A request may be received in writing or by electronic means. Once received, the request goes through multiple phases, which include assigning a tracking number, searching for responsive records, processing records, and releasing records. FOIA allows a requester to challenge an agency's final decision on a request through an administrative appeal or a lawsuit. Specifically, a requester has the right to file an administrative appeal if he or she disagrees with the agency's decision on their request. Agencies generally have 20 working days to respond to requesters regarding administrative appeals. A requester should generally exhaust their administrative remedies, such as filing an administrative appeal, before a lawsuit can be filed. If a request is denied on appeal, the requester then has 6 years to file a lawsuit pertaining to the request. Further, if a requester substantially prevails in a FOIA lawsuit, the court may assess against the government reasonable attorneys' fees and litigation costs. Figure 1 provides a simplified depiction of the federal government's FOIA administrative appeal and litigation process. FOIA assigns Justice the responsibility to develop guidance for federal agencies on the implementation of the law and to oversee the agencies' compliance with FOIA requirements. Justice also provides training to agencies on all aspects of FOIA and prepares annual summary reports on agencies' FOIA processing and litigation activities. These activities are carried out by the department's Office of Information Policy, as follows: Develops guidance. The office develops guidance and best practices documents to assist federal agencies in complying with FOIA requirements. For example, it has developed guidance for ensuring timely determinations on requests; expediting the processing of requests; and reducing backlogs. It also has developed guidance to inform agencies on what information should be contained in their Annual FOIA Reports, to include information on agencies' overall processing and litigation costs. In addition to the guidance, the office has documented best practices for improving transparency. Oversees agency compliance. To oversee FOIA operations, the office collects information from agencies, including through Annual FOIA Reports and Chief FOIA Officer Reports. These reports include information such as the number of FOIA requests received and processed in a fiscal year, the disposition of requests processed, and total costs associated with processing and litigating requests. Provides training. The office conducts training sessions on a variety of FOIA-related topics. For example, it conducts an annual training class that provides a basic overview of the act. It also offers a seminar for attorneys that handle FOIA litigation, which includes lectures and instruction on, for example, a successful litigation strategy. Hands-on courses focused on the procedural requirements involved in processing a request from start to finish also are offered. Prepares annual reports. As required by FOIA, the office prepares an annual report--Justice's Litigation and Compliance Report. This report, which is submitted to Congress, describes the department's efforts during the year to encourage compliance with the act. It also provides a listing of all FOIA lawsuits filed or decided in that year, along with information on the exemptions involved in each case, the disposition of each case, and any court-assessed costs, fees, and penalties. In addition to the aforementioned responsibilities, Justice is responsible for representing federal agencies if they are sued for an action or inaction under FOIA. The department's attorneys and support staff are assigned to work on each lawsuit. (The agency subject to the lawsuit also plays a supporting role.) Justice's Civil Division and the 93 United States Attorneys' Offices handle the defense of the majority of the lawsuits on behalf of other federal agencies. According to the department, the United States Attorneys' Offices handle about 70 percent of the lawsuits, while the Civil Division handles most of the remaining lawsuits brought against agencies. A small percentage of FOIA lawsuits are handled by other components of Justice, such as the Tax Division. However, if a lawsuit involves multiple agency defendants, a United States Attorneys' Office may be primarily responsible for the lawsuit. Once a case is assigned to a specific division within Justice, the attorneys use various case management systems to track the lifecycle of the lawsuit (e.g., from receipt of complaint to final disposition). Specifically, Justice identified three case management systems that are used by the United States Attorneys' Offices and the Civil Division: The United States Attorneys' Offices primarily use two systems to track lawsuits--the Legal Information Office Network System (LIONS) and the United States Attorneys' Resource Summary Reporting System (USA-5). LIONS allows individual Attorneys' Offices to maintain, track, and report information on pending employee workloads and lawsuit assignments. This system contains data fields for limited, pre-specified case-specific information, such as the amounts of relief requested, estimated, or granted. FOIA lawsuits are specifically identified through a "cause of action" field in LIONS. However, according to Justice officials in the Executive Office for United States Attorneys, FOIA lawsuits can also be included under other categories in this system, such as categories for lawsuits related to the Privacy Act or miscellaneous claims against the government. The United States Attorneys' Offices also use USA-5 to track lawsuits. Within this system, attorneys do not track the amount of time spent on individual lawsuits, but instead, the amount of time spent on particular program categories. FOIA litigation lawsuits are generally included in the "Program Litigation" category, which is a category that includes programs others than FOIA, such as administrative matters, veterans' re-employment rights, and the Privacy Act. Justice's Civil Division uses its automated case management system (CASES) to track lawsuit-related information. According to the department, this system is primarily used for assigning lawsuits to a particular section within the Civil Division; routing case-related mail; identifying the attorneys handling a particular case; and generating statistical, management, and budget information, such as the amount of time spent by an attorney on a particular lawsuit. The system may also include information on the amount of attorneys' fees and costs paid in a lawsuit, if applicable. As previously mentioned, Justice annually publishes a litigation and compliance report that is required by FOIA. This report provides information on all of the FOIA lawsuits filed in federal district court each year, as derived directly from the federal courts' docketing systems through the Public Access to Court Electronic Records (PACER) system. Justice's litigation and compliance reports indicated that 3,350 FOIA lawsuits were filed across the federal government between 2006 and 2015, as shown in table 1. The litigation and compliance reports also identify the FOIA lawsuits for which a decision was rendered by federal courts each year. According to the department, the report data are compiled through a summary of court decisions issued by the Office of Information Policy on a weekly basis and a survey of PACER data. The reports provide a description of the disposition in each FOIA case, any claimed exemptions, and any costs, fees, or penalties assessed by the courts. For the 112 selected FOIA lawsuits where the plaintiffs had prevailed, litigation-related costs could not be fully determined. Litigation-related costs associated with such lawsuits are comprised of (1) Justice's costs for defending the lawsuits on behalf of agencies, (2) the agencies' respective costs for the lawsuits, and (3) any attorneys' fees and costs as assessed by a court or based on settlement agreements awarded to plaintiffs. However, Justice does not collect and track all of the costs that its attorneys and staff incur for individual lawsuits in which the plaintiffs prevailed. Moreover, agencies involved in the selected lawsuits did not have mechanisms in place to track FOIA litigation costs where the plaintiff prevailed, thus hindering their reporting of these costs for 55 of the selected lawsuits. Justice's and the agencies' FOIA officials stated that they had not taken steps to track their expenses for individual lawsuits where the plaintiffs prevailed because there is no statutory requirement for them to do so. Further, while Justice's annual Litigation and Compliance reports contained information on attorneys' fees and costs assessed by the courts as required by FOIA, the information was not comprehensive because it did not reflect attorneys' fees and costs awarded to plaintiffs in settlement agreements or changes in award amounts due to the appeals process. While Justice defends FOIA lawsuits on behalf of the federal government, it does not track all costs that the department incurs in defending individual lawsuits in which the plaintiffs prevailed. As noted previously, Justice relies on its three case management systems to manage the lawsuits. However, officials in the United States Attorneys' Offices stated that their case management systems--LIONS and USA-5--do not track any expenses related to FOIA lawsuits. According to the officials, these systems were not designed to track costs that the department incurs in defending individual lawsuits. Furthermore, these systems are not used by the department to specifically track FOIA lawsuits in which the plaintiffs prevailed. Officials in the Civil Division stated that their case management system, CASES, includes data fields that can be used to track time spent on each FOIA lawsuit and the award of any attorneys' fees and costs paid to the plaintiffs. However, according to the officials, the department does not require its staff to enter such data into these fields. Accordingly, of the 112 selected lawsuits, Justice provided cost information, totaling about $97,000 for 8 lawsuits in which the plaintiffs substantially prevailed. Officials in the Office of Information Policy, the United States Attorneys Offices, and the Civil Division told us that the department did not provide cost information for the other 104 lawsuits because it could not easily or accurately calculate hours and the value of the time spent by the department's attorney or other staff that worked on the lawsuits. They stated that the department did not have tracking capabilities that would allow staff to easily produce the information without significant resources. For example, they explained that providing information on all 112 lawsuits would be a time-consuming task that would require staff to gather piecemeal data from each of the 93 United States Attorneys' Offices throughout the country. Further, the officials acknowledged that their systems do not contain comprehensive cost information on individual FOIA lawsuits that would enable them to easily or accurately calculate the total time spent by their attorneys and other staff on the lawsuits. They stated that there is no statutory requirement for them to have such information. In the absence of a requirement for Justice to collect and track comprehensive information on its expenses incurred for individual FOIA lawsuits where the plaintiffs prevailed, the ability to reliably ascertain the department's costs associated with such lawsuits would be difficult. Federal agencies have received guidance from Justice that asks them to provide their total litigation-related costs to the department as part of the annual FOIA reporting process. The guidance states that the agencies' total litigation-related costs are to include the salaries of personnel involved in the litigation, litigation overhead expenses, and any other FOIA litigation-related costs. In addition, it states that an agency's annual FOIA budget may be used as a resource for determining and reporting the FOIA litigation expenses. In response to the guidance, the agencies involved with the selected lawsuits had provided litigation-related cost information to Justice as part of their annual reporting on FOIA. For fiscal years 2009 through 2014, these agencies collectively reported costs totaling $144 million for all of the FOIA lawsuits that they defended. However, with respect to cost data at the individual lawsuit level, 17 of the 28 agencies provided cost information in response to our data collection instrument for 57 of the 112 lawsuits where the plaintiff substantially prevailed. According to this information, the agencies incurred approximately $1.3 million in FOIA litigation-related costs for these lawsuits during fiscal years 2009 through 2014. For example, the Department of Energy reported $76,440 in litigation-related costs for its 2 lawsuits, while the Social Security Administration reported $7,284 in litigation-related costs for its 3 lawsuits. (Appendix III provides descriptive examples of the 112 selected lawsuits and appendix IV identifies any costs reported by the 28 agencies for these lawsuits.) As part of their responses to our data collection instrument, each of these 17 agencies told us they had a system or process in place for tracking FOIA litigation-related cost information. The agencies described various systems or processes that they used. For example, the Internal Revenue Service stated that it tracked FOIA litigation cost data in a database that it used to collect information related to all of its lawsuits. Similarly, the Federal Election Commission provided cost data and noted that staff members in its Office of General Counsel were required to file monthly time reports in an electronic case management system that showed the lawsuits on which they had worked. Further, the Nuclear Regulatory Commission stated that its staff reported the hours worked on lawsuits and had time codes for the lawsuit in our review. Other agencies also reported that they were able to provide cost data by going back to specific lawsuit case files or time and attendance systems to determine the information. For example, Social Security Administration officials stated that agency's attorneys input their time spent on individual lawsuits into a docket management information system. Additionally, the General Services Administration said it based its data on a review of case notes and e-mails from the attorneys that worked on specific cases. However, for the remaining 55 selected lawsuits where the plaintiff substantially prevailed, litigation-related costs were not provided by the responsible agencies. Officials representing these agencies generally stated that they did not have mechanisms in place to track FOIA litigation- related costs where the plaintiffs prevailed. Moreover, they pointed to the fact that Justice's guidance does not require them to collect and report this information. For example, an Associate Deputy General Counsel at the Department of Defense noted that the department's attorneys did not track their work on any particular FOIA cases and that there were no other offices within the department that tracked the hours worked by their staff on individual cases. Similarly, FOIA officials at the Departments of Transportation, Treasury, Homeland Security, Agriculture, State, Justice, Health and Human Services, Education, and Commerce; the Environmental Protection Agency; the Office of Personnel Management; the Office of Management and Budget; the Central Intelligence Agency; the Consumer Financial Protection Bureau; and the Federal Housing Finance Agency stated in their responses that they could not provide information on specific FOIA lawsuits because the data were not being tracked or because staff that had worked on the lawsuits were no longer employed at these agencies and, thus, were not available to reconstruct the data. Requiring agencies to collect information on actual costs incurred in defending FOIA lawsuits, including those in which the plaintiffs prevailed, could enhance transparency in federal government operations. However, such a requirement would likely necessitate costly modifications to agencies' information systems and business processes. FOIA requires Justice to report on attorneys' costs and fees assessed by the courts and associated with lawsuits for which decisions have been rendered by the end of a calendar year. Specifically, Justice is to annually report to Congress a listing of the number of FOIA cases handled by each agency; the exemption(s) involved in each case; the disposition of each case; and the cost, fees, and penalties assessed and awarded to plaintiffs by the courts. To meet this requirement, Justice has posted annually on its website using information derived from the federal courts' docketing system--the Public Access to Court Electronic Records-- its Litigation and Compliance reports. Specifically, the Litigation and Compliance reports include information for lawsuits with decisions rendered by the end of the calendar year, the disposition of each lawsuit, the exemptions involved, and fees awarded by the courts, if any. These reports also include any decisions made by the appellate courts and, to the extent available on PACER, any stipulations of dismissals filed by the parties due to settlement. For fiscal years 2009 through 2014, the department reported that the courts had awarded $587,438 in attorneys' fees and costs to the attorneys representing the plaintiffs in 10 of the 112 selected lawsuits. However, for these 10 lawsuits, Justice's reported cost information differed from the cost information provided by agencies for 8 lawsuits. Specifically, the agencies reported that they had paid higher award amounts than what were reported by Justice. Conversely, for 1 lawsuit, the amount of attorneys' fees and costs that the agency reported paying was less than what was reported by Justice. For the other lawsuit, the appeal process was ongoing and no attorneys' fees and costs had been paid as of June 2016. The differences in Justice's and the agencies' reporting on these lawsuits, which amounted to $58,576 (more than what agencies said had been paid), are shown in table 2. According to the department, the differences in the awards of attorneys' fees and costs are due to the appeals process and the settlement agreements between the respective agencies and the plaintiffs. For example, during the appeals process, courts may change their rulings and either increase or decrease the awards of attorneys' fees and costs. Further, when a plaintiff and an agency enter into a settlement agreement, the court documents may not reflect the agreed upon amounts to be awarded. According to officials in Justice's Office of Information Policy, the inclusion of costs resulting from settlement agreements and appeals is not required to be included in the department's reports to Congress. Since Justice is not required to track and report on appeals, which can impact the total amount awarded to a plaintiff, the actual costs associated with the awards of attorneys' fees and costs may not be known. Requiring Justice to include in its Litigation and Compliance reports the awards of attorneys' fees and costs resulting from appeals and settlement agreements could keep Congress and the public more informed of the results and costs associated with FOIA lawsuits. However, it should be noted that such a requirement could be costly to Justice. Thus, a consideration of both the costs and benefits of such a requirement would assist Congress in determining whether a requirement to include information on appeals and settlement agreements would lead to an efficient use of government resources. Each year, federal agencies are subject to hundreds of lawsuits from FOIA requesters whose requests were denied or not responded to in a timely manner. Agencies subject to the lawsuits and Justice incur costs to defend against these lawsuits and may, in lawsuits where the plaintiff prevailed, be ordered to pay the plaintiff's attorneys' fees and costs. However, the costs associated with FOIA lawsuits where the plaintiff prevailed cannot be fully determined because not all federal agencies, including Justice, track their costs at the individual lawsuit level. Moreover, the data regarding attorneys' fees and costs reported by Justice do not capture changes in award as a result of appeals or settlement agreements. Although requiring Justice and agencies to report actual cost information on lawsuits, and tracking the appeals process and settlement agreements between agencies and plaintiffs could lead to better transparency and openness in federal operations, there would be costs associated with doing so. Considering these costs relative to the potential benefits could help in determining whether establishing such a requirement would be an effective means of enhancing FOIA litigation- related operations. To provide greater transparency in the reporting of FOIA litigation costs, Congress could consider requiring Justice to provide a cost estimate for collecting and reporting information on costs incurred when defending lawsuits in which the plaintiffs prevailed. Further, Congress could consider amending the act to require Justice to reflect in its Litigation and Compliance reports, changes in the award of attorneys' fees and costs resulting from the appeals process and settlement agreements between agencies and plaintiffs, if deemed to be cost-effective. We received written comments on a draft of this report from Justice. In its comments (reprinted in appendix V), Justice stated that, in the face of ever-increasing numbers of FOIA requests, the department appreciated our recognition of the need to balance the cost of additional reporting against the benefit it could provide to achieve the goal of good FOIA administration. Further, the department noted a number of steps that it had taken to provide new information on agency FOIA administration, both at the administrative stage, which comprises the majority of FOIA activity, and for requests that reach litigation. In addition, Justice provided technical comments, which we incorporated, as appropriate. Beyond Justice, we sought comments on the draft report from the 27 other agencies included in our study. Of these, 20 agencies told us they had no comments on the draft report. The 7 remaining agencies--the Departments of Commerce, Interior, and Transportation; the Nuclear Regulatory Commission, the Social Security Administration, the Federal Election Commission, and the U.S. Railroad Retirement Board--provided technical comments. We also incorporated these comments, as appropriate. We will send copies of this report to other interested congressional committees, the Attorney General, the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Labor, State, Transportation, the Treasury, and Veterans Affairs; the administrators of the Environmental Protection Agency, General Services Administration; the commissioners of the Nuclear Regulatory Commission and the Social Security Administration; the directors of the Office of Personnel Management, Office of Management and Budget, Federal Housing Finance Agency, and the Consumer Financial Protection Bureau; and the Chairman of the Railroad Retirement Board. In addition, this 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) 512-6304 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 VI. Our objective was to determine the Freedom of Information Act (FOIA) litigation-related costs incurred by federal agencies for lawsuits in which the plaintiff substantially prevailed. To address the objective, we obtained and reviewed the Department of Justice's (Justice) Litigation and Compliance Reports, covering the time period from January 2009 through December 2014, to identify FOIA lawsuits where decisions were rendered. Our review led to the identification of 1,672 lawsuits for that time period. Of this total number of lawsuits, we identified those lawsuits in which information indicated that the courts or a stipulation had awarded attorneys' fees and costs to the plaintiffs. (For this study, we established that if a plaintiff was awarded attorneys' fees and costs, then the plaintiff had substantially prevailed in the lawsuit). We did not include lawsuits where the plaintiffs may have substantially prevailed in the lawsuits but were not awarded attorneys' fees and costs. This resulted in our selection of 112 lawsuits across 28 federal agencies where the courts had awarded attorneys' fees and costs. For the 28 agencies, we developed and administered a data collection instrument to obtain information on the agencies' respective litigation costs for the identified lawsuits and the attorneys' fees and costs paid to the plaintiffs. We requested the following for each lawsuit: (1) the number of hours spent by each employee (e.g., attorney, administrative assistant, and FOIA staff) that worked on the lawsuit; (2) the annual salary for each employee that worked on the lawsuit; (3) an explanation as to whether the lawsuit was or was not exclusively related to FOIA; (4) the amount of litigation overhead and any other FOIA litigation-related expenses associated with the lawsuit; and (5) the total amount of judgment paid, including date paid, if applicable. We administered the data collection instrument in February 2016 and received responses from all 28 agencies. To test the accuracy and completeness of data provided to us by agencies we performed the following procedures: compared cost data against available court records; interviewed FOIA staff and legal counsels in the Departments of Agriculture, Defense, Housing and Urban Development, and State, and the Environmental Protection Agency and the Office of Management and Budget to determine what cost data are collected and reported; and determined agencies' processes in reporting estimated hours spent on litigating FOIA-related lawsuits. Based on the results of our testing, we believe the data were reliable enough for the purposes used in this report. For agencies that had an established process for collecting and reporting lawsuit information, we calculated the total cost for the agency by multiplying time spent by staff on a case with the employee's hourly salary rate and added any applicable overhead costs reported by the agency. To determine the costs incurred by Justice on these lawsuits, we first determined how Justice tracks lawsuit information and attorney time spent on each lawsuit. We then requested and received documentation on case management systems used across Justice's divisions and reviewed this documentation to determine if these systems had capabilities to track the amounts of time attorneys and other staff spent working on FOIA litigation lawsuits. We reviewed system documentation for the following Justice case management systems: United States Attorneys' Resource Summary Reporting System (USA-5), Legal Information Office Network System (LIONS), Civil Division's Case Management System (CASES), and Tax Division's Case Management System (TaxDoc). We then requested information from these systems on the amounts of time recorded by Justice staff for the 112 lawsuits included in our study. We supplemented this information by interviewing Justice officials in the Office of Information Policy, the Executive Office for United States Attorneys, and the Civil Division. To determine the details of selected lawsuits, we reviewed case information and court documentation for each of the 112 lawsuits obtained from www.foiaproject.org, CourtLink, and Public Access to Court Electronic Records (PACER) and selected a variety of types of lawsuits to illustrate in our report. To determine attorney fees and costs for the 112 lawsuits, we reviewed Justice's annual litigation and compliance reports, where information on attorney fees and costs awarded by the court to the plaintiff is reported. We then compared these amounts to the totals reported by agencies on what they paid to plaintiffs to identify any differences. In lawsuits where there was a difference, we asked Justice and the agencies for information on why the differences could have occurred. We conducted this performance audit from September 2015 through September 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Freedom of Information Act (FOIA) prescribes nine specific categories of information that are exempt from disclosure, which are described below. Of the 112 lawsuits selected where the plaintiff substantially prevailed, a lawsuit was filed either because (1) the agency failed to respond within the statutory time frame (58 lawsuits); (2) the agency failed to provide all of the documentation in the FOIA request (46 lawsuits); or (3) for other reasons, such as denial of a fee waiver or appealing a dismissal of a claim (8 lawsuits). The following examples illustrate the reasons lawsuits were filed and the corresponding decisions rendered that resulted in payments of attorneys' fees and court costs to the plaintiffs. Failure to Respond Within the Statutory Time Frame In May 2011, a requestor sought records from the Federal Election Commission related to correspondence pertaining to agency business between three commissioners and any outside entities. The Federal Election Commission acknowledged receipt of the request by e-mail the next day and granted the requestor a fee waiver. Two months after the initial request was submitted, the Federal Election Commission informed the requestor that it had received the first set of potentially responsive documents from its searches, was still performing more searches, and was reviewing thousands of potentially relevant documents. The requestor claimed the agency had said it could release the first batch of responsive documents within 2 weeks and filed suit when the agency failed to do so. The Federal Election Commission responded with the first set of records about 3 weeks later and completed its response 10 days after that by releasing two more batches of records. At that time, the agency provided an explanation of its exemption claims and told the requestor that it could file an appeal. The court ultimately found that the agency acted unreasonably in withholding documents in response to the FOIA request and ordered it to pay the requester $153,759 in attorneys' fees. In March 2013, a requestor asked the Office of Management and Budget to provide documents relating to communications to or from Congressional staff which contained information on federal expenditures. After 4 months with no response, the requestor filed a lawsuit. The Office of Management and Budget and the requester entered into a settlement agreement resulting in the lawsuit being dismissed and the agency paying $4,182 in attorneys' fees and costs. In March 2012, a requestor sought documentation related to a warrant search. The Federal Bureau of Investigation produced more than 1,000 pages of responsive records and withheld approximately 600 under the Privacy Act and various FOIA exemptions. The requester filed a lawsuit after not receiving a response to the administrative appeal. The court ordered the Federal Bureau of Investigation to release the information that was withheld and to pay $7,500 in attorneys' fees and costs arising from the lawsuit. In March 2014, a requester asked the Office of Personnel Management to provide documents relating to understanding the basis of the agency's annuity computations. After 5 months with no response, the requestor filed a lawsuit. The Office of Personnel Management and the requester entered into a settlement agreement resulting in the lawsuit being dismissed and the agency paying $1,250 in attorneys' fees and costs. Agency Failed to Provide All Documentation In March of 2013 the requester filed a lawsuit in connection with a request for records concerning how the Department of Labor audits permanent labor certification applications made by employers pursuant to the Immigration and Nationality Act. The lawsuit was filed after a year of correspondence concerning fees and the scope of the request. Over the course of several months after the suit was filed, the department provided 347 documents in full or in part to the requester but attempted to withhold other sensitive records and information regarding how the audits are conducted. In November 2013, the court ruled against the department's FOIA exemption assertions and ordered an additional search. As a result, the original 347 documents were all released in full in addition to approximately 1,045 additional documents. In October of 2014, the Department of Labor and the requester entered into a settlement where it agreed to pay the requester $51,000 to cover attorneys' fees, expenses, and costs in exchange for the plaintiff withdrawing any remaining claims. In July 2013, a requestor sought documentation related to the renovation of Consumer Financial Protection Bureau headquarters. The Consumer Financial Protection Bureau told the requester it had located 257 pages of documents and was withholding 254 pages of documents under exemptions 5 and 6. The requester filed an administrative appeal. After 3 months, the bureau upheld its decision to withhold the 254 pages and agreed to the request for a further search. The bureau located 93 additional pages and withheld 81 pages under exemptions 5 and 6. The requester then filed a lawsuit. The bureau and the requester entered into a mutual decision resulting in the lawsuit being dismissed and Consumer Financial Protection Bureau paying $800 in attorneys' fees and costs. In December 2011, a requestor sought documentation concerning the Department of Homeland Security's social media monitoring initiatives. The department did not provide documentation or a determination regarding the request, so the requestor filed an administrative appeal. After the initial request, the requester filed a lawsuit after not receiving a response to the administrative appeal or any documentation. The Department of Homeland Security released 286 pages in full, 173 with redactions, and withheld 286 pages. The court ruled for the jointly for the requester and the department. The court also ordered the department to pay $30,000 in attorneys' fees and costs. In 2012, a plaintiff filed a FOIA lawsuit seeking non-tax return information related to his deceased father from the Social Security Administration. Since Privacy Act rights end with death and no other federal regulation prohibited the records disclosure, the agency provided the records sought. The requestor then requested damages and litigation fees under FOIA, which was dismissed. The requestor appealed the judgment, but the dismissal was affirmed. The agency did not contest the request for litigation costs of $350 in filing fees and awarded them accordingly. In January 2014, a request was made to the U.S. Fish and Wildlife Service for a 2009 memorandum concerning the legal status of the thick-billed parrot, the wood bison, the margay, and the northern swift fox under the Endangered Species Act. The agency withheld the memorandum under exemption 5 claiming it was protected by the attorney-client privilege. The requestor appealed the agency's decision and then filed a lawsuit. The parties settled with the agency paying $8,000 to the cover the requestor's attorneys' fees and costs. We identified 112 lawsuits across 28 federal agencies where the courts had awarded attorneys' fees and costs from 2009 to 2014. The following table shows the agencies with lawsuits, the total number of lawsuits at each agency, the number of lawsuits for which agencies provided costs, the reported costs for those lawsuits, and the amount of attorneys' fees and costs agencies reportedly paid to plaintiffs for the total number of lawsuits defended. In addition to the contact names above, Anjalique Lawrence (Assistant Director), Eric Trout (Analyst in Charge), Andrew Banister, Chris Businsky, Rebecca Eyler, Kendrick Johnson, David Plocher, Rosalind Romain, Jonathan M. Wall, and Charles Youman made key contributions to this report.

FOIA requires federal agencies to provide the public with access to government information and each year, agencies release information. Nevertheless, many FOIA requests are denied or not responded to in a timely manner. The act allows requesters to litigate if the agency does not respond to a request within the statutory time frames. Over the last decade, Justice reported 3,350 FOIA lawsuits filed against agencies, with a 57 percent increase in lawsuits filed since 2006 (see figure). GAO was asked to determine FOIA litigation-related costs incurred by federal agencies for lawsuits in which the plaintiffs substantially prevailed. To do so, GAO reviewed Justice's data on FOIA-related lawsuits with a decision rendered from 2009 through 2014, and identified 112 lawsuits across 28 federal agencies where the plaintiff substantially prevailed. GAO reviewed cost data from Justice and the selected agencies, and interviewed agency officials to discuss the availability and reliability of these data. Of the 1,672 Freedom of Information Act (FOIA) lawsuits with a decision rendered between 2009 and 2014, GAO identified 112 lawsuits where the plaintiff substantially prevailed. Litigation-related costs for these 112 lawsuits could not be fully determined. Costs associated with such lawsuits are comprised of (1) the Department of Justice's (Justice) costs for defending the lawsuits on behalf of agencies, (2) the agencies' respective costs for the lawsuits, and (3) any attorneys' fees and costs as assessed by a court or based on settlement agreements awarded to the plaintiffs' attorneys. Of the 112 lawsuits, Justice provided information on its costs for defending 8 lawsuits totaling about $97,000. Justice officials stated that the department does not specifically track costs for lawsuits in which the plaintiffs substantially prevailed and that its attorneys are not required to track such costs for individual lawsuits. Regarding individual agencies, 17 of the 28 in GAO's study had a system or process in place that enabled them to provide cost information on 57 of the 112 selected lawsuits. According to this information, the agencies incurred approximately $1.3 million in FOIA litigation-related costs for these lawsuits during fiscal years 2009 through 2014. The remaining agencies did not have a mechanism in place to track FOIA litigation-related costs where the plaintiffs prevailed. These agencies said costs were not tracked because Justice's guidance does not require agencies to collect and report costs related to specific lawsuits, or if the plaintiff prevailed as a result of a lawsuit. As required by FOIA, Justice has reported annually on the results of all lawsuits, including any awards of attorneys' fees and costs to the plaintiffs. However, for 11 of the 112 selected lawsuits, Justice reported an amount of attorneys' fees and costs awarded that differed from the amounts reported by the defending agencies. According to Justice, the differences in the award of attorney's fees and costs were due to the appeals process and settlement agreements between the respective agencies and the plaintiffs. Although requiring Justice and agencies to report actual cost information could lead to better transparency regarding federal operations, costs would be associated with such reporting. Considering these costs, as well as potential benefits, could help Congress in determining whether such a requirement would be cost-effective for enhancing oversight of FOIA litigation-related operations. If Congress determines that transparency in the reporting of FOIA litigation costs outweighs increased costs for systems and processes to be developed, then it could consider requiring Justice to provide a cost estimate for collecting and reporting information on costs incurred when defending lawsuits in which the plaintiffs prevailed. In commenting on a draft of this report, Justice stated that it appreciated GAO's recognition of the need to balance the cost and benefit of additional reporting to achieve good FOIA administration.

The Competition in Contracting Act (CICA) of 1984 requires agencies to obtain full and open competition through the use of competitive procedures in their procurement activities unless otherwise authorized by law. However, Congress also recognized that in certain situations contracts may need to be awarded noncompetitively--that is, without full and open competition. Generally, these contracts must be supported by written justifications and approvals that contain sufficient facts and rationale to justify the use of a specific exception to full and open competition, such as when the contractor is the only source capable of performing the work.program fall under one of these exceptions but were not previously required to include a justification. Sole-source contracts awarded under the 8(a) Pub. L. No. 111-84, SS 811 (2009). table 1, which compares the required elements of CICA and 8(a) justifications for sole-source contracts. While the required elements of 8(a) and CICA justifications differ, both types of justifications are generally required to be published on the federal government's web site for announcing contract opportunities and the agency website after the contract award is made. In addition, the official who must approve an 8(a) justification for a contract over $20 million would be the same official who must approve a CICA justification of the same amount. This official is determined by the estimated total dollar value of the proposed contract, as outlined in the FAR. The head of the procuring activity or the agency's senior procurement executive generally approves 8(a) justifications. Figure 1 shows the competition thresholds and current sole-source justification requirements under the 8(a) program. Prior to awarding an 8(a) contract, whether sole-source or competitive, agencies are required to submit an offer letter to SBA identifying the requirement--that is, what goods or services are being procured--as well as any procurement history for the requirement, the estimated dollar amount, and the name of the particular 8(a) firm if intending to award the contract on a sole-source basis. A business opportunity specialist within an 8(a) program district office is to respond with a letter stating whether SBA has accepted the procurement into the 8(a) program after confirming the firm's eligibility to receive the contract and considering factors that could prohibit SBA's acceptance of the procurement. SBA assesses a firm's eligibility based on a number of criteria, including the firm's size and whether the procurement is consistent with the firm's business plan. Under the new 8(a) justification requirement, SBA may not accept a sole- source contract over $20 million for negotiation under the 8(a) program unless the procuring agency has completed an 8(a) justification in accordance with the FAR. Partnership agreements between the procuring agencies and SBA outline the responsibilities of both parties in the 8(a) contracting process. These agreements generally delegate SBA's contract execution function to the agencies after SBA has completed initial acceptance of the procurement into the program. The FAR Council oversees development and maintenance of the FAR. Its membership consists of the OFPP Administrator for Federal Procurement Policy, the Secretary of Defense, the Administrator of the National Aeronautics and Space Administration, and the Administrator of the General Services Administration. The FAR Council issues rules to implement changes to the FAR that are mandated by law. Typically, the first step is a proposed rule, which presents the proposed text in the Federal Register and seeks written comments. In some cases, interim rules are used to implement immediate changes to the FAR and include the text of the revision. Proposed and interim rules can be amended by final rules, which make changes to the FAR after consideration of public comments. The FAR Council did not implement the new 8(a) justification requirement in the FAR by the mandatory deadline set in law. Section 811 of the NDAA for Fiscal Year 2010 required that the FAR be amended within 180 days of the statute's enactment date to require justifications for 8(a) sole- source contracts over $20 million. Instead, 504 days elapsed between the enactment of the law on October 28, 2009, and the FAR change to implement it on March 16, 2011. In August 2010, almost 1 year after enactment of section 811, the FAR Council issued a notice announcing plans to hold three tribal consultation meetings to obtain comments on implementation of this section from the tribal communities. The council held public meetings during October 2010 in Washington, D.C.; Albuquerque, New Mexico; and Fairbanks, Alaska. After receiving comments, the FAR Council published the rule addressing the 8(a) justification requirements as an interim rule, rather than proposed, because the statutory date for issuance of regulations had already passed. OFPP officials who were involved in the implementation of this rule explained that the primary reason for the FAR Council's delay was establishing a process for, and holding, tribal consultations. According to the OFPP officials, the FAR Council did not have previous experience conducting such consultations, and developing a process for this delayed the announcement of the meetings. Figure 2 shows key dates in the enactment and implementation of this provision. In its announcement of the planned tribal consultation meetings, the Council cited an executive order that directs certain executive federal agencies to consult with Indian tribes on policies that have tribal implications.order are a critical component of a sound and productive federal-tribal relationship. The Council noted that the consultations provided for in the Section 811 of the NDAA for Fiscal Year 2010 did not require agencies to implement the new justification requirement until it was implemented in the FAR through an interim or final rule, and contracting and policy officials from the agencies involved in our review confirmed that they waited for the FAR revision. Almost 325 days elapsed between the 180- day mandatory deadline after enactment (April 26, 2010) and FAR implementation on March 16, 2011. During this period, according to FPDS-NG data, agencies awarded 42 sole-source 8(a) contracts with anticipated values over $20 million--with a total value of over $2.3 billion--that would have been subject to the new justification requirement if the FAR Council had implemented the change by the statutory deadline. Figure 3 illustrates the number of such contracts awarded per fiscal year quarter in the last 4 years and key dates in the implementation of the new justification requirement. According to FPDS-NG data, 72 contracts had a reported value of more than $20 million in the period from the October 28, 2009, enactment of the statute requiring the 8(a) justification requirement through March 31, 2012. (See appendix II for the number and value of contracts by agency.) However, we found inaccuracies in the data on reported contract value. To understand the trends in award of 8(a) sole-source contracts with reported values greater than $20 million, we also analyzed FPDS-NG data from fiscal year 2008 through the last full year of data available, fiscal year 2011. Compared to fiscal years 2008 through 2010, the number and value of these contracts declined significantly in fiscal year 2011, when only 20 were awarded, as shown in figure 4. Although we found the FPDS-NG data on total contract value overall to be sufficiently reliable to use for our analysis, we found several cases where the Base and All Options data element had been inaccurately reported by the agencies as being much lower than the actual value of the contract. For instance, the Army had awarded a contract worth about $84 million according to contract documents, but its reported value in FPDS-NG was only $24 million. This data element is intended to reflect the total contract value at the time of award, including all options. For indefinite delivery indefinite quantity (IDIQ) contracts, the FPDS-NG data dictionary stipulates that this element is the estimated value for all orders expected to be placed against the contract.field in FPDS-NG for all awards, we found five awarded since October 28, Although this is a required 2009, that implausibly listed a total value of zero. For example, two related Army contracts were both listed as having a value of zero, but when we reviewed the contract files, we found that their total anticipated value was actually $350 million. GSA officials who are responsible for managing the FPDS-NG data system told us that there should not be any instances in which a contract award would have a value of zero. The errors in this data element make it difficult to accurately determine the extent to which agencies are awarding sole source 8(a) contracts valued over $20 million. From March 16, 2011, through March 31, 2012, 14 sole-source 8(a) contracts worth over $20 million were awarded by five agencies. Only three of those contracts--two awarded by the Air Force and the other by the State Department--included 8(a) justifications. The agencies awarding the remaining 11 contracts did not comply with the new justification requirement, either because they were not aware of the requirement and did not prepare a justification, or because they were confused and incorrectly used a CICA justification, as summarized in Figure 5. Contracting officials are required to ensure that all requirements of law and regulation are met before awarding any contract, and as a result, they should keep abreast of changes to the FAR. Yet, for five of the 11 contracts, contracting officials did not comply with the new justification requirement because they were not aware of it. A GSA regional office awarded a sole-source contract for support services to an 8(a) firm in October 2011, with an anticipated value of $40 million. No justification was completed. According to GSA officials, the contracting officer was unaware of the justification requirement at the time of award. As a result of our inquiry, GSA officials stated that they will not exercise options on the contract and are planning to award a replacement contract through an 8(a) competitive process. The regional office also plans to issue guidance to acquisition staff regarding the justification requirement. The Naval Sea Systems Command awarded a contract for information technology services worth about $40.5 million, but did not prepare an 8(a) justification. According to Command contracting officials, they were unaware of the requirement at the time the contract was awarded in July 2011. The Command issued guidance in December 2011 requiring that justifications be prepared not only for 8(a) sole- source contracts above the $20 million threshold, but also for any such contracts above the 8(a) competition threshold of $4 million (or $6.5 million for manufacturing contracts). The contracting officials said that they have begun planning to award the successor contract through a competition among 8(a) firms. Officials at a U.S. Army Corps of Engineers contracting office were aware of increased scrutiny of 8(a) sole-source contracts, but were not aware of the justification requirement itself. They had received a January 2011 memorandum from Army acquisition executives noting the forthcoming justification requirement and calling for contracting officials to limit the use of 8(a) sole-source contracts over $20 million. As a result, when awarding a $35 million 8(a) sole-source contract award for museum relocation services in May 2011, Army Corps contracting officials prepared a memorandum explaining the decision to exceed the $20 million threshold, but it did not meet the requirements of an 8(a) justification. The Army awarded two sole-source IDIQ contracts for engineering and technical support services in June 2011, each of which had a value over $20 million, but did not prepare 8(a) justifications for either contract, as required. These contracts were awarded through a single solicitation to two different firms, with a total value of $350 million. Contracting officials stated that they were not aware of the new justification requirement. Furthermore, we found that these two Army contracts were awarded improperly because SBA had not reviewed the eligibility of the firms and the procurement for the 8(a) program. The contract file documentation states that the contracts were 8(a) sole-source, yet the agency did not send an offer letter to SBA. The contracting officer had contacted an SBA official outside of the 8(a) program, thinking that this was the proper way to offer the procurement into the 8(a) program. But without an offer letter and subsequent SBA acceptance into the program, there was no way to ensure that the firm was eligible to receive the award or that the procurement was properly accepted into the program. We brought this issue to the attention of SBA headquarters officials, who expressed concern and stated they would look into it. Even in cases where contracting officials were aware of the new 8(a) justification requirement, they did not always correctly implement it, due to confusion about what the FAR requires. For example, we found four cases where officials, having determined that their contracts were subject to the new justification requirement, prepared CICA justifications rather than 8(a) justifications. According to the contracting officer for one such contract at the State Department, the preparation of the CICA justification was a result of the rush of end-of-fiscal-year work and the fact that 8(a) justifications were a new requirement they had not dealt with previously. Likewise, a contracting officer at the Army Contracting Command, realizing that 8(a) sole-source contracts now require a justification, prepared a CICA justification instead of an 8(a) justification. The command's competition advocate, who reviews justifications for sole- source contracts, initially advised the contracting officer that a justification was not required. According to the contracting officer, he learned shortly before contract award that a justification was in fact required, but he was not aware that the elements required in an 8(a) justification were different from those in a CICA justification. In one case at the Drug Enforcement Administration (DEA), officials were aware of the justification requirement but decided not to complete one because their acquisition process began before the FAR was amended. SBA had accepted the procurement into the 8(a) program in January 2011, before the 8(a) justification requirement was implemented in the FAR. However, the $448 million contract, for administrative support services, was awarded on June 14, 2011. A justification was required because the contract was awarded after the FAR implementation date. A memorandum in the contract file dated May 15, 2011, explained DEA's rationale for not preparing a justification, stating that it would not be constructive to revisit the solicitation process in order to prepare a justification because the negotiations with the firm were nearing conclusion. For one Department of the Interior contract, officials were unsure whether the 8(a) justification requirement applied--in part because of ambiguities in the regulations regarding whether 8(a) justifications should be prepared when class justifications already exist--and thus did not prepare one. A class justification generally covers multiple contracts within a program or sets of programs. This contract was awarded by Interior on behalf of a DOD program office that had a class CICA justification in place, which permitted the award of sole-source contracts to support the program's work. Contracting officials for this contract were unsure whether the class justification would preclude the need for a separate 8(a) justification for this sole-source contract award. The FAR only states that contracting officers must ensure that each contract action taken under the authority of the class justification is within its scope; it does not address whether a separate 8(a) justification would be required in this situation. This contract illustrates another source of confusion--how to proceed when the anticipated value of a contract changes during negotiation, which happens between SBA's acceptance of the procurement and contract award. The FAR requires an 8(a) justification at two points: before SBA can accept the contract for negotiation under the 8(a) at time of contract award. The potential for confusion arises because a contract's value can change during the negotiation process, and the FAR does not address scenarios in which anticipated contract values rise above or fall below the $20 million threshold between SBA's acceptance of the procurement for negotiation and the award of the contract. For the contract awarded by the Department of the Interior, at the time SBA accepted the procurement, the anticipated value was slightly under the $20 million threshold. However, by the time the contract was awarded, estimated costs had increased to $21.4 million. We also reviewed a DOD contract that illustrates the opposite situation, but which was not required to have an 8(a) justification because the offer letter was sent before the requirement was implemented in the FAR. At the time the procurement was accepted by SBA under the 8(a) program, its anticipated value was about $30 million. The estimated value of the contract dropped to $18.3 million by the time of award. The FAR also does not address whether the new 8(a) justification is needed when out-of-scope modifications are made on existing 8(a) sole- source contracts. Generally, agencies may not modify contracts to add products or services not anticipated in the original scope without a separate sole-source justification. In some cases, however, agencies have determined that the flexibilities of 8(a) sole-source contracts awarded to firms owned by ANCs or Indian tribes allowed them to make such modifications without preparing a justification. For example, in our 2006 report on 8(a) contracting, we found that the Department of Energy had added a number of new types of work to a contract, nearly tripling the value, and the contracting officer cited the flexibilities of the 8(a) sole- source contract awarded to an ANC-owned firm as the reason he was able to do so. We did not identify any such modifications in our present review; however, some contracting officials told us that it was not clear to them if a justification would be required for modifications to 8(a) sole- source contracts. DEA contracting officials cited the ability to make out- of-scope modifications as one of the attractive features of awarding 8(a) sole-source contracts to firms owned by ANCs or Indian tribes, but said they would require a justification for any modification of $20 million or more. GAO-06-399. $20 million each. Officials stated that they were not aware of the new 8(a) justification requirement at the time they awarded these contracts. These awards were not subject to the 8(a) justification, as it only applies to contracts over $20 million. SBA does not have a process in place to confirm that 8(a) justifications are present. The FAR states that the procuring agency must have completed a justification before SBA can accept for negotiation an 8(a) sole-source contract over $20 million, but it does not specify what steps SBA should take to confirm the presence of an 8(a) justification. We found that in most cases, SBA did not discuss the new justification requirements in its correspondence to agencies. During our review, we found a case where an agency had improperly awarded an 8(a) contract, a situation that was not detected by the SBA district official who reviewed the sole-source justification. Army contracting officials told us that an SBA district office business opportunity specialist followed up after receiving an 8(a) offer letter from the Army, to request a sole-source justification. The Army provided SBA with a justification--although it was again a CICA justification, as opposed to an 8(a) justification--and the SBA official noted that the justification requirement had been met. However, the SBA official did not recognize and respond to information showing that the contract was to be awarded to a sister subsidiary owned by the same tribal entity as the incumbent firm--a practice prohibited by SBA's 8(a) regulations.when offering this procurement to the 8(a) program, the Army stated that there was no acquisition history, yet the justification clearly stated that the incumbent and proposed 8(a) firms were owned by the same tribal entity. Hence, this contract was improperly awarded to the sister subsidiary. When we informed SBA headquarters officials of this situation, they Specifically, expressed concern and indicated they would follow up with the business opportunity specialist. To highlight the 8(a) sole source justification requirement, SBA has revised its partnership agreements to reflect that the procuring agency is responsible for completing the justification. However, SBA's district officials also have an important role to play in ensuring that the justifications are properly prepared. SBA officials said they were not sure why the district officials did not confirm the presence of justifications in most of the cases we reviewed, noting that the FAR change is relatively recent and that it may take time for all staff to learn of the requirement. The officials added that they are revising their operating procedures and training curricula to reflect the 8(a) justification requirement. These actions, when implemented, will be useful in highlighting the justification requirement for SBA district officials. However, SBA has yet to convey to its district officials the practical means of how to go about ensuring that the procuring agencies have completed the justification. Agencies have generally not complied with the justification requirement for 8(a) sole-source contracts. This slow start may be due in part to the relatively recent implementation of the requirement; however, we also found a lack of awareness and confusion among contracting officials and SBA district officials. In some situations the FAR is not clear whether a justification is required. This includes cases where there is a class justification already in place, when the value of a contract rises above or falls below $20 million during the negotiation process, or when out-of- scope modifications are made to 8(a) sole-source contracts. Clarifying guidance is needed to help ensure that agencies are applying the justification requirement consistently. While agencies are required to prepare justifications in accordance with the FAR, SBA is required, in practice, to confirm that these justifications are in place. SBA does not currently have a process in place to do so. Finally, because of shortcomings in the data agencies are entering into FPDS-NG regarding the total value of contracts at the time of award, agencies lack the information that would allow them to monitor how many sole-source 8(a) contracts are awarded over the $20 million threshold. To help mitigate future confusion regarding justifications for 8(a) sole- source contracts over $20 million, we recommend that the Administrator of the Office of Federal Procurement Policy, in consultation with the FAR Council, promulgate guidance to: Clarify whether an 8(a) justification is required for 8(a) contracts that are subject to a pre-existing CICA class justification. Provide additional information on actions contracting officers should take to comply with the justification requirement when the contract value rises above or falls below $20 million between SBA's acceptance of the contract for negotiation under the 8(a) program and the contract award. Clarify whether and under what circumstances a separate sole-source justification is necessary for out-of-scope modifications to 8(a) sole- source contracts. To help ensure that Small Business Administration officials meet FAR requirements for sole source contracts over $20 million, we recommend that the Administrator of the Small Business Administration take the following two actions when revising operating procedures and training curricula: Include instructions to business opportunity specialists on the steps they are to take to confirm whether agencies have met the justification requirement, such as obtaining a copy of the justification from the agency. Include instructions to confirm that procuring agencies have prepared an 8(a) justification rather than a CICA justification. To help ensure that federal procurement data provides accurate and complete information, we recommend that the Administrator of the General Services Administration implement controls in FPDS-NG to preclude agency officials from entering a value of zero dollars for the Base and All Options data element when the initial award of a contract is entered into the database. We provided a draft of this report to SBA, OFPP, GSA, and the departments of Defense, the Interior, Justice, and State. We received written comments from SBA, which are reproduced in appendix III. SBA did not fully address our recommendations. In email responses, OFPP and GSA generally agreed with our recommendations, and OFPP also included additional comments. DOD did not respond. The other agencies responded with no comment. In its written response, SBA stated that the burden is on the procuring agencies to prepare the appropriate sole-source justification and that SBA would take actions to ensure that the agencies do so. For example, SBA plans to modify its partnership agreements to incorporate a requirement that the contracting officer certify that the justification has been completed. While these actions may help increase awareness of the justification requirement at the procuring agencies, they do not address SBA's own responsibilities. As we discuss in the report, the FAR states that SBA may not accept for negotiation sole source 8(a) contracts over $20 million unless the appropriate justification has been completed. SBA states that it is difficult to interpret the FAR as requiring SBA to verify the existence of the justification. We disagree. Logically, to meet the FAR requirement, SBA must confirm the existence of an 8(a) justification. Our recommendations were intended to help SBA's business opportunity specialists understand how to comply with the FAR requirement. In an email response, OFPP generally agreed with our recommendations and asked that we reflect that the Administrator of OFPP should take the recommended actions in consultation with the FAR Council. We agreed and made that change. OFPP further noted that, when planning the tribal consultations to implement the 8(a) justification requirement, the FAR Council also considered the President's Memorandum of November 5, 2009, which underscores the Administration's commitment to regular and meaningful consultation with tribal officials in policy decisions that have tribal implications. We are sending copies of this report to the Secretaries of Defense, the Interior, and State; the Attorney General; the Administrators of the Small Business Administration, the General Services Administration, and the Office of Federal Procurement Policy; and interested congressional committees. This report will also be available at no charge on GAO's 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 by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. The objectives of this review were to determine (1) the timeliness of actions taken to implement the 8(a) justification requirement in the Federal Acquisition Regulation (FAR); (2) the number of sole source 8(a) contracts over $20 million that have been awarded since October 2009 and trends over time; and (3) the extent to which agencies have implemented the new justification requirement. To assess the timeliness of the actions taken to incorporate the new justification requirement into the FAR, we reviewed the relevant interim and final rules published in the Federal Register. We also interviewed officials from the Office of Federal Procurement Policy (OFPP), as the Administrator of OFPP serves as chair of the Federal Acquisition Regulatory Council, which implements changes to the FAR. Additionally, to confirm agency officials' statements to us that they did not include justifications in 8(a) sole-source contracts awarded after the October 29, 2009, enactment of the law but before its March 16, 2011, implementation in the FAR, we selected a judgmental sample of five such contracts. We selected those with the highest reported values in the Federal Procurement Data System-Next Generation (FPDS-NG) at agencies already within the scope of our review, and verified the absence of justifications with agency contracting officials. As stated in the report, Section 811 of the NDAA for Fiscal Year 2010 did not require agencies to implement the new justification requirement until it was implemented in the FAR. To determine the number of 8(a) sole-source contracts over $20 million awarded in the last several years, we analyzed contract data from FPDS- NG for contracts awarded from October 1, 2007, through March 31, 2012. We took several measures to assess the reliability of this FPDS-NG data: We selected nine additional contracts to review for data reliability purposes. Among the 13 contracts identified in FPDS-NG as having values between $19.5 million and $20 million, we selected a judgmental sample of seven to review, including four contracts awarded by one Army Corps of Engineers contracting office worth exactly $20 million each. For these contracts, we reviewed information in the contract files to determine the anticipated total value of the contract at the time of award, and confirmed that all were equal to or under $20 million and thus not subject to 8(a) justification requirements. In addition, we conducted a statistical analysis of 8(a) sole-source contracts with a total value of less than $19.5 million, identifying contracts with high levels of correlation with characteristics of high- value 8(a) sole-source contracts, such as contract type and the type of service provided. Based on this analysis, we selected two additional contracts at entities already included in our review and reviewed relevant contract files to verify their value, and confirmed that both were under the $20 million threshold. We also calculated total obligations as of March 31, 2012, on the contracts in this data set as a further check against inaccuracies in the Base and All Options data element in FPDS-NG. Finally, we checked the data reported in FPDS-NG against information gathered in reviews of contract files for 14 contracts over the $20 million threshold awarded after March 16, 2011, as discussed below. We determined that the data for this period was sufficiently reliable to identify contracts that were subject to the 8(a) justification requirements and describe their characteristics. To determine the extent to which agencies have implemented the new justification requirement, we identified and reviewed all 14 relevant contracts that were awarded between the FAR implementation date of March 16, 2011, and March 31, 2012. We took the following steps to identify these contracts: Most of the relevant contracts were identified using the Base and All Options data element in FPDS-NG. We initially identified 14 sole- source 8(a) contracts with values over $20 million. During reviews of the contract files, we determined that 3 of the 14 contracts identified in our FPDS-NG analysis did not meet criteria for the justification requirement and eliminated them from our review. One Army contract was eliminated because its reported value of $99 billion was erroneous, and its actual value was below $20 million. The Army has taken steps to correct this information. We found that another Army contract was not a new award, but rather an administrative action taken for accounting purposes; the underlying contract was awarded prior to implementation of the justification requirement. We also eliminated an Office of Personnel Management contract that was awarded competitively, despite being reported in FPDS-NG as 8(a) sole-source. To compensate for any errors in the Base and All Options data element, we also calculated cumulative obligations for all 8(a) sole- source contracts awarded during the same period. Based on this analysis, we identified one additional DOD contract, awarded by the Army. A review of the contract file confirmed that its value was over $20 million. Finally, in the course of our review, we identified two additional contracts through other means. One contract was identified by State Department officials when we inquired about 8(a) sole-source contracts over $20 million. The other, an Army contract, was identified through references to it in a related contract file. Of the 14 contracts that we identified as meeting the criteria for the justification requirement, 8 were awarded by DOD and the rest by the General Services Administration and the Departments of the Interior, Justice, and State. We reviewed these contract files to determine if justification documents were present and assess whether the justifications complied with FAR requirements. We also reviewed other contract documents, including Small Business Administration (SBA) coordination records, acquisition plans, price negotiation memorandums, and award memorandums. We reviewed policy documents related to implementation of the justification requirement. We also interviewed contracting and policy officials at the relevant organizations regarding acquisition histories of the contracts and policies and practices related to the justification requirement. In addition, we also reviewed a contract awarded by DOD's Washington Headquarters Service that was not subject to the justification requirement. It was identified for review because it had obligations of more than $20 million. A review of the contract file revealed that the contract was valued below $20 million at the time of award, thus it was not included among the 14 contracts discussed above. The organizations with contracts in our review, including those reviewed for data reliability purposes, were as follows: Naval Surface Warfare Center, Dahlgren, Virginia Peterson Air Force Base, Colorado Redstone Arsenal Army Base, Alabama Joint Base Elmendorf-Richardson, Alaska Robins Air Force Base, Georgia Space and Naval Warfare Systems Command, Systems Center Pacific, San Diego, California U.S. Army Corps of Engineers Norfolk District U.S. Army Corps of Engineers Sacramento District U.S. Army Corps of Engineers Tulsa District U.S. Army Contracting Command, Natick, Massachusetts Washington Headquarters Service, Washington, D.C. General Services Administration, Federal Acquisition Service Region 8, Denver, Colorado Department of the Interior, Acquisition Services Directorate, Reston, Department of Justice, Drug Enforcement Administration, Arlington, Department of State, Office of Acquisition Management, Arlington, Additionally, we interviewed SBA officials regarding their interpretation of the FAR rule implementing the 8(a) justification requirements and measures the agency has taken or plans to take to comply with this change. We also reviewed SBA 8(a) program regulations. We conducted this performance audit from April 2012 to December 2012 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. Air Force Army Navy Other DOD This table summarizes the number of contracts and reported value awarded by agency between October 28, 2009--the date of enactment for the National Defense Authorization Act for Fiscal Year 2010--and March 31, 2012, the date of the most current data available at the time of our review. In addition to the person named above, Tatiana Winger, Assistant Director; Pamela Davidson; Danielle Green; Georgeann Higgins; Julia Kennon; Teague Lyons; Kenneth Patton; Dae Park; Jungjin Park; Sylvia Schatz; and Roxanna Sun made key contributions to this report.

SBA's 8(a) program is the government's primary means of developing small businesses owned by socially and economically disadvantaged individuals, including firms owned by Alaska Native Corporations and Indian tribes. The NDAA for Fiscal Year 2010, enacted on October 28, 2009, called for revisions to the FAR to provide for a written justification for sole-source 8(a) contracts over $20 million, where previously justifications were not required. GAO determined (1) the timeliness with which this new justification requirement was incorporated in the FAR; (2) the number of 8(a) sole-source contracts valued over $20 million that have been awarded since October 2009 and trends over time; and (3) the extent to which agencies have implemented this new justification requirement. GAO analyzed federal procurement data, reviewed the 14 contracts subject to the requirement across five federal agencies, and interviewed officials from OFPP, SBA, the Department of Defense, and other agencies. The National Defense Authorization Act (NDAA) for Fiscal Year 2010 required that the Federal Acquisition Regulation (FAR) be amended within 180 days after enactment to require justifications for 8(a) sole-source contracts over $20 million. These justifications bring more attention to large 8(a) sole source contracts. The FAR Council, which updates the FAR, missed this mandatory deadline by almost 325 days. During this delay, based on data in the Federal Procurement Data System-Next Generation (FPDS-NG), 42 sole-source 8(a) contracts with reported values over $20 million, totaling over $2.3 billion, were awarded without being subject to a justification. Office of Federal Procurement Policy (OFPP) representatives involved with the FAR Council's implementation of this rule attributed the delay primarily to the time required to establish a process for consulting with Indian Tribes and Alaska Native Corporations. From October 28, 2009, through March 31, 2012, agencies reported awarding 72 sole-source 8(a) contracts over $20 million. GAO also analyzed trend information in FPDS-NG from fiscal year 2008 through fiscal year 2011 (the most current available information), which showed that the number and value of these contracts declined significantly in 2011. While GAO determined that FPDS-NG data was sufficiently reliable for the purposes of this review, GAO found errors, such as contracts with an implausible reported value of zero. GAO found a slow start to implementation of the new justification requirement. Of the 14 sole-source 8(a) contracts awarded since the FAR was revised, only three included an 8(a) justification. The agencies awarding the remaining 11 contracts did not comply, either because contracting officials were not aware of the justification requirement or because they were confused about what the FAR required. For example, contracting officials were confused in one instance where another justification was already in place that covered multiple contracts. Further, the Small Business Administration (SBA) cannot accept a contract over $20 million for negotiation under the 8(a) program unless the procuring agency has completed a justification, but GAO found that SBA did not have a process in place to confirm the presence of a justification. GAO recommends that OFPP issue guidance to clarify the circumstances in which an 8(a) justification is required. GAO also recommends that the General Services Administration--which operates FPDS-NG--implement controls in FPDS-NG to help ensure that contract values are accurately recorded, and that SBA take steps to ensure that its staff confirm the presence of justifications. OFPP and GSA generally agreed with the recommendations. SBA indicated it would take some actions but did not fully address the recommendations.

At the local level, VHA's delivery system is organized into 18 VISNs, each responsible for overseeing VAMCs within a defined geographic area. VISN directors report to the Deputy Under Secretary for Health (USH) for Operations and Management who oversees VHA's field operations. The Deputy USH for Operations and Management also serves as the focal point between VHA's central office and the VISNs and VAMCs. Within VHA's central office, policy management roles are divided between multiple offices. VHA's central office is responsible for national policies developed by individual program offices--approximately 145 program offices as of May 2017. These program offices may have clinical or administrative functions and vary in the number of policies that they develop and manage. To help standardize national policy processes and reduce the burden on program office subject matter experts, VHA's Office of Regulatory and Administrative Affairs (ORAA) manages the national policy development and review process. As of June 2017, ORAA had about four full-time- equivalent staff assigned to national policy management. These staff are primarily responsible for shepherding documents through the policy review process, providing policy-writing expertise, and working with relevant VHA subject matter experts within individual program offices to develop or update policies. Through its policy-development process, ORAA aims to reduce variability, simplify the process, and ensure any issues are identified and vetted prior to final approval. ORAA advises responsible program offices about their policies, but does not have the authority to require their compliance to complete policy-related tasks. ORAA also tracks and reports policy, procedural, and timeliness requirements, and is responsible for ongoing process improvement. It collaborates with the Office of Policy and Services on policy management activities and with the Office of Organizational Excellence on high-risk areas of concern. See figure 1 for VHA's key leadership positions related to policy management. VHA Directive 6330 governs the organization's policy management; the June 2016 revisions established clearer definitions for national policy and guidance documents. It also updated VHA's policy drafting and submission processes, as well as its requirements for policy issuance and recertification. Specifically, the revised directive defines national policy as a document that "establishes a definite course of action for VHA and assigns responsibilities for executing that course to identifiable individuals or groups." The directive stipulates that two primary document types are to be used for national policy--directives and notices: Directives are to be used to establish national policy and contain certain types of information, such as the roles and responsibilities for each component of the organization. Notices are to be used to communicate information about a one-time event (e.g., rescinding a current national policy) or to establish interim policy until a directive can be developed. The directive also states that a memo signed by the USH can be used to establish policy for VHA's central office, but not for VISNs and VAMCs. Additionally, VHA Directive 6330 states that guidance is not national policy and defines guidance as "recommendations that inform strong practices within the organization and are supported by evidence, legal requirements, national policy, or organizational priorities." It states that guidance includes recommendations for implementing statutes, regulations, or national policy. Guidance documents include program office memos, standard operating procedures, and other such documents that are not signed by the USH. VHA Directive 6330 establishes a 5-year recertification date for directives, while notices have an automatic 1-year expiration period. VHA has not established recertification time frames for guidance documents. We found that VHA is in the process of reviewing existing national policy documents to align with its new policy definitions as outlined in Directive 6330. It began reviewing documents in October 2015 in response to our high-risk concerns related to policy management, and this effort has evolved over time. Specifically, ORAA initiated a process of reviewing 788 documents previously issued as national policy--directives, handbooks, manuals, and information letters--the majority of which were outdated. However, existing guidance documents, such as program office memos, have not been included in this review because there is no central repository that would facilitate their identification, and the number of these documents is unknown. In addition, ORAA officials told us that they do not have enough staff to review these additional documents. (See figure 2.) Through its review process, ORAA intends to streamline the number and types of policy documents used by the organization. (See table 1.) ORAA is eliminating handbooks, manuals, and information letters, although they will continue to function as national policy until rescinded. As part of this effort, ORAA plans to move any relevant content to other policy and guidance documents as appropriate. For example, ORAA is incorporating handbooks into their related directives. VHA noted that this consolidation should help reduce any redundancy and inconsistency when multiple documents articulate different aspects of a single policy. This will also help VHA ensure that when national policy is updated, the update will also include a review of relevant information currently found in other policy documents. Officials from many of the VISNs and VAMCs in our review agreed that a single document source for policy information would be helpful. ORAA officials noted that the definitions for what constitutes national policy and guidance documents are still evolving. According to our review of ORAA information, almost 60 percent of the 788 policy documents identified for transition under the new definitions were outdated in October 2015. As part of its transition, ORAA is taking outdated documents and either rescinding them or recertifying the ones that are still relevant. VHA's recertification process involves assessing whether a national policy document still serves a purpose and should be updated accordingly, or is no longer needed and should be rescinded or combined with another policy. Officials from most VISNs and VAMCs in our review told us that unless a policy has been rescinded, they continue to follow it, even if past its recertification date. This practice is consistent with requirements in the revised VHA Directive 6330 and a memo signed by the USH in June 2016. ORAA officials expect that transitioning VHA's existing policy documents will take about 5 years. As of June 2017, ORAA reduced the total number of documents identified for transition by 193 (from 788 to 595), and 43 percent of these remaining documents (256 of 595) are outdated. (See figure 3.) Much of the reduction has been driven by rescinding manuals and information letters. The number of directives and handbooks has not changed substantially; this is due, in part, to the continuation of policies reaching their recertification dates and the publication of new or changed policies. ORAA officials said that its limited progress is also due to resource constraints, such as insufficient staffing, funding, and inadequate information technology capability. Because ORAA does not own the policies, officials noted that they must rely on the responsible program offices to comply with policy-related tasks. Contrary to the new national policy definitions in VHA Directive 6330, program offices continue to issue policy using memos--an issue we also noted in our high-risk update in 2017. Officials from every program office in our review told us that they have continued to use memos to issue policy quickly. ORAA officials stated this may be due to the lengthy national policy review process, which they said took an average of 317 days in fiscal year 2016. Program offices use memos for a variety of purposes, including clarifications or updates to issued directives, data collection requests, information about policies or procedures while a directive is under development, and the provision of training information. Memos signed by the Deputy USH for Operations and Management-- referred to as "10N" memos--are the most common type of program office memo we identified in our review. Historically, VHA has primarily used 10N memos to communicate with VISNs and VAMCs because the Deputy USH for Operations and Management oversees local operations. ORAA officials stated that program office memos were never intended to serve as national policy. Specifically, VHA Directive 6330 states that a notice should be used to establish interim policy until a directive can be developed. However, VHA has mostly used notices to issue rescissions of previous policy documents, and memos continue to be used to establish policy. For example, we identified a 10N memo that instructed VAMCs to immediately implement changes to ongoing professional practice evaluations and peer review requirements for VAMC chiefs of staff. In another instance, officials at one VAMC noted that, at the time of our visit, they had already received 32 changes to the Veterans Choice Program since 2014 through non-policy documents, including memos. Using program office memos--instead of the appropriate policy vehicle-- to issue policy is problematic in light of VHA's new policy and guidance document definitions. Additionally, unlike national policy, program office memos are not internally vetted and are not subject to recertification, as described below. Lack of internal vetting. Memos are not subject to a formal review process and can be issued quickly once signed. VHA noted in its high-risk action plan that 10N memos are the predominant source of guidance documents, and have been used to create policy without being vetted by other agency offices or VA's labor management relations group. Without such a vetting process, VHA leadership and other officials in the organization do not always have input on or even awareness of the potential impact of policy issued through these memos. Further, some of the VISNs and VAMCs in our review cited concerns about contradictory information among related program office memos. Not subject to recertification. Unlike national policy documents, memos are not subject to recertification and are therefore typically not rescinded. Officials from some of the VISNs and VAMCs in our review described challenges when outdated memos are not rescinded, including questions about whether the memo should still be applied to local practices. For example, one VAMC wanted to use a certain non-VA care option for radiation oncology services, but a memo that was over a year old instructed local facilities to use a different non-VA care option. Since that memo had not been rescinded, VAMC officials said that they could not use their preferred non-VA care option to avoid delays in care. ORAA is taking steps to address program offices' use of memos to issue policy, but it is only focusing on 10N memos at this time. ORAA officials told us they have agreed with the Deputy USH for Operations and Management to have a 5-year recertification date for 10N memos, although this has yet to go into effect. They are also reviewing and assessing guidance documents submitted by program offices to see whether the content should be in a different document type, such as a directive. However, ORAA officials noted that they are not sure whether they have sufficient staff to sustain these reviews. Without further steps to clarify how and when program office memos should be used, the continued use of these memos by program offices may undermine VHA's efforts to implement new policy and guidance definitions, as intended. Furthermore, VHA cannot ensure that VISNs and VAMCs have a clear understanding of which policies to follow. As a part of its updated Directive 6330 on national policy management, VHA established a standard process to make national policy documents accessible to VISNs and VAMCs. Specifically, ORAA's Publications Control Officer is responsible for ensuring national policy documents are disseminated to each level of the organization by maintaining the VHA publications website and distribution list, according to VHA Directive 6330. Once a national policy document is finalized, the Publications Control Officer posts it to VHA's publications website. However, officials from two of the VISNs and most of the VAMCs in our review stated that the documents are difficult to search for on this website because it requires specific wording to locate them. As a result, some officials told us that they often search for national policy documents using other online search engines such as Google. ORAA officials told us that making the VHA publications website more user-friendly is dependent upon their ability to obtain the appropriate technical capability. The Publications Control Officer is also responsible for distributing issued national policy no later than 2 business days after it is signed by the USH. To do so, this individual uses a national e-mail group--the VHA distribution list--as the standard mechanism to distribute the policy document to each component of the organization. The distribution list includes groups of staff from program offices and key VISN and VAMC staff. According to ORAA officials, staff can be added to or removed from the distribution list on an ad hoc basis. Many VISN and VAMC officials in our review were satisfied with the use of the distribution list to disseminate national policy documents. VHA program offices may also provide copies of the documents to VISNs and VAMCs to inform them of forthcoming policy or policy changes. Officials from several VISNs and VAMCs told us that receiving a national policy document from various sources ensures that it is disseminated to the right people at the local level. ORAA officials told us that they recently conducted a survey and learned that it is not always clear which VAMC staff position is responsible for policy implementation. For example, officials from one VAMC in our review were unsure who within their facility was receiving national policy documents from the distribution list. In the future, ORAA officials said that they plan to update the distribution list process and e-mail contacts to ensure that the appropriate VISN and VAMC staff members are receiving the information. ORAA officials also said they plan to continue exploring which staff positions are responsible for managing policy at the local level to determine if there are any gaps that need to be filled. ORAA officials said that their ability to identify and address these gaps is contingent on competing priorities and staffing. Unlike with national policy documents, there is no standard process used to ensure guidance documents issued by various VHA program offices are consistently made accessible to VISNs and VAMCs. As a result, we found that guidance documents can be difficult to find, and there is no assurance that VISNs and VAMCs receive them and are all following the same guidance. Specifically, guidance documents are not part of a central repository, are not tracked, and are not consistently disseminated to VISNs and VAMCs. Lack of a central repository. Guidance documents, such as program office memos, that do not go through the formal VHA review process are not posted on VHA's publications website and are maintained in different ways by the program offices that develop them. For example, 3 of the 4 VHA program offices in our review told us they maintain memos on various internal websites, while the remaining program office does not maintain copies of its memos once sent to the local level. ORAA officials noted that while a central repository with all VHA guidance would be ideal, they do not have sufficient staff and resources to accomplish this. However, they would like to establish a location on the VHA intranet, where ORAA could post future 10N memos. Officials said they do not have the capacity to identify and add previously issued 10N memos due to staff limitations. Not systematically tracked. In general, guidance documents are not typically assigned tracking numbers and, as a result, are difficult to identify and quantify. For example, as previously mentioned, most VHA program offices in our review said that identifying and quantifying the total number of their memos would be difficult because they do not systematically track them. As a result, program offices do not know whether some of these documents are duplicative or whether they conflict with one another or with other policy documents. At the local level, officials from three VISNs and five VAMCs in our review noted difficulties with finding program office memos. Officials explained that they sometimes rely on staff's institutional knowledge to find a specific memo, or they may contact the relevant program office. ORAA officials told us they would like to work with the Deputy USH for Operations and Management to assign tracking numbers to 10N memos so that they can be referenced and searched. Inconsistent dissemination. VHA program offices may disseminate guidance to VISN staff for distribution to VAMCs or to both VISN and VAMC staff at the same time. Each program office in our review told us they maintain their own e-mail groups for communication with the local level. However, officials from one VAMC expressed concern that receiving guidance depends on staff being included in a specific program office's e-mail group. According to standards for internal control in the federal government, management should internally communicate the necessary quality information to achieve the entity's objectives. In doing so, management selects appropriate methods to communicate internally and considers how that information will be made readily available to its staff when needed. Without a standard process for consistently maintaining and disseminating guidance documents to VISNs and VAMCs, the agency lacks assurance that staff members receive and follow the same guidance, as intended. VHA has not consistently solicited input on national policies either prior to issuance or after implementation from VISNs and VAMCs. Officials from the four VISNs and eight VAMCs in our review outlined a variety of challenges they face when implementing national policy, including insufficient or undefined time frames and conflicting policies on the same topic. Insufficient or undefined time frames. Officials from most of the VISNs and VAMCs in our review told us that it is difficult to implement policies with insufficient or undefined time frames. For example, officials from one VAMC told us that a national policy sometimes does not specify required implementation time frames, and as a result, the expectations for when VAMCs should complete implementation are not clear. VHA officials told us that there is no VHA-wide standard for specifying time frames for completing implementation of national policy. Resource constraints. Officials from most of the VISNs and VAMCs in our review identified resource constraints as an implementation challenge for certain policies, such as those with stringent staffing and building space requirements. For example, officials from one VISN told us that its facilities were required to have a certain type of surgeon available, which proved challenging to recruit and retain for smaller, more rural VAMCs. Additionally, officials from another VAMC said that one national policy required mental health patients to have access to a safe outdoor space, which would be difficult to implement without major construction and at least 5 years to plan. Officials said that to comply with this policy, they plan to have staff walk patients outside. However, this reduces the available staff on the mental health unit during this time. Because local situations may vary, VHA program office officials told us that it is difficult to specify resource needs in national policy that applies across all VISNs and VAMCs. Not specific to VAMC complexity level. Officials from most of the VISNs and VAMCs in our review noted that the lack of tailoring for a facility's complexity level makes national policy implementation difficult. As a result, officials stated that level 2 (medium complexity) and 3 (low complexity) VAMCs are often expected to adhere to the same policy requirements as level 1 (high complexity) VAMCs. For example, officials noted that policies requiring 24-hour physician coverage for specialties such as emergency medicine, women's health, and suicide prevention are challenging for complexity level 2 and 3 VAMCs, which may not have sufficient patient volume or staffing resources. Officials from one program office explained that complexity level is not addressed in national policy, but may be addressed in a standard operating procedure or local policy. Officials from VHA's Office of Organizational Excellence told us that national policies are intended to be written broadly for VAMCs of all complexity levels. However, other VHA officials acknowledged that policies are written for facilities that fully operate a service or program, and have the capability to implement all of its accompanying policy requirements, which are usually level 1 (high complexity) facilities. Conflicting policies on the same topic. A few VISNs and VAMCs in our review noted implementation challenges when more than one program office has responsibility for the same policy area, and they do not collaborate when issuing policies on the same topic. For example, officials from one VAMC told us that they were unsure what humidity levels they should follow for sterile processing services when the national policy from one program office stated that the humidity level must be at 60 percent, which was contradictory to a national policy from another program office that stated humidity levels must be at 55 percent. Officials from some of the VISNs and VAMCs in our review told us that obtaining input on national policy prior to issuance--particularly from those responsible for policy implementation--could help VHA to identify and mitigate many of the challenges that impede local policy implementation. For example, officials from three VISNs and two VAMCs told us that the terminology changes to VHA's updated scheduling policy issued in July 2016 caused confusion for staff. Additionally, officials from one VISN and one VAMC told us that terminology changes led to different interpretations and variation in implementation across VAMCs, which may have been mitigated through prior feedback discussions. In December 2016, ORAA instituted a new process to obtain comments on draft national policy that includes posting policy documents for a 2- week period on a SharePoint site. All VHA officials, including those in VISNs and VAMCs, have access to the site and are able to comment. In addition, ORAA has plans to develop a pre-policy form that would require program offices to provide information on the policy's purpose, whether it conflicts with other VHA policy, metrics to measure implementation, identification of any new resources needed, a cost analysis, and a communications plan for VISNs and VAMCs. VHA officials told us that the pre-policy form could be another mechanism to collect information on potential implementation challenges. However, VHA officials have yet to finalize it. Officials from several VISNs and VAMCs in our review said it also would be helpful for VHA to collect feedback from them after policy implementation to identify and address any unanticipated difficulties. Some program offices in our review already collect feedback on their own policies after implementation; however, this is not done systematically. According to standards for internal control in the federal government, management should internally communicate the necessary quality information to achieve the entity's operational objectives. In doing so, management can obtain relevant information from reliable internal sources. Without a way to systematically obtain local feedback on national policies, VHA may lack the relevant information that would allow it to mitigate potential implementation challenges and resolve any unexpected problems to ensure policies are being implemented as intended. In certain cases, when VAMCs may be unable to comply with all or part of a national policy, program offices may approve policy exemption waivers on an informal and ad hoc basis. However, we found that VHA lacks information on these policy exemption waivers because it has not established a standard process for program offices to use for waiver submissions and approvals and does not centrally track those that have been granted. Furthermore, program offices are not required to reassess approved waivers to determine whether they are still warranted. No standard submission or approval process. VHA does not have an established waiver exemption process that would standardize how program offices manage the submission and approval of waivers. As a result, program offices managed waiver submission and approval on an ad hoc basis, although certain national policies may specify a process for how VAMCs should submit a waiver. If a process for submitting waivers is not specified for a policy, it is up to a VAMC to create and submit one for its facility's needs. For example, one VAMC had a waiver approved through e-mail and a conference call, and another VAMC had a waiver approved after a site visit. No central tracking. VHA does not centrally track approved policy exemption waivers, and as a result, it does not know how many local facilities are not implementing national policy as intended. Additionally, several program offices in our review did not know how many waivers their offices had approved. No reassessment requirement. There is no VHA requirement for program offices to reassess issued policy exemption waivers to determine whether they are still needed. Officials in some program offices told us that their waivers have an expiration date, and officials from another program office told us that time limits for waivers depends on the policy. Nevertheless, waivers are not routinely reassessed to determine whether they are still needed. In June 2017, VHA's Office of Organizational Excellence established a committee comprised of subject matter experts and representatives from VHA, VISNs, and VAMCs to standardize the policy exemption waiver process. According to its charter, the committee will assess the challenges local facilities experience when there are issues complying with a national policy and develop a process that will be used to pursue a waiver. Under this process, officials explained that a VAMC would submit a proposal to its VISN, which would then submit it to the VHA waiver committee for approval. According to standards for internal control in the federal government, management should design control activities, such as procedures, to achieve objectives and respond to risks. In doing so, management designs appropriate procedures to help it fulfill responsibilities and address identified risks. Additionally, internal control standards state that management should establish and operate activities to monitor the internal control system and evaluate the results. In doing so, management considers using quality information to evaluate the agency's performance and make informed decisions. Without processes in place to systematically approve, track, and reassess policy waivers, VHA does not know which facilities are not implementing certain policies, the reasons why they are unable to do so, and whether these reasons continue to be valid. Almost all of the VISNs and VAMCs in our review told us that they had developed their own local policies. Officials from all four VISNs in our review told us they generally try to limit the number of regional policies so as not to overburden their VAMCs. Their regional policies are usually focused on administrative issues (for example, staff telework and records management) and overarching areas of responsibility (for example, sterile processing of medical equipment services and utilization management). The number of policies these four VISNs developed ranged from none to 88. VISNs vary in how often they renew their regional policies. Officials from one VISN told us they renew their policies every 2 to 3 years, while officials from another VISN told us they do so every 5 years. Officials from the eight VAMCs in our review told us that they generally issue facility-wide local policies (for example, policy management and medical appointment scheduling) and service-line- specific standard operating procedures for front line clinical care. These VAMCs generally develop local policies for different reasons, including when more specificity is needed for national policy implementation or to meet Joint Commission requirements. VAMCs might also create a policy for a local circumstance, such as transportation or building issues. The number of local policies for the eight VAMCs ranged from 151 to 561. Officials from all eight VAMCs told us they generally renew their local policies every 3 years due to Joint Commission requirements or as needed. Ad hoc updates to local policies may be due to newly issued national policy. The VISNs and VAMCs in our review maintain local policies on a variety of websites, such as on SharePoint or intranet sites. The majority of VISN and VAMC officials said that they used SharePoint sites as the primary or only place for maintaining local policies. VHA officials generally do not have access to local SharePoint sites unless specifically requested. As a result, VHA officials are not necessarily aware of the number or types of local policies. VHA has not established a process for systematically ensuring that local policies are aligned with national policies, which increases the risk of inconsistent policy implementation across VAMCs--one of the primary reasons that VA health care was placed on our high-risk list. In recent years, we and others have reported various instances of VAMCs' differences in implementing national policy, most notably with its policy for scheduling medical appointments. More recently, in February 2017, we reported weaknesses in the way VAMCs were implementing their controlled substance inspection programs because local policies at most of the VAMCs in our review did not include all nine VHA program requirements as outlined in the national policy. Officials from each level of the organization told us about ad hoc efforts to assess local policies: Officials from each of the VAMCs in our review generally told us that they assess their local policies to ensure they are consistent with issued national policy. VAMC officials also told us that VISNs and national program offices periodically assess whether specific local policies follow national policies during periodic site visits. Officials from the VISNs in our review noted that their overall monitoring activities are primarily focused on evaluating local compliance with national policy and not on assessing local policy for alignment with national policy. None of the officials from the program offices in our review told us they have a standard process for assessing whether local and national policies are aligned. However, program offices may check the alignment of local policies on a case-by-case basis. For example, officials from a national program office told us about a recent assessment they conducted of local policies for a same-day access initiative to ensure certain national requirements were met. VHA has recently outlined plans for additional oversight in response to our high-risk report that includes assessing whether local policies are aligned with national policies. According to the plan, VHA's Office of Integrity will conduct risk-based internal audits where senior VHA leadership would set priorities for audit areas (e.g., suicide prevention), and staff would then review local policies in those areas. A VHA official in the Office of Integrity explained that both the national program offices and VISNs may have responsibility for ensuring alignment of local and national policies under VHA's plans, but there is currently no consensus for designating this responsibility. VHA also plans to include standards, such as internal controls, in every new or revised policy to allow officials to determine whether the policy is being appropriately implemented and meets objectives. However, VHA is still in the early stages of putting its plans in place. According to standards for internal control in the federal government, management should perform ongoing monitoring of its activities to help ensure its objectives are carried out as outlined in policy. In doing so, management can build in continual monitoring into its internal control system through separate, periodic evaluations. Without a standard process to ensure local policy alignment with national policy, VHA may continue to experience inconsistent practices across its health care system. As one of the largest health care delivery systems in the nation, it is important for VHA to ensure that its facilities consistently implement national policies as intended to ensure timely, high-quality care for the nation's veterans. VHA has taken a number of steps to improve its policy management; however, this is a substantial undertaking, and much work remains that will require a sustained focus to remedy a number of issues. In addition, appropriately allocating the necessary resources will be critical to VHA's ability to continue making improvements in this area as resource constraints continue to be an overarching impediment. A number of systemic problems have contributed to the inconsistent implementation of national policy at the local level. Most notably, despite its newly revised directive on policy management, VHA's program offices continue to issue policy through mechanisms such as memos that are not defined as policy vehicles. Policy issued in such a manner can also be contradictory or outdated because it is not subject to a formal review process or periodically recertified. Additionally, VISNs and VAMCs may not be receiving or following the same memos and other issued guidance because VHA lacks a standard dissemination process or central repository for these documents. Furthermore, VHA does not have the ability to identify concerns associated with local implementation of national policies because it does not systematically collect information about challenges, before or after implementation. It also has not established a standard process for issuing and managing policy exemption waivers that may be granted to VAMCs. Compounding these problems is the lack of a process, including designated oversight roles, to ensure that the myriad of local policies established by VISNs and VAMCs are appropriately aligned with national policies. Collectively, if these issues persist, VHA will be unable to ensure that its policies are being consistently and effectively implemented as intended at the local level, potentially impacting veterans' access to timely, safe, and high-quality care. We are making the following six recommendations to VHA: The Under Secretary for Health should further clarify when and for what purposes each national policy and guidance document type should be used, including whether guidance documents, such as program office memos, should be vetted and recertified. (Recommendation 1) The Under Secretary for Health should develop standard processes for consistently maintaining and disseminating guidance documents to each level of the organization. (Recommendation 2) The Under Secretary for Health should systematically obtain information on potential implementation challenges from VISNs and VAMCs and take the appropriate actions to address challenges prior to policy issuance. (Recommendation 3) The Under Secretary for Health should establish a mechanism by which program offices systematically obtain feedback from VISNs and VAMCs on national policy after implementation and take the appropriate actions. (Recommendation 4) The Under Secretary for Health should establish a standard policy exemption waiver process and centrally track and monitor approved waivers. (Recommendation 5) The Under Secretary for Health should establish a standard process, including designated oversight roles, to periodically monitor that local policies established by VISNs and VAMCs align with national policies. (Recommendation 6) VHA provided written comments on a draft of this report. In its comments, reproduced in appendix I, VHA concurred with all of our recommendations except one, which it concurred with in principle citing that the recommendation is no longer needed because VHA has already taken steps to address it. Specifically, VHA requested that we close our recommendation that the agency systematically obtain information on potential implementation challenges with national policy because ORAA has instituted new policy development processes that allow VHA employees and program offices to provide feedback on national policy prior to issuance or recertification. However, VHA added that its pre-policy form--which would require program offices to provide key information on draft national policies--will not be rolled out until January 2019 due to the need to ensure that sufficient systems are in place to obtain cost and performance data and to conduct an implementation analysis. The pre-policy form will serve as a mechanism to systematically collect information about national policies prior to issuance and will require program offices to provide information on a policy's purpose, whether it conflicts with other VHA policy, implementation metrics, resources needed, a cost analysis, and a communications plan for VISNs and VAMCs. While VHA's more recent efforts to obtain feedback on national policies are a step in the right direction, these efforts are not systematic because they rely on employee and program office participation. Consequently, we cannot close this recommendation until the pre-policy form has been implemented. VHA also provided specific information about implementing each of the remaining recommendations and stated that its target completion date for implementing these recommendations is the third quarter of fiscal year 2018. However, VHA noted challenges related to its ability to implement our recommendations regarding guidance documents as it has never attempted a systematic effort to align national guidance under a single process or gather these documents in a central location. In addition, VHA stated that adequate staffing continues to be an obstacle and that information technology needs must be met to ensure the proper dissemination and maintenance of these documents. As we have noted in our high-risk work, capacity and resource allocation challenges continue to impede VHA's ability to address our concerns, and will continue to act as barriers until they are adequately addressed. VHA also provided a technical comment, which we incorporated. We are sending copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, the Under Secretary for Health, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in Appendix II. Debra A. Draper, (202) 512-7114 or [email protected]. In addition to the contact named above, Bonnie Anderson (Assistant Director), E. Jane Whipple (Analyst-in-Charge), and Ashley Dixon made key contributions to this report. Also contributing were Jennie F. Apter, Jacquelyn Hamilton, Vikki Porter, and Brian Schmidt.

GAO was asked to conduct a management review of VHA; this is the sixth report in the series. In this review of VHA's policy management, GAO examines the extent to which (1) VHA has implemented its new definitions for national policy and guidance documents; (2) VHA ensures that national policy and guidance documents are accessible to VISNs and VAMCs; (3) VHA collects information on local challenges with implementing national policy, including the exemptions granted when policy requirements cannot be met; and (4) local policies are developed and maintained by VISNs and VAMCs, and whether they are aligned with national policies. GAO reviewed agency documentation, including VHA's revised directive on policy management. GAO also interviewed VHA officials involved with policy improvement efforts, as well as officials from a nongeneralizable sample of four national program offices, four VISNs, and eight VAMCs selected to provide geographic variation, among other factors. The Veterans Health Administration (VHA)--within the Department of Veterans Affairs (VA)--is taking steps to align existing national policy documents with newly revised definitions that streamline and clarify document use. According to the new definitions in its June 2016 directive on policy management, directives and notices are now the sole documents for establishing national policy; other types of documents, such as program office memos, are considered guidance. VHA is reviewing about 800 existing national policy documents to eliminate those that no longer meet its new definitions, and to rescind or recertify those that are outdated. At this time, VHA is not planning to review guidance documents, such as program office memos and standard operating procedures, to assess whether they align with its updated directive, because there is no central repository for these documents and it would be too resource intensive to locate all of them. Further, GAO's review found--contrary to VHA's updated directive--that program offices are continuing to use memos to issue policy. The continued use of program office memos to establish national policy undermines VHA's efforts to improve its policy management. VHA has a standard process for making national policy documents accessible to VA medical centers (VAMC) and the Veterans Integrated Service Networks (VISN) to which the medical centers report, but lacks a process for making guidance documents accessible. VHA makes national policy documents accessible to all organizational levels through a publications website and e-mail distribution list as outlined in its June 2016 directive. However, GAO found that VHA has not established a similar process for program offices to make guidance documents accessible at the local level. Specifically, there is no central repository, such as a publications website, for guidance documents, and the program offices do not track or consistently disseminate the guidance documents they issue. Without a standard process for consistently maintaining and disseminating guidance, VHA lacks assurance that staff receive and follow the same guidance, as intended. VHA does not routinely collect information on local challenges with national policy implementation or on exemption waivers. The four VISNs and eight VAMCs in GAO's review reported various challenges they face when implementing national policy, such as resource constraints and undefined time frames. In instances where VAMCs cannot meet policy requirements, program offices may approve policy exemption waivers on an ad hoc basis. However, GAO found that VHA lacks complete information on approved policy exemption waivers because it does not have a standard process for approving, tracking, and reassessing them. In recognition of this issue, VHA established a committee to develop a waiver process in June 2017. VISNs and VAMCs in GAO's review develop and maintain various local policies, but VHA does not ensure that they align with national policies. Specifically, GAO found that VHA does not have a process for program offices to systematically ensure that local policies align with national policies. Without such a process, VHA may continue to experience inconsistent policy implementation across its health care system. GAO is making six recommendations to VHA, which include clarifying national policy and guidance documents, ensuring access to guidance documents, incorporating local feedback into national policy, establishing a process to approve and track policy exemption waivers, and ensuring alignment of local and national policy. VHA generally concurred with GAO's recommendations.

Between fiscal years 2003 and 2007 the unified budget deficit declined. Certainly declining deficits are better than rising deficits. But this decline in the unified deficit is not an indicator that our challenge has eased. First, even this short-term deficit is understated: It masks the fact that the federal government has been using the Social Security surplus to offset spending in the rest of government for many years. If we exclude that Social Security surplus, the on-budget deficit--what I call the operating deficit--in fiscal year 2007 was more than double the size of the unified deficit. For example, the Department of the Treasury (Treasury) reported a unified deficit of $163 billion and an on-budget deficit of $344 billion in fiscal year 2007. The accrual-based net operating deficit reported in the Financial Report of the United States Government was also significantly higher than the unified deficit--$276 billion for fiscal year 2007. This measure provides more information on the longer-term implications of today's policy decisions and operations than does either cash-based figure, but it too offers an incomplete picture of the long-term fiscal challenge. As we recently reported, several countries have begun preparing fiscal sustainability reports to help assess the implications of their public pension and health care programs and other challenges in the context of overall sustainability of government finances. European Union members also annually report on longer-term fiscal sustainability. The goal of these reports is to increase public awareness and understanding of the long-term fiscal outlook in light of escalating health care cost growth and population aging, to stimulate public and policy debates, and to help policymakers make more informed decisions. These countries used a variety of measures, including projections of future revenue and spending and summary measures of fiscal imbalance and fiscal gaps, to assess fiscal sustainability. Last year, we recommended that the United States should prepare and publish a long-range fiscal sustainability report every 2 to 4 years. Despite these improvements in short-term deficits, the long-term outlook continued to move in the wrong direction. Even in 2001--in a time of annual surpluses--GAO's long-term simulations showed a long-term challenge, but at that time it was more than 40 years out. Although an economic slowdown, decisions driven by the attacks of 9/11, and the need to respond to natural disasters have contributed to the change in outlook, they do not account for the dramatic worsening in the long-term outlook since 2001. Subsequent tax cuts and the passage of the Medicare prescription drug benefit in 2003 were also major factors, but they are not the only actions that challenge fiscal discipline. For example, one might also question the current farm bill in the face of reported record farm income. As the Committee knows, CBO's latest projections show the deficit rising in response to a weakening economy. Neither this increase nor the recent declines tell us much about our long-term path. Rather, our long-term path must inform how we deal with the near-term weakness. Our real challenge then is not this year's deficit or even next year's; it is how to change our current path so that growing deficits and debt levels do not swamp our ship of state. Health care costs are still growing much faster than the economy and our population is still aging. The retirement of the baby boom generation and the rising health care costs will soon place unprecedented and long-lasting stress on the federal budget, raising debt held by the public to unsustainable levels. Figure 1 shows GAO's simulation of the deficit path based on recent trends and policy preferences. In this we assume that the expiring tax cuts are extended through 2017--and then revenues are brought to their historical level as a share of gross domestic product (GDP)--that discretionary spending grows with the economy and no structural changes are made to Social Security, Medicare, or Medicaid. Rapidly rising health care costs are not simply a federal budget problem; they are our nation's number one fiscal challenge. As shown in figure 2, GAO's fiscal model demonstrates that state and local governments-- absent policy changes--will also face large and growing fiscal challenges beginning within the next few years. As is true for the federal budget, growth in health-related spending--Medicaid and health insurance for state and local employees and retirees--is the primary driver of the fiscal challenges facing the state and local governments. For the federal government increased spending and rising deficits will drive a rising debt burden. At the end of fiscal year 2007, debt held by the public exceeded $5.0 trillion. Figure 3 shows that this growth in our debt cannot continue unabated without causing serious harm to our economy. But this is only part of the story. The federal government has been spending the surpluses in the Social Security and other trust funds for years; if we include debt held by those funds, our total debt is much higher--$9.0 trillion. On September 29, 2007, the statutory debt limit had to be raised for the third time in 4 years; between the end of fiscal year 2003 and the end of fiscal year 2007 the debt limit had to be increased by one-third. Although borrowing by one part of the federal government from another may not have the same economic and financial implications as borrowing from the public, it represents a claim on future resources and hence a burden on future taxpayers and the future economy. As alarming as the size of our current debt is, it excludes many items, including the gap between future promised and funded Social Security and Medicare benefits, veterans' health care, and a range of other commitments and contingencies that the federal government has pledged to support. If these items are factored in, the total burden in present value dollars is estimated to be about $53 trillion. I know it is hard to make sense of what "trillions" means. One way to think about it is this: Imagine we decided to put aside and invest today enough to cover these promises tomorrow. It would take approximately $455,000 per American household--or $175,000 for every man, woman, and child in the United States. Clearly, despite some progress in addressing our short-term deficits, we have not made progress on our long-term fiscal challenge. In fact, we have lost and continue to lose ground absent meaningful action (see fig. 4). Although Social Security is a major part of the fiscal challenge, it is far from our biggest challenge. Spending on Medicare and Medicaid represents a much larger, faster growing, and more immediate problem. In fact, the federal government's obligations for Medicare Part D alone exceed the unfunded obligations for Social Security. Health care spending systemwide continues to grow at an unsustainable pace, eroding the ability of employers to provide coverage to their workers and undercutting their ability to compete internationally. Finally, despite spending far more of our economy on health care than other nations, the United States has above average infant mortality, below average life expectancy, and the largest percentage of uninsured individuals. In short, our health care system is badly broken. Medicare and Medicaid spending threaten to consume an untenable share of the budget and economy in the coming decades. The federal government has essentially written a "blank check" for these programs. In contrast, other industrialized nations have put their health care programs on a budget, even ones with national health care plans. We should consider imposing limits on federal spending for health care sooner rather than later. Figure 5 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Although Social Security in its current form will grow from 4.2 percent of GDP today to 6.3 percent in 2080, Medicare and Medicaid's burden on the economy will almost quadruple--from 4.7 percent to 17.7 percent of the economy. Unlike Social Security, which grows larger as a share of the economy and then levels off, Medicare and Medicaid continue to grow during this projection period. Furthermore, these projections assume growth in Medicare and Medicaid spending of GDP per capita plus about 1 percent on average--a rate that is significantly below recent historical experience of about 2.5 percent above GDP per capita. But even with this "optimistic" assumption, the outlook is daunting. It is clear that health care is the main driver of our long-term challenge. In fact, if there is one thing that could bankrupt America, it's runaway health care costs. We must not allow that to happen. Changing the path of health care spending is much more complicated than dealing with Social Security. Unlike Social Security, Medicare spending growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. The growth of medical technology has contributed to increases in the volume and complexity of health care services, and information on the cost and quality of health care is not readily available. Public and private health care spending continues to rise because of increased medical prices and increased utilization due to growth in the number, or volume, of services per capita, and use of more intense, or complex, services. Moreover, the actual costs of health care consumption are not transparent. Consumers are largely insulated by third-party payers from the cost of health care decisions. As shown in figure 6, total health care spending is absorbing an increasing share of our nation's GDP. From 1976 through 2006, total public and private spending on health care grew from about 8 percent to 16 percent of GDP. Total health care spending is projected to grow to about 20 percent of GDP by 2016. Addressing the unsustainability of health care costs is a major competitiveness and societal challenge that calls for us as a nation to fundamentally rethink how we define, deliver, and finance health care in both the public and the private sectors. A major difficulty is that our current system does little to encourage informed discussions and decisions about the costs and value of various health care services. These decisions are very important when it comes to cutting-edge drugs and medical technologies, which can be very expensive but offer no advantage over their alternatives. Medical technology is a major contributor to growth in health care spending. For example, one study found that the average amount spent per heart attack case increased nearly $10,000 per case after controlling for inflation, or 4.2 percent real growth per year between 1984 and 1998. Nearly half of the cost increases resulted from people getting more intensive technologies--such as cardiac catheterization--over time. In some cases, new technology can lead to overdiagnosis and the excessive use of resources. One study cites the use of spinal magnetic resonance imaging (MRI) as one example. Researchers find that diagnostic spinal MRI sometimes reveals abnormalities having no clinical relevance. According to the study, some physicians act on this information and perform unnecessary surgery that can lead to complications. Obesity, smoking, and other population risk factors can lead to expensive chronic conditions; the increased prevalence of such conditions--for example, diabetes and heart disease--drives growth in the utilization of health care resources and therefore in spending. Obesity has been the subject of several recent studies focusing on associated health care cost increases. For example, one study attributes 27 percent of the growth in inflation-adjusted per capita spending between 1987 and 2001 to the rising prevalence of obesity and higher relative per capita spending among obese individuals. Both public and private payers face fundamental challenges in the struggle to contain health care spending growth. One of the challenges involves the unbridled use of technology and society's unmanaged expectations. Experts note that the nation's general tendency is to treat patients with available technology when there is the slightest chance of benefit to the patient, even though the costs may far outweigh the benefit to society as a whole. They note that the discipline of technology assessment has not kept pace with technology advancements. Today's employers, which finance a substantial share of the health care of the privately insured population, are seeking more information on health care technology costs and benefits. Although the Food and Drug Administration (FDA), for example, evaluates new medical products based on safety and efficacy data submitted by manufacturers, it does not evaluate whether the new products are cost-effective compared with existing products used for the same treatment indications. In turn, Medicare, which generally relies on FDA approval decisions, does not evaluate whether new technologies are superior, either clinically or economically, compared with technologies already covered and paid for by the program. Further exacerbating the situation, consumers, spurred by advertising and the Internet, demand access to new medical technology without knowledge of its value, safety, or efficacy. Another cost containment challenge for all payers relates to the market dynamics of health care compared with other economic sectors. In an ideal market, informed consumers prod competitors to offer the best value. However, without reliable comparative information on medical outcomes, quality of care, and cost, consumers are less able to determine the best value. Insurance masks the actual costs of goods and services, providing little incentive for consumers to be cost-conscious. Similarly, clinicians must often make decisions in the absence of universal medical standards of practice. Under these circumstances, medical practices vary across the nation, as evidenced by wide geographic variation in per capita spending and outcomes, even after controlling for patient differences in health status. In recent years, policy analysts have discussed a number of incremental reforms aimed at moderating health care spending, in part by unmasking health care's true costs. Some call for devising new insurance strategies to make health care costs more transparent to patients. Currently, many insured individuals pay relatively little out of pocket for care at the point of delivery because of comprehensive health care coverage--precluding the opportunity to sensitize these patients to the cost of their care. Other steps include reforming the policies that give tax preferences to insured individuals and their employers. These policies permit the value of employees' health insurance premiums to be excluded from the calculation of their taxable earnings and exclude the value of the premium from the employers' calculation of payroll taxes for both themselves and employees. Tax preferences also exist for health savings accounts and other consumer-directed plans. These tax exclusions represent a significant source of forgone federal revenue and work at cross-purposes to the goal of moderating health care spending. Proposals have been made to better target tax preferences to low-income individuals and to change the tax treatment to allow consumers the same tax advantages whether they receive their health insurance through their employers or purchase it on their own. As figure 7 shows, in 2006 the tax expenditure responsible for the greatest revenue loss was that for the exclusion of employer contributions for employees' insurance premiums and medical care. Another area conducive to incremental change involves provider payment reforms. These reforms are intended to induce physicians, hospitals, and other health care providers to improve on quality and efficiency. For example, studies of Medicare patients in different geographic areas have found that despite receiving a greater volume of care, patients in higher use areas did not have better health outcomes or experience greater satisfaction with care than those living in lower use areas. Public and private payers are experimenting with payment reforms designed to foster the delivery of care that is proven to be both better clinically and more cost-effective. Ideally, identifying and rewarding efficient providers and encouraging inefficient providers to emulate best practices will result in better value for the dollars spent on care. The development of uniform standards of practice could lead to more cost-effective treatments designed to achieve the same outcomes. The problem of escalating health care costs is complex because addressing federal programs such as Medicare and the federal-state Medicaid program will need to involve change in the health care system of which they are a part--not just within federal programs. This will be a major societal challenge that will affect all age groups. Because our health care system is complex, with multiple interrelated pieces, solutions to health care cost growth are likely to be incremental and require a number of extensive efforts over many years. In my view, taking steps to address the health care cost dilemma systemwide puts us on the right path for correcting the long-term fiscal problems posed by the nation's health care entitlements. I have suggested in the past that we consider four elements as pillars of any major health care reform effort: Provide universal access to basic and essential health care. Impose limits on federal spending for health care. Implement national, evidence-based medical practice standards to improve quality, control costs, and reduce litigation risks. Take steps to ensure that all Americans assume more personal responsibility and accountability for their own health and wellness. As a nation, we need to weigh unlimited individual wants against broader societal needs and decide how responsibility for financing health care should be divided among employers, individuals, and government in an affordable and sustainable manner. Ultimately, we may need to define a set of basic and essential health care services to which every American is ensured access. Individuals wanting additional services, and insurance coverage to pay for them, would have that choice but would be required to allocate their own resources. Clearly, such a dramatic change would require a long transition period--all the more reason to act sooner rather than later. As we enter 2008, what we call the long-term fiscal challenge is not in the distant future. In fact, the first baby boomers already have filed for early retirement benefits and will be eligible for Medicare benefits in less than 3 years. The budget and economic implications of the baby boom generation's retirement have already become a factor in CBO's 10-year baseline projections and that impact will only intensify as the baby boomers age. As the share of the population over 65 climbs, demographics will interact with rising health care costs. The longer we wait, the more painful and difficult the choices will become. Simply put, our nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time. The financial markets are noticing. Approximately 3 years ago, Standard and Poor's issued a publication stating that absent policy changes, the U.S. government's debt-to-GDP ratio was on track to mirror ratios associated with speculative-grade sovereigns. Within the last month, Moody's Investors Service issued its annual report on the United States. In that report, they noted their concern that absent Medicare and Social Security reforms, the long-term fiscal health of the United States and our current Aaa bond rating were at risk. These not too veiled comments serve to note the significant longer-term interest rate risk that we face absent meaningful action to address our longer-range challenge as well. Higher longer-term interest costs would only serve to complicate our fiscal, economic, and other challenges in future years. As you are aware, during the past 3 years, I have traveled to 25 states as part of the Fiscal Wake-Up Tour. During the tour, it has become clear that the American people are starved for two things from their elected officials--truth and leadership. Last fall, I was pleased to join you when you announced your proposal to create a Bipartisan Task Force for Responsible Fiscal Action. As I said at the time, I believe it offers one potential means to achieve an objective we all should share: taking steps to make the tough choices necessary to keep America great and to help make sure that our country's, children's, and grandchildren's future is better than our past. By introducing your proposal to create a Bipartisan Task Force for Responsible Fiscal Action, you have shown the kind of leadership that is essential for us to successfully address the long-term fiscal challenge that lies before us. And I want to note you are not alone. Several other members on both sides of the political aisle and on both sides of Capitol Hill have also introduced legislation seeking to accomplish similar objectives. But we do need to act. The passage of time is shrinking the window for action. Albert Einstein said the most powerful force in the universe is compound interest and today the miracle of compounding is working against us. After 2009 the Social Security cash surplus--which has cushioned and masked the impact of our imprudent fiscal policy--will begin to shrink, putting pressure on the rest of the budget. The Medicare Hospital Insurance trust fund is already in a negative cash flow situation. I hope we do not wait to act until the Social Security trust fund turns to negative cash flow in 2017. Demographics narrow the window for other reasons as well. People need time to prepare for and adjust to changes in benefits. There has been general agreement that there should be no change in Social Security benefits for those currently in or near retirement. If we wait until the baby boom generation has retired, that becomes much harder and much more expensive. Mr. Chairman, Senator Gregg, Members of the Committee, meeting this long-term fiscal challenge overarches everything. It is our nation's largest sustainability challenge, but it is not our only one. If we want to position the United States to meet the challenges of this century both abroad and at home, we must also tackle other challenges, including reexamining what government does and how it does business. Last month, we published a new report that lays out a possible path for change. The report is entitled A Call for Stewardship: Enhancing the Federal Government's Ability to Address Key Fiscal and Other 21st Century Challenges. It provides 13 potential tools for Congress and the administration to use to begin to confront our long-term fiscal and other challenges. I hope you find this report useful in facilitating discussions and decisions about various challenges facing our great nation in the 21st century. Today it is understandable that many Americans and their elected representatives are concerned about recent market declines and a slowing economy. We have an obligation, however, to look at both the short term and the long term. Whatever Congress and the President decide to do in response to our current economic weakness, it is important to be mindful of the danger posed by our long-term fiscal path. This long-term challenge increases the importance of careful design of any stimulus package--it should be timely, targeted, and temporary. Budgets, deficits, and long-term fiscal and economic outlooks are not just about numbers, they are also about values. It is time for all Americans, especially baby boomers to recognize our collective stewardship obligation for the future. In doing so, we need to act soon because time is working against us. We must make choices that may be difficult and unpleasant today to avoid passing an even greater burden on to future generations. Let us not be the generation that sent the bill for its conspicuous consumption to its children and grandchildren. Thank you Mr. Chairman, Mr. Gregg, and Members of the Committee for having me today. We at GAO, of course, stand ready to assist you and your colleagues as you tackle these important challenges. For further information on this testimony, please contact Susan J. Irving at (202) 512-9142 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Jay McTigue, Assistant Director, and Melissa Wolf. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO has for many years warned that our nation is on an imprudent and unsustainable fiscal path. During the past 3 years, the Comptroller General has traveled to 25 states as part of the Fiscal Wake-Up Tour. Members of this diverse group of policy experts agree that finding solutions to the nation's long-term fiscal challenge will require bipartisan cooperation, a willingness to discuss all options, and the courage to make tough choices. At the request of Chairman Conrad and Senator Gregg, the Comptroller General discussed the long-term fiscal outlook, our nation's huge health care challenge, and the shrinking window of opportunity for action. As we enter 2008, what we call the long-term fiscal challenge is not in the distant future. Already the first members of the baby boom generation have filed for early Social Security retirement benefits--and will be eligible for Medicare in only 3 years. Simulations by GAO, the Congressional Budget Office (CBO), and others all show that despite a 3-year decline in the budget deficit, we still face large and growing structural deficits driven primarily by rising health care costs and known demographic trends. Under any plausible scenario, the federal budget is on an imprudent and unsustainable path. Rapidly rising health care costs are not simply a federal budget problem; they are our nation's number one fiscal challenge. Growth in health-related spending is the primary driver of the fiscal challenges facing the state and local governments. Unsustainable growth in health care spending is a systemwide challenge that also threatens to erode the ability of employers to provide coverage to their workers and undercut our ability to compete in a global marketplace. Addressing the unsustainability of health care costs is a societal challenge that calls for us as a nation to fundamentally rethink how we define, deliver, and finance health care in both the public and the private sectors. The passage of time has only worsened the situation: the size of the challenge has grown and the time to address it has shrunk. The longer we wait the more painful and difficult the choices will become, and the greater the risk of a very serious economic disruption. It is understandable that the Congress and the administration are focused on the need for a short-term fiscal stimulus. However, our long-term challenge increases the importance of careful design of any stimulus package--it should be timely, targeted, and temporary. At the same time, creating a capable and credible commission to make recommendations to the next Congress and the next president for action on our longer-range and looming fiscal imbalance is called for.

The protection of the nation's critical infrastructure against natural and man-made catastrophic events has been a concern of the federal government for over a decade. For example, in May 1998, Presidential Decision Directive 63 (PDD-63) established critical infrastructure protection as a national goal and presented a strategy for cooperative efforts by the government and the private sector to protect it. In December 2003, HSPD-7 was issued, defining responsibilities for DHS and federal agencies responsible for addressing specific critical infrastructure sectors. These agencies are to identify, prioritize, and coordinate the protection of critical infrastructure to prevent, deter, and mitigate the effects of attacks. DHS is to, among other things, coordinate national critical infrastructure protection efforts, establish uniform policies, approaches, guidelines, and methodologies for integrating federal infrastructure protection and risk management activities within and across sectors; and provide for the sharing of information essential to critical infrastructure protection. According to the NIPP, DHS is also to develop and implement comprehensive risk management programs and methodologies, develop cross-sector and cross-jurisdictional protection guidance, recommend risk management and performance criteria and metrics within and across sectors, and establish structures to enhance the close cooperation between the private sector and government at all levels. In addition, DHS is the focal point for the security of cyberspace-- including analysis, warning, information sharing, vulnerability reduction, mitigation and recovery efforts for public and private critical infrastructure information systems. To accomplish this mission, DHS is to work with other federal agencies, state and local governments, and the private sector. Federal policy further recognizes the need to prepare for debilitating Internet disruptions and--because the vast majority of the Internet infrastructure is owned and operated by the private sector--tasks DHS with developing an integrated public/private plan for Internet recovery. HSPD-7 designated sector-specific agencies for each of the critical infrastructure sectors, responsible for coordinating and collaborating with relevant federal agencies, state and local governments, and the private sector, and facilitating the sharing of information about threats, vulnerabilities, incidents, potential protective measures, and best practices. Agencies must submit an annual report to DHS on their efforts. DHS serves as the sector-specific agency for 10 of the sectors: information technology; telecommunications; transportation systems; chemical; emergency services; commercial nuclear reactors, material, and waste; postal and shipping; dams; government facilities; and commercial facilities. (See table 1 for a list of sector-specific agencies and a brief description of each sector). Under the NIPP, the sector-specific agencies, in coordination with their respective government and private sector councils, are responsible for developing individual protection plans for their sectors that, among other things, (1) define the security roles and responsibilities of members of the sector, (2) establish the methods that members will use to interact and share information related to protection of critical infrastructure, (3) describe how the sector will identify its critical assets, and (4) identify the approaches the sector will take to assess risks and develop programs to protect these assets. DHS is to use these individual plans to evaluate whether any gaps exist in the protection of critical infrastructures on a national level and, if so, to work with the sectors to address these gaps. All of the sectors have established government councils, and voluntary private sector councils under the NIPP model have been formed for all sectors except transportation systems. The nature of the 17 sectors varies and council membership reflects this diversity, but the councils are generally comprised of representatives from the various federal agencies with regulatory or other interests in the sector, some state and local officials with purview over the sectors, and asset owners and operators. Because some of the councils are newer than others, council activities vary based on the council's maturity and other characteristics, with some younger councils focusing on establishing council charters, while more mature councils focused on developing protection strategies. Seven sectors had not formed either a government council or sector council until after publication of an Interim NIPP in February 2005, while 10 of the sectors had done so. These 10 sectors said they recognized the need to collaborate to address risks and vulnerabilities that could result in economic consequences for their sectors. For example, prior to the development of the NIPP, DHS and the Department of Agriculture had (1) established a government coordinating council for the agriculture and food sector to coordinate efforts to protect against agroterrorism, and (2) helped the agriculture and food sector establish a private sector council to facilitate the flow of alerts, plans, and other information. As of March 2007, the transportation systems sector had yet to form a sector council, but a DHS Infrastructure Protection official said each transportation mode-- such as rail, aviation, and maritime--had established a sector council. According to DHS officials, once the modes are organized, the transportation systems council will be formed. Transportation Security Administration (TSA) officials attributed the delay to the heterogeneous nature of the transportation sector--ranging from aviation to shipping to trucking. The composition, scope, and nature of the 17 sectors themselves vary significantly, and the memberships of their government and sector councils reflect this diversity. The enormity and complexity of the nation's critical infrastructure require council membership to be as representative as possible of their respective sectors. As such, council leaders-- government sector representatives and private council chairs--believe that their membership is generally representative of their sectors. Government councils include representatives from various federal agencies with regulatory or other interests in the sectors. For example, the chemical sector council includes officials with DHS; the Bureau of Alcohol, Tobacco, Firearms and Explosives; the Department of Commerce; the Department of Justice; the Department of Transportation; and the Environmental Protection Agency because each has some interest in the sector. Some government councils also include officials from state and local governments with jurisdiction over entities in the sector. Private sector council membership varies, reflecting the unique composition of entities within each, but is generally representative of a broad base of owners, operators, and associations--both large and small--within a sector. For example, members of the drinking water and water treatment systems sector council include national organizations such as the American Water Works Association and the Association of Metropolitan Water Agencies and also members of these associations that are representatives of local entities including Breezy Hill Water and Sewer Company and the City of Portland Bureau of Environmental Services. In addition, the commercial facilities sector council includes more than 200 representatives of individual companies spanning 8 different subsectors, including public assembly facilities; sports leagues; resorts; lodging; outdoor events facilities; entertainment and media; real estate; and retail. This provides the councils opportunities to build the relationships needed to help ensure critical infrastructure protection efforts are comprehensive. Council activities have varied based on the maturity of the councils. Because some of the councils are newer than others, council meetings have addressed a range of topics from agreeing on a council charter to developing industry standards and guidelines for business continuity in the event of a disaster or incident. For example, the commercial facilities government council, which formed in 2005, has held meetings to address operational issues--such as agreeing on a charter, learning what issues are important to the sector, learning about risk management tools, and beginning work on the sector-specific plan. Councils that are more mature have been able to move beyond these activities to address more strategic issues. For example, the banking and finance sector council, which formed in 2002, focused its efforts most recently on strengthening the financial system's ability to continue to function in the event of a disaster or incident (known as "resilience"), identifying a structured and coordinated approach to testing sector resilience, and promoting appropriate industry standards and guidelines for business continuity and resilience. Government and sector council representatives most commonly cited long-standing working relationships between entities within their respective sectors and with the federal agencies that regulate them, the recognition among some sector entities of the need to share infrastructure information with the government and within the sector, and operational support from DHS contractors as factors that facilitated council formation. However, these representatives also most commonly identified several key factors that posed challenges to forming some of the councils, including (1) difficulty establishing partnerships with DHS because of issues including high turnover of its staff and DHS staff who lacked knowledge about the sector to which they were assigned, (2) hesitancy to provide sensitive information or industry vulnerabilities to the government due to concerns that the information might be publicly disclosed, and (3) lack of long-standing working relationships within the sector or with federal agencies. One of the factors assisting the formation of many of the government and sector councils was the existence of long-standing working relationships within the sectors and with the federal agencies that regulate them. Ten of the sectors had formed either a government council or private sector council that addressed critical infrastructure protection issues prior to publication of an Interim NIPP. In addition, according to government and sector council representatives, sectors in which the industries have been highly regulated by the federal government--such as the banking and finance sector as well as the commercial nuclear sector--were already used to dealing with the federal government on many issues. Therefore, forming a relationship between the government and the private sector and within the sector was not very difficult. The availability of DHS contractors that provided administrative and other assistance--such as meeting planning, developing materials, recording and producing minutes, delivering progress reports, and supporting development of governance documents--to the government and sector councils was a third facilitating factor cited by representatives of 13 government and 5 sector councils. For example, representatives of the emergency services sector council and the telecommunications sector council stated that some of the services were very helpful, including guidance the contractors provided on lessons learned from how other sector councils were organized. Council representatives with three government and eight private sector councils reported that they experienced problems forming their councils due to a number of challenges establishing partnerships with DHS. Specifically, these reported challenges included high turnover of staff, poor communications with councils, staff who were unfamiliar with the sector and did not understand how it works, shifting priorities that affected council activities, and minimal support for council strategies. DHS acknowledged that its reorganization resulted in staff turnover, but according to DHS's Director of the Infrastructure Programs Office within the Office of Infrastructure Protection, this should not have affected formation since DHS has taken a consistent approach to implementing the partnership model and issuing guidance. However, the director acknowledged that continuing staff turnover could affect the eventual success of the partnerships because they are dependent on the interactions and developing trust. Continuity of government staff is a key ingredient in developing trusted relationships with the private sector. Representatives with six government and five sector councils noted that the private sector continues to be hesitant to provide sensitive information regarding vulnerabilities to the government as well as with other sector members due to concerns that, among other things, it might be publicly disclosed. For example, these representatives were concerned that the items discussed, such as information about specific vulnerabilities, might be subject to public disclosure under the Federal Advisory Committee Act and thereby be available to competitors or potentially make the council members subject to litigation for failure to publicly disclose any known threats or vulnerabilities. This issue continues to be a long-standing concern and one that contributed to our designating homeland security information sharing as a high-risk issue in January 2005. We reported then that the ability to share security-related information is critical and necessary because it can unify the efforts of federal, state, and local government agencies and the private sector in preventing or minimizing terrorist attacks. In April 2006, we reported that DHS continued to face challenges that impeded the private sector's willingness to share sensitive security information with the government. In this report, we assessed the status of DHS efforts to implement the protected critical infrastructure information (PCII) program created pursuant to the Homeland Security Act. This program was specifically designed to establish procedures for the receipt, care, and storage of critical infrastructure information voluntarily submitted to the government. We found that while DHS created the program office, structure, and guidance, few private sector entities were using the program. Challenges DHS faced included being able to assure the private sector that such information will be protected and specifying who will be authorized to have access to the information, as well as to demonstrate to critical infrastructure owners the benefits of sharing the information. We concluded that if DHS were able to surmount these challenges, it and other government users may begin to overcome the lack of trust that critical infrastructure owners have in the government's ability to use and protect their sensitive information. We recommended that DHS better define its critical infrastructure information needs and better explain how this information will be used. DHS concurred with our recommendations. In September 2006 DHS issued a final rule that established procedures governing the receipt, validation, handling, storage, marking, and use of critical infrastructure information voluntarily submitted to DHS. Four government and four sector council representatives stated that the lack of prior working relationships either within their sector or with the federal government created challenges in forming their respective councils. For example, the public health and health care sector struggled with creating a sector council that represented the interests of the sector because it is composed of thousands of entities that are not largely involved with each other in daily activities. According to the sector- specific agency representative of the Department of Health and Human Services (HHS), historically, there was relatively little collaboration on critical infrastructure protection-related issues among sector members. Despite these reported challenges, the public health and health care sector has been able to form a sector council that is in the early stages of organization. The commercial facilities sector, which also involves varied and often unrelated stakeholders nationwide, similarly reported that the disparities among stakeholders made forming a council challenging. This sector encompasses owners and operators of stadiums, raceways, casinos, and office buildings that have not previously worked together. In addition, the industries composing the commercial facilities sector did not function as a sector prior to the NIPP and did not have any prior association with the federal government. As a result, this sector council has been concentrating its efforts on identifying key stakeholders and agreeing on the scope of the council and its membership. Each of the 17 sectors provided a sector-specific plan to DHS by the end of December 2006, as required by the NIPP, according to DHS Infrastructure Protection officials. Representatives from both the government and sector councils cited factors that have facilitated the development of their plans--similar to those that facilitated development of their councils-- most commonly citing pre-existing plans; historical relationships between the federal government and the private sector or across the private sector, and contractor support. Sector representatives most commonly reported that key challenges in drafting their plans were the late issuance of a final NIPP, which caused some sectors to delay work on their plans, the changing nature of DHS guidance on how to develop the plans, and the diverse make-up of sector membership. Sector-specific agencies met the deadline to complete their plans by December 2006, according to DHS Infrastructure Protection officials. The NIPP requires these plans to contain definitions of the processes the sectors will use to identify their most critical assets and resources as well as the methodologies they will use to assess risks, but not information on the specific protective measures that will be utilized by each sector. The NIPP also requires agencies to coordinate the development of plans in collaboration with their security partners represented by government and sector councils and provide documentation of such collaboration. To date, the level of collaboration between sector-specific agencies and the sector councils in developing the sector-specific plans has varied--ranging from soliciting stakeholder comments on a draft to jointly developing the plan. For example, TSA developed the transportation systems plan and solicited input from private sector stakeholders, while representatives of the energy sector council worked with the Department of Energy to draft the energy plan. Despite these differences, according to DHS Infrastructure Protection officials, all the sectors submitted their plans to DHS by the December 2006 deadline and DHS and other stakeholders are in the process of reviewing them. Sector representatives from the agriculture and food, banking and finance, chemical, and energy sectors said their sectors had already developed protection plans prior to the interim NIPP published in February 2005 because they had recognized the economic value in planning for an attack. These representatives said they were able to revise their previous plans to serve as the plans called for in the NIPP. For example, the Department of Energy, with input from the sector, had developed a protection plan in anticipation of the Year 2000 computer threat; Department of Energy officials noted that both this plan and the relationships established by its development have been beneficial in developing the protection plan for the energy sector. Similarly, the banking and finance sector council, which worked closely with the Department of Treasury, has had a critical infrastructure protection plan in place for the banking and finance sector since 2003 and planned to use it, along with other strategies, to fit the format required by the NIPP. Representatives from 13 government and 10 sector councils agreed that having prior relationships--either formally between the federal government and the private sector based on regulatory requirements, or informally within and across industries--facilitated sector-specific plan development. For example, a nuclear sector representative said that its regulator, the Nuclear Regulatory Commission, had already laid out clear guidelines for security and threat response that facilitated developing the sector's plan. The drinking water and wastewater sector council representative said that its long-standing culture of sharing information and decades of work with the Environmental Protection Agency helped with plan development. Representatives from seven sector-specific agencies and five sector councils said that assistance from DHS officials or DHS contractors was also a factor that helped with plan development, such as research and drafting. For example, DHS contract staff assisted the Department of the Interior and DHS's Chemical and Nuclear Preparedness and Protection Division in drafting the plans for the national monuments and icons and emergency services sectors, respectively. Representatives from the chemical, emergency services, nuclear, and telecommunications sector councils said that contractors hired by DHS were helpful as resources providing research or drafting services. Representatives from six government councils and six sector councils said that the delays in issuing a final NIPP and changing DHS sector-specific plan guidance contributed to delays in developing their sector plans. According to DHS, sectors had begun drafting their sector-specific plans following the issuance of initial plan guidance in April 2004. But, DHS issued revised guidance based, in part, on stakeholder comments a year later with new requirements, including how the sector will collaborate with DHS on risk assessment processes as well as how it will identify the types of protective measures most applicable to the sector. DHS then issued additional guidance in 2006 requiring that the plans describe how sector-specific agencies are to manage and coordinate their responsibilities. These changes required some sectors--such as dams, emergency services, and information technology--to make significant revisions to their draft plans. Representatives from these sectors expressed frustration with having to spend extra time and effort making changes to the format and content of their plans each time DHS issued new guidance. Therefore, they decided to wait until final guidance was issued based on the final, approved NIPP. In our current work, once we have access to these plans, it will be important to determine how these delays may have affected the quality, completeness, and consistency of the plans. However, some sectors found the changes in the NIPP and plan guidance to be improvements over prior versions that helped them prepare their plans. For example, representatives from the emergency services sector said that guidance became more specific and, thus, more helpful over time, and representatives from the national monuments and icons sector said that the DHS guidance has been useful. Representatives from the information technology, public health, energy, telecommunications, and transportation systems sectors, among others, had commented that the NIPP should emphasize resiliency--meaning how quickly can a key asset or resource begin operations after an incident--rather than protection measures, such as hiring guards, installing gates and similar actions. According to some of these representatives, it is impossible and cost- prohibitive to try to protect every asset from every possible threat. Instead, industries in these sectors prefer to invest resources in protecting the most critical assets with the highest risk of damage or destruction and to plan for recovering quickly from an event. Representatives from the telecommunications sector added that resiliency is especially important for interdependent industries in restoring services such as communications, power, the flow of medical supplies, and transportation as soon as possible. DHS incorporated the concept of resiliency into the final NIPP to address these concerns and continues to emphasize protection as well. As in establishing their councils, in developing their sector-specific plans, officials from three government councils and five sector councils said that their sectors were made up of a number of disparate stakeholders, making agreement on a plan more difficult. For example, the commercial facilities sector is composed of eight different subsectors of business entities that have historically had few prior working relationships. According to the government council representative, the magnitude of the diversity among these subsectors has slowed the process of developing a plan so that the sector only had an outline of its plan as of May 2006. Similarly, government and private council representatives of the agriculture and food sector indicated that the diversity of industries included in this sector such as farms, food-processing plants, and restaurants, each of which has differing infrastructure protection needs, has made developing a plan more difficult. To some extent, all sectors depend on cyber infrastructure to operate, such as using computers to control access at nuclear facilities. So, it is important that sectors include cybersecurity in their sector's protection plan and programs. As the focal point for critical infrastructure protection, DHS has many cybersecurity-related responsibilities that are called for in law and policy. In 2005 and 2006, we reported that DHS had initiated efforts to address these responsibilities, but that more remained to be done. Specifically, in 2005, we reported that DHS had initiated efforts to fulfill 13 key cybersecurity responsibilities (shown in table 2), but it had not fully addressed any of them. For example, DHS established forums to foster information sharing among federal officials with information security responsibilities and among various law enforcement entities, but had not developed national threat and vulnerability assessments for cybersecurity. Since that time, DHS has made progress on its responsibilities--including the release of its NIPP--but none has been completely addressed. Moreover, in 2006, we reported that DHS had begun a variety of initiatives to fulfill its responsibility to develop an integrated public/private plan for Internet recovery, but that these efforts were not complete or comprehensive. For example, DHS had established working groups to facilitate coordination among government and industry infrastructure officials and fostered exercises in which government and private industry could practice responding to cyber events, but many of its efforts lacked time frames for completion and the relationships among its various initiatives are not evident. DHS faces a number of challenges that have impeded its ability to fulfill its cybersecurity responsibilities, including establishing effective partnerships with stakeholders, achieving two-way information sharing with stakeholders, demonstrating the value it can provide to private sector infrastructure owners, and reaching consensus on DHS's role in Internet recovery and on when the department should get involved in responding to an Internet disruption. In addition, we reported that DHS faced a particular challenge in attaining the organizational stability and leadership it needed to gain the trust of other stakeholders in the cybersecurity world--including other government agencies as well as the private sector. In July 2005, DHS undertook a reorganization that established the position of the Assistant Secretary of Cyber Security and Telecommunications--in part to raise the visibility of cybersecurity issues in the department. In September 2006, DHS announced the appointment of an Assistant Secretary for Cyber Security and Telecommunications. Since the appointment, the Assistant Secretary has led efforts to ensure the inclusion of cybersecurity in each critical infrastructure sector's sector specific plan. The Assistant Secretary has set priorities that include (1) preparing for and deterring attacks by encouraging entities, through implementation of the sector specific plans, to systematically assess their network vulnerabilities and take steps to fix them, (2) responding to cyber attacks of potentially national significance by leveraging operational expertise and building situational awareness and incident response capabilities of the government and private sector; and (3) building awareness about the responsibilities for securing networks across the public and private sectors. In addition to the National Cyber Security Division, the Assistant Secretary is also responsible for the National Communications System, which ensures continuity of communications and priority service for the government under conditions of national emergency, and the Office of Emergency Communications, established pursuant to the fiscal year 2007 DHS appropriations act. This office is responsible for developing a national strategy and technical assistance and outreach to state and local governments for ensuring operable and interoperable emergency communications capabilities for first responders. To strengthen DHS's ability to implement its cybersecurity responsibilities and to resolve underlying challenges, GAO has made about 25 recommendations over the last several years. These recommendations focus on the need to (1) conduct important threat and vulnerability assessments, (2) develop a strategic analysis and warning capability for identifying potential cyber attacks, (3) protect infrastructure control systems, (4) enhance public/private information sharing, and (5) facilitate recovery planning, including recovery of the Internet in case of a major disruption. DHS concurred with most of the recommendations addressed to them. Together, the recommendations provide a high-level road map for DHS to use in working to improve our nation's cybersecurity posture. While DHS has made progress in addressing some of these recommendations many things remain to be done. Until it addresses these recommendations, DHS will have difficulty achieving results in its role as the federal focal point for the cybersecurity of critical infrastructures-- including the Internet. Table 3 shows our detailed recommendations. Critical infrastructure protection is vital to our national security, economic vitality, and public health. Yet a decade after focusing on improving our ability to protect our key assets and resources, progress has been mixed, as Katrina demonstrated. It showed that significant damage to critical infrastructure and key resources could disrupt the functioning of businesses and government alike, underscoring the need for the private and public sector to establish stronger partnerships and working relationships in order to take a coordinated approach to critical infrastructure protection. DHS has moved out by issuing the National Infrastructure Protection Plan as a guiding framework for a national effort, and is providing contractor, technical, and analytical support to sectors, among other things, to encourage progress. Likewise, some sectors--those who are more mature, have been regulated, are more homogeneous, or had economic incentives, such as the threat of Y2K--came together to collaborate, work effectively, and develop protection strategies, even before DHS established the national plan. But other sectors--those who have just been created, who have not worked with federal agencies in the past, who are not regulated but must volunteer to participate in the planning process, and who are large and diverse--face bigger challenges in achieving this coordination and rate of progress. Despite these challenges, each sector submitted a protection plan to DHS. However, DHS has yet to release them. Given the wide variance in the maturity of the sectors, the quality, comprehensiveness, completeness, and consistency of the plans remain to be seen. In addition, it is important to realize that in some cases, the sector specific plan is really more of a first step--a "plan to plan." In other words, the sectors were only to describe how they expect to identify and prioritize critical assets, how they expect to assess their risks, vulnerabilities, threats and consequences, and how they will approach developing protection programs, not detail how they will implement them. Thus, fulfilling its statutory responsibilities for ensuring the nation's critical infrastructure is protected will be a long-term commitment for DHS. This makes it even more important that DHS address challenges that our work has identified over the years and for which we have made a number of recommendations yet to be implemented, including our body of work assessing the protection of cyber infrastructure. These challenges include building trusted working relationships and better collaborating with states and localities, given that the infrastructure is in their communities, as well as the private sector, given that they own most of the assets and resources. Challenges also include providing the environment and incentives for the private sector to voluntarily share information with DHS on gaps in vulnerabilities and protective measures, information that the agency must have to be able to ensure assets and resources critical to the nation are protected. Challenges also include providing organizational stability and leadership, addressing employee turnover and gaps in expertise, and enhancing agency capabilities, such as for providing analysis and warning and identifying and assessing threats and vulnerabilities. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the subcommittee may have at any time. For further information on this testimony, please contact Eileen Larence at (202) 512-8777 or by e-mail at [email protected], or regarding cyber- critical infrastructure protection issues, David Powner at (202) 512-9286 or by e-mail at [email protected]. Individuals making key contributions to this testimony include Susan Quinlan, Assistant Director; Michael Gilmore; Landis Lindsey; and Edith Sohna. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

As Hurricane Katrina so forcefully demonstrated, the nation's critical infrastructures--both physical and cyber--have been vulnerable to a wide variety of threats. Because about 85 percent of the nation's critical infrastructure is owned by the private sector, it is vital that the public and private sectors work together to protect these assets. The Department of Homeland Security (DHS) is responsible for coordinating a national protection strategy including formation of government and private sector councils as a collaborating tool. The councils, among other things, are to identify their most critical assets, assess the risks they face, and identify protective measures, in sector-specific plans that comply with DHS's National Infrastructure Protection Plan (NIPP). This testimony is based primarily on GAO's October 2006 sector council report and a body of work on cyber critical infrastructure protection. Specifically, it addresses (1) the extent to which these councils have been established, (2) key facilitating factors and challenges affecting the formation of the council, (3) key facilitating factors and challenges encountered in developing sector plans, and (4) the status of DHS's efforts to fulfill key cybersecurity responsibilities. GAO has made previous recommendations, particularly in the area of cybersecurity that have not been fully implemented. Continued monitoring will determine whether further recommendations are warranted. To better coordinate infrastructure protection efforts as called for in the NIPP, all 17 critical infrastructure sectors have established their respective government councils, and nearly all sectors have initiated their voluntary private sector councils. But council progress has varied due to their characteristics and level of maturity. For example, the public health and healthcare sector is quite diverse and collaboration has been difficult as a result; on the other hand, the nuclear sector is quite homogenous and has a long history of collaboration. As a result, council activities have ranged from getting organized to refining infrastructure protection strategies. Ten sectors, such as banking and finance, had formed councils prior to development of the NIPP and had collaborated on plans for economic reasons, while others had formed councils more recently. As a result, the more mature councils could focus on strategic issues, such as recovering after disasters, while the newer councils were focusing on getting organized. Council members reported mixed views on what factors facilitated or challenged their actions. For example, long-standing working relationships with regulatory agencies and within sectors were frequently cited as the most helpful factor. Challenges most frequently cited included the lack of an effective relationship with DHS as well as private sector hesitancy to share information on vulnerabilities with the government or within the sector for fear the information would be released and open to competitors. GAO's past work has shown that a lack of trust in DHS and fear that sensitive information would be released are recurring barriers to the private sector's sharing information with the federal government, and GAO has made recommendations to help address these barriers. DHS has generally concurred with these recommendations and is in the process of implementing them. All the sectors met the December 2006 deadline to submit their sector-specific plans to DHS, although the level of collaboration between the sector and government councils on the plans, which the NIPP recognizes as critical to establishing relationships between the government and private sectors, varied by sector. Issuing the NIPP and completing sector plans are only first steps to ensure critical infrastructure is protected. Moving forward to implement sector plans and make progress will require continued commitment and oversight. While DHS has initiatives under way to fulfill its many cybersecurity responsibilities, major tasks remain to be done. These include assessing and reducing cyber threats and vulnerabilities and coordinating incident response and recovery planning efforts. Effective leadership by the Assistant Secretary for Cyber Security and Telecommunications is essential to DHS fulfilling its key responsibilities, addressing the challenges, and implementing recommendations.

The U.S. economy has become increasingly oriented toward international trade, with exports and imports together representing about one-quarter of U.S. gross domestic product (GDP) in 1996. As the largest regional market for U.S. products, accounting for approximately $242 billion or 40 percent of U.S. exports in 1996, the Western Hemisphere is of growing importance to U.S. commercial interests. Canada and Mexico are by far the largest U.S. trade partners in the hemisphere, accounting for approximately two-thirds of total U.S. exports of goods to the region. Countries in the Western Hemisphere also constitute about 30 percent of total U.S. foreign direct investment. During the 1960s and 1970s, most countries in Latin America and the Caribbean experimented with various arrangements to promote subregional economic integration and free trade. These initiatives were generally frustrated by trade and investment restrictions characteristic of these countries' protective economic development strategies. By the late 1980s, faced with stagnant economies and mounting external debt, countries in the region began to move away from these restrictive policies and initiated market-oriented reforms to stimulate economic growth. Although these reforms were primarily intended to address domestic economic problems, they also facilitated trade liberalization efforts. Moreover, the U.S.-Canada Free Trade Agreement in 1988 signaled a new commitment on the part of North American countries to regional trade liberalization. By the early 1990s, almost all countries in the hemisphere were engaged in multilateral or bilateral efforts to liberalize trade. After a decade of economic decline, Latin American economies have rebounded in the 1990s, and the region now represents the second fastest growing area in the world after Southeast Asia. The 1994 Miami Summit of the Americas gave new impetus to trade liberalization efforts in the region. At Miami, the 34 democratically elected leaders of countries in the Western Hemisphere agreed to conclude a free trade agreement no later than 2005, with concrete progress by the turn of the century. The summit declaration committed participating governments to negotiate, among other things, the elimination of barriers to trade in goods and services as well as investment and to provide rules in such areas as intellectual property rights and government procurement. The plan of action adopted at Miami called for two meetings of trade ministers ("ministerials") to reach agreement on the key principles upon which to base the FTAA. These two ministerials, held in Denver, Colorado (1995), and Cartagena, Colombia (1996), established a series of working groups to gather data and make recommendations to the ministers in preparation for FTAA negotiations. A third ministerial took place in Belo Horizonte, Brazil, earlier this year. The six major multilateral trading arrangements among countries of the Western Hemisphere are NAFTA, Mercosur, the Andean Community, the Caribbean Community, the Central American Common Market, and the Latin American Integration Association (LAIA). (See figs. 1 and 2.) The United States is a party only to NAFTA. There are also over 20 smaller multilateral and bilateral free trade accords among countries in the region. NAFTA, the most comprehensive trade arrangement in the region, was concluded in 1992 by Canada, Mexico, and the United States and became effective in January 1994. NAFTA created the world's largest free trade area, with a combined population of nearly 400 million and a combined GDP of almost $8 trillion. NAFTA provides for the gradual elimination of tariff barriers on most goods over a 10-year period. It covers trade in services, provides protection for investment and intellectual property rights, applies rules to government procurement, and contains a dispute settlement system. A distinct feature of NAFTA is the two side agreements on labor and the environment, designed to institutionalize efforts to (1) improve working conditions and living standards in each country and (2) address and resolve environmental issues that may arise between the parties. Mercosur was created in March 1991 by Argentina, Brazil, Paraguay, and Uruguay. Comprising a population of approximately 200 million and with a combined GDP of about $851 billion, Mercosur is the world's third largest integrated multinational market, after NAFTA and the EU. Mercosur currently functions as a customs union, providing not only for a free trade area but also for the establishment of a common external tariff. The external tariff instituted in 1995 is not to exceed 20 percent for most imports. Today, approximately 85 percent of imports from outside the bloc enter under the common external tariff, and about 90 percent of all intra-Mercosur trade is duty free. Mercosur includes a commitment by member countries to coordinate more disciplined macroeconomic policies. Also, Mercosur countries are committed to agree on a common foreign trade policy. Unlike NAFTA, Mercosur lacks agreements on intellectual property rights and government procurement. Further, while Mercosur calls for coordination on trade in services, the U.S. International Trade Commission reports that there is no fixed schedule for liberalization in this area. Besides NAFTA and Mercosur, there are four older subregional multilateral trade groupings in the Western Hemisphere. Three of these groupings--the Andean Community, the Caribbean Community, and the Central American Common Market--are customs unions at varying stages of implementation. They have all recently taken steps to further liberalize trade and promote economic integration. The fourth subregional trade arrangement, LAIA, is a network of agreements granting tariff preferences for certain product categories to member countries. In addition to the larger trade blocs previously discussed, there are more than 20 smaller multilateral and bilateral trade accords among the countries of the Western Hemisphere. Many of these were established during the 1990s. Five of these arrangements involve our NAFTA partners Canada and Mexico. Mexico-Chile Free Trade Accord (1992). This agreement calls for a phased tariff elimination between the parties. It excludes many product categories such as agricultural commodities. Mexico and Chile are currently in the process of renegotiating their 1992 agreement in an effort to broaden its scope. Mexico-Costa Rica Free Trade Agreement (1995). This agreement is generally modeled on NAFTA but excludes many agriculture and energy products. Mexico-Bolivia Free Trade Agreement (1995). This is similar to the Mexican agreement with Costa Rica. Group of Three Agreement--Mexico, Colombia, and Venezuela (1995). The Group of Three Agreement calls for the total elimination of tariffs over a 10-year period with some exceptions in the textile, petrochemical, and agricultural sectors. In addition, the arrangement includes agreements on services, intellectual property rights, government procurement, and investment. Canada-Chile Free Trade Agreement (1996). The Canada-Chile Free Trade Agreement provides for tariff elimination and contains side agreements on labor and the environment. However, it excludes, among other items, financial services and intellectual property rights. At the FTAA ministerial meetings in Denver, Cartagena, and Belo Horizonte, 12 working groups were established for the purpose of collecting information in preparation for FTAA negotiations. At Belo Horizonte, trade ministers issued a declaration calling for formal FTAA negotiations to be launched by Western Hemisphere leaders at their next summit in April 1998. While the ministers agreed on several other key issues, there is still disagreement among participating countries on the approach formal negotiations should follow. The areas of responsibility assigned to the 12 FTAA working groups reflect some of the priorities of the United States and other countries in the hemisphere (see table 1). For example, there are working groups on intellectual property rights and government procurement, issues of key interest to the United States; on subsidies, antidumping, and countervailing duties, areas of special concern to Argentina; and on smaller economies, a priority for Caribbean countries. The United States chairs the Working Group on Government Procurement. According to administration officials, there are also some issues of particular U.S. interest, such as labor and the environment, that are not fully addressed by any of the existing working groups. USTR officials noted that the United States has participated in all of the meetings and other activities of each working group. The working groups were established to collect basic information on key issues in preparation for FTAA negotiations. U.S. and OAS officials explained that the working groups have been the mechanism for accelerating progress on the priorities of participating countries. Progress in meeting the information mandates set forth at the ministerials differs for each of the 12 working groups. For example, the Working Group on Investment is particularly advanced, having prepared a comprehensive technical compendium on investment treaties in the region. This compendium was published at the Belo Horizonte ministerial in May 1997. According to both U.S. and OAS officials, the Working Group on Investment has also made considerable progress, exchanging views on elements that could be included in a FTAA investment chapter, including investor protection, national treatment, and dispute settlement. Progress in other working groups has been more modest. For example, the Working Group on Market Access reported in February 1997 that many countries had yet to submit the schedules and statistics required to prepare a hemispheric data base on tariff structures and nontariff measures. Moreover, the Working Group on Dispute Settlement, which was only established in May 1997, has not yet met. A Tripartite Committee, made up of the OAS, the IDB, and the United Nations Economic Commission on Latin America and the Caribbean, was formed after the first ministerial in Denver to provide analytical support to the working groups as requested. Each organization in the Tripartite Committee is responsible for providing technical support to the FTAA process through the working groups. For example, the IDB is collecting trade statistics to assist the Working Group on Market Access, while the OAS has provided support to other groups on trade policy issues, such as subsidies and competition policy. At this time, the Tripartite Committee's role in support of the FTAA is anticipated to be transitory. The countries are considering the possibility of establishing a temporary FTAA secretariat during the negotiations. At the Belo Horizonte meeting, ministers directed the Tripartite Committee to conduct a feasibility study based on the agreed functions of a temporary secretariat. This study is to be reported to the vice ministers at their meeting scheduled to take place in October 1997. In preparation for the ministerial meeting in Belo Horizonte, various countries and subregional blocs involved in the FTAA process submitted proposals for the overall strategy they would like to see pursued in formal FTAA negotiations. At the ministerial, consensus was reached on several key issues advanced in these proposals. A joint declaration issued at Belo Horizonte called for formal FTAA negotiations to be launched by the next summit of Western Hemisphere leaders scheduled to take place in Chile in April 1998. In the declaration, countries agreed that the FTAA would be consistent with member countries' commitments under the WTO and the FTAA. Moreover, countries agreed that the FTAA would coexist with, rather than supplant, existing subregional trade arrangements, such as NAFTA or Mercosur, to the extent that rights and obligations under these agreements are not covered or go beyond rights and obligations under the FTAA. The declaration also recognized the right of participating countries to negotiate independently or as members of subregional trade groupings, and the need to establish a temporary administrative secretariat to support future negotiations. Finally, the declaration reiterated the commitment of participating countries to conclude a trade agreement encompassing the entire hemisphere by 2005 at the latest. At the Belo Horizonte ministerial, participating countries also agreed to set up a Preparatory Committee at the vice ministerial level that will make recommendations for FTAA negotiations. The establishment of a Preparatory Committee signals a new level in the FTAA process. It indicates participating countries expect concrete results in preparing for negotiations. The Preparatory Committee is supposed to meet at least three times between May 1997 and February 1998, when the next FTAA ministerial is scheduled to take place in San Jose, Costa Rica. At the San Jose ministerial, trade ministers are committed to reach agreement on the objectives, approaches, structure, and location of the FTAA negotiations, based on the recommendations of the Preparatory Committee. Still, there is disagreement among participating countries on the pace and direction of formal negotiations. Most countries, including the United States, would prefer that formal FTAA negotiations on all issues commence during the next summit of regional leaders in 1998 and conclude no later than 2005. The members of Mercosur, however, have proposed that negotiations proceed in three phases: (1) in 1998 and 1999, countries would agree on and begin to implement "business facilitation" measures, such as adopting common customs documents or harmonized plant and animal health certificates; (2) from the year 2000 to 2002, work would begin on "standards and disciplines," including antidumping and countervailing duty rules, and market access for services; and (3) from 2003 to 2005, other disciplines and market access issues would be negotiated, including tariff reductions, a key concern of the United States. No other countries appear to support Mercosur's phased approach to negotiations. Adverse economic developments in Mexico in the months immediately following the 1994 Miami Summit raised U.S. concerns about pursuing further free trade initiatives in the region. While U.S. officials were debating the future course of U.S. involvement in regional trade efforts, other countries in the hemisphere began pursuing their own agenda, both deepening commitments under existing trade blocs and establishing new bilateral agreements. In principle, these efforts may be consistent with U.S. goals to promote free trade. In practical terms, lack of U.S. participation in shaping these agreements has created disadvantages for some U.S. exporters' access to markets in the region. These disadvantages are beginning to be felt in various sectors, including agriculture, telecommunications, pharmaceuticals, and the automotive industry. According to representatives of several Western Hemisphere countries, regardless of whether the United States resumes a more active role in shaping regional trade liberalization efforts, their countries will continue their own initiatives toward free trade and economic integration, even if these efforts do not coincide with U.S. interests. Moreover, these officials noted that it is essential for the U.S. administration to obtain fast track authority in order to make meaningful progress toward achieving the FTAA. In launching the FTAA at the Miami Summit, the United States was building on the momentum for free trade generated by the passage of NAFTA a year earlier. NAFTA was more comprehensive than any other agreement in the Western Hemisphere. It not only covered traditional tariff and nontariff issues but also placed important obligations on member countries in matters such as investment, government procurement practices, customs procedures, and trade in services. At the time, NAFTA was generally regarded as a blueprint for further trade liberalization in the region. Moreover, U.S. leadership was evident in its support of negotiations on Chile's accession to NAFTA. Only days after the summit, however, Mexico was hit by a serious financial crisis, with spillover effects in other Latin American economies. The commitment by the U.S. government of significant resources to stem and resolve the crisis raised concerns in the United States about further regional trade liberalization efforts. In the intervening period, fast track authority lapsed. Although U.S. participation in the FTAA preparatory process continued, the executive branch has been constrained from pursuing other tariff liberalization negotiations in the region. Formal negotiations on Chilean accession to NAFTA, for example, were suspended in 1995. While debate continues in the United States regarding further regional trade liberalization efforts, other countries in the region have proceeded to negotiate new trade agreements and deepen their participation in existing arrangements. Chile has been at the forefront of this trend; it has negotiated a network of free trade agreements with several countries in the region, including Venezuela and Colombia. In 1996, Chile also concluded a free trade arrangement with Mercosur, becoming in effect an associate member of that trade bloc. Under this arrangement, Chile and the Mercosur countries will phase out tariffs on products traded among them, but Chile will not adopt Mercosur's common external tariff. Chile's pursuit of free trade is not limited to South America. The Canada-Chile Free Trade Agreement, which became effective on July 1, 1997, is modeled on NAFTA and is intended as a provisional agreement to facilitate Chilean accession to NAFTA. Nevertheless, as noted earlier, there are some differences between this bilateral agreement and NAFTA, reflecting some of the areas where Chilean and Canadian interests differ significantly from those of the United States. For example, under their bilateral agreement, Chile and Canada are committed to forgo imposing antidumping and countervailing duties within 6 years after the agreement goes into effect. NAFTA, on the other hand, does not affect member countries' ability to unilaterally impose antidumping measures and countervailing duties. In addition to its trade negotiations with Canada, Chile has cultivated close commercial relations with Mexico, our other NAFTA partner. Currently, Chile and Mexico are renegotiating their 1992 free trade agreement to make it more compatible with NAFTA. Mexico, in turn, has been extending its own web of bilateral trade agreements throughout the hemisphere. As noted earlier, Mexico has concluded bilateral free trade agreements with Costa Rica and Bolivia and has a trilateral arrangement with Colombia and Venezuela. Mexico is also negotiating free trade agreements with Ecuador, El Salvador, Guatemala, Honduras, Panama, and Peru. In addition, Mexico plans to negotiate a transitional agreement with Mercosur that will cover key areas, such as market access, government procurement, intellectual property rights, and investment. Mercosur has been another focus of subregional trade initiatives since the Miami Summit. In addition to the arrangement with Chile, Mercosur has concluded a free trade agreement with Bolivia and is engaged in negotiations to widen its reach to other Andean Group countries. Mercosur and Mexico are also scheduled to begin trade negotiations later this year. Beyond the Western Hemisphere, Mercosur has concluded a framework agreement on trade with the EU and there are discussions aimed at establishing a free trade area encompassing the two trade blocs (see fig. 3). Mercosur has not only been broadening its network of agreements with other countries, it has also been deepening the level of economic integration among the four original member countries. As noted earlier, in 1995 Mercosur countries instituted the common external tariff, which is currently applied to about 85 percent of imports from outside the bloc. Trade among Mercosur member countries has almost tripled, from approximately $5 billion in 1991 to $14.5 billion in 1995--the last year for which figures were available. Lack of U.S. participation in shaping emerging Western Hemisphere trade agreements has created disadvantages for some U.S. exporters' access to these markets. By lowering or eliminating tariffs among participating countries, subregional free trade agreements that exclude the United States result in comparatively higher duties for U.S. exports. For example, Chile's network of bilateral trade agreements has given Chilean agricultural products an edge over U.S. exports in South America. Thus, while Chilean apples enter many South American markets duty free, Washington State apples face 10 to 25 percent tariffs. In recent years, Washington growers have seen their share of these markets dwindle as Chile capitalizes on its tariff preferences. Like Chile's arrangements with other South American countries, the Canada-Chile agreement has already yielded benefits for Canadian firms not enjoyed by U.S. companies. Recently, Canada's Northern Telecom won a nearly $200-million telecommunications equipment contract in Chile. According to the State Department, the choice of Northern Telecom over U.S. companies was at least in part due to the fact that buying from a U.S. producer would have meant an additional $20 million cost in duties relative to purchasing from Canada. While U.S. exports to Mercosur countries have been growing, U.S. exporters will likely face increasing difficulties in penetrating markets in Mercosur countries as commitment to common bloc trade policies deepens. For example, a USTR official noted that Mercosur is currently considering adopting product safety standards that are quite different from U.S. standards. This official explained that if these standards are adopted, U.S. auto manufacturers could be at a disadvantage in accessing the growing markets of Mercosur member countries. Mercosur's position on the recent WTO Information Technology Agreement also provides an indication of how the bloc's common foreign trade policy will complicate U.S. efforts to promote its economic interests in the region. The Information Technology Agreement, which was signed by 28 WTO members in Singapore in December 1996, provides important tariff concessions in an industry in which the United States enjoys a considerable competitive advantage. Brazil did not join in the Information Technology Agreement, seeking to protect its own emerging information technologies industry. Brazil's position on the agreement has now been adopted as an element of Mercosur's common external trade policy, while other partners like Argentina, if acting individually, might have taken a different position. The difficulties faced by the U.S. pharmaceutical industry in the Argentine market also illustrate some of the drawbacks encountered by U.S. firms as countries in the region drift away from the long-standing U.S. concern regarding intellectual property protection. In a recent statement before the Trade Subcommittee of the House Ways and Means Committee, the President of the Pharmaceutical Research and Manufacturers of America estimated that annual losses by member companies due to patent infringement in Argentina amount to several hundred million dollars. He noted that NAFTA has the strongest safeguards for intellectual property rights of any trade agreement, and concluded that if Argentina had been brought into NAFTA, that government would have had to seek to curtail patent infringement more decisively than it does now. It is worth noting that Argentina's former Finance Minister favored joining NAFTA rather than integrating further within Mercosur. However, after NAFTA negotiations with Chile were suspended, it became clear that prospects for Argentine accession to NAFTA were rather distant, and Argentina proceeded to cement its position within Mercosur. Western Hemisphere leaders have indicated their countries will continue their own initiatives toward free trade and economic integration. For example, in statements during his recent visit to the United States, the President of Chile said that his country shares the U.S. interest in promoting free trade. Elaborating on his President's remarks, a Chilean government spokesman on trade issues explained that, like the United States, Chile would like to see the widest and most comprehensive agreement possible on free trade for the Western Hemisphere. According to this official, whether through NAFTA or the FTAA, with or without the United States, Chile intends to continue to pursue trade liberalization because it is seen as furthering Chile's own interests. Chile still wants to join NAFTA, but NAFTA is now less critical to Chile than it was in 1995. Like Chile, Canadian interests in regional trade liberalization generally coincide with those of the United States. However, the recent Canada-Chile free trade agreement demonstrates that Canada is pursuing its commercial interests in the region. Indeed, the Canadian Minister of International Trade recently indicated that his government is considering negotiating a trade agreement with Mercosur. According to a Canadian government spokesman on trade policy, Canada's free trade agreement with Chile was not only meant to expedite Chilean accession to NAFTA, but it was also intended to keep alive the momentum for free trade in anticipation of FTAA negotiations. Canada would like to see decisive U.S. participation in FTAA negotiations because the two countries share many interests with regard to trade. This official explained that it would be unfortunate if the United States lacked fast track authority by the time of the 1998 Santiago Summit, as it would be at a distinct disadvantage in shaping the FTAA. It would appear that Mexico's interests in regional trade liberalization parallel those of Chile and Canada. However, some observers suggest that Mexico may be reluctant to surrender the current advantage it enjoys in terms of access to North American markets. Nevertheless, according to Mexican government trade officials, all of Mexico's agreements and negotiations with other countries in the hemisphere have sought to encourage the adoption of trade disciplines consistent with NAFTA. These officials explained that Mexico has actively supported Chilean accession to NAFTA and the concept of a free trade agreement that would encompass the entire hemisphere. Moreover, they noted that Mexico is committed to the principles of free trade and will continue to pursue free trade arrangements with other countries in the hemisphere and other regions. In contrast to the NAFTA partners and Chile, the Mercosur countries' vision of the FTAA differs significantly from that of the United States. As the largest member of Mercosur, Brazil has sought to shape the FTAA process to make it consistent with its distinct trade priorities. Since the FTAA would entail broadening Brazil's ongoing market-opening efforts, Brazil favors a slower managed approach to hemispheric trade liberalization. This would give its industries more time to adjust to foreign competition. Thus, Brazil has proposed that FTAA negotiations on market access be deferred until 2003, while the United States would like to see this matter addressed as soon as negotiations begin in 1998. A Brazilian government spokesman noted that if U.S. negotiators lack fast track authority in 1998, FTAA negotiations would still be able to reach agreement on business facilitation measures. These include items such as common customs documents, which would not require legislative approval. In this case, discussions on market access would be deferred, as favored by Mercosur in general and by Brazil in particular. In preparing this report, we relied on our past and ongoing work on Western Hemisphere trade issues. Our description of existing subregional and bilateral trade arrangements is based primarily on a review of documents on these arrangements from academic and technical publications. For our discussion on the status of FTAA negotiations and recent trade developments in the region outside the FTAA process, we interviewed officials from the OAS, IDB, USTR, the U.S. International Trade Commission, and the U.S. Department of State; representatives from five other Western Hemisphere nations at the forefront of regional trade negotiations; and academicians and other experts on the process of regional economic integration. We also reviewed documents on the FTAA prepared by the OAS Trade Unit and the FTAA working groups; declarations and supporting documentation from the Miami Summit and the three FTAA ministerial meetings that have taken place thus far; and reports from USTR, the U.S. Department of Commerce, the U.S. International Trade Commission and the Congressional Research Service. In addition, we attended several conferences and congressional hearings dealing with various aspects of the FTAA process. In order to provide some indication of the relative size of markets in the region, we prepared tables on the principal Western Hemisphere trade groupings presented in the appendix. These tables are based on data for individual countries in the region from the International Monetary Fund's Publications International Financial Statistics and Direction of Trade Statistics. We used 1994 figures for these tables because that is the latest year for which information was available for most countries in the region. For certain countries we used 1993 data, when 1994 data were not available. We conducted our review from February to June 1997 in accordance with generally accepted government auditing standards. USTR provided technical comments on a draft of this report, and we have incorporated them in the text where appropriate. USTR did not provide any evaluation of the overall thrust of the report. We are sending copies of this report to USTR, the Secretaries of Commerce and State, and interested congressional committees. We will make copies available to others on request. Please call me at (202) 512-8984 if you have any questions concerning this report. Major contributors to this report were Elizabeth Sirois, Assistant Director; Juan Gobel, Evaluator-in-Charge; Emil Friberg, Senior Economist; and Patricia Cazares, Evaluator. Currently, there are six major multilateral trading blocs in the Western Hemisphere. Following is a general profile of each of these blocs, including information on membership, gross domestic product (GDP), per capita gross domestic product, and the bloc's total exports, using data from 1994, except as noted. Established in 1969 (formerly Andean Pact or Andean Group). Established in 1973 as successor to the Caribbean Free Trade Association (CARIFTA, established in 1967). Established in 1961. Established in 1991. Established in 1980 as a successor to the Latin American Free Trade Association (LAFTA, established in 1960). Established in 1994. Budget Issues: Privatization Practices in Argentina (GAO/AIMD-96-55; Mar. 19, 1996). Mexico's Financial Crisis: Origins, Awareness, Assistance, and Efforts to Recover (GAO/GGD-96-56; Feb. 23, 1996). NAFTA: Structure and Status of Implementing Organizations (GAO/GGD-95-10BR; Oct. 7, 1994). U.S.-Chilean Trade: Pesticide Standards and Concerns Regarding Chilean Sanitary Rules (GAO/GGD-94-198; Sept. 28, 1994). North American Free Trade Agreement: Assessment of Major Issues (GAO/GGD-93-137; Sept. 9, 1993; 2 vols.). U.S.-Chilean Trade: Developments in the Agriculture, Fisheries, and Forestry Sectors (GAO/GGD-93-88; Apr. 1, 1993). CFTA/NAFTA: Agricultural Safeguards (GAO/GGD-93-14R; Mar. 18, 1993). 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 provided information on efforts to liberalize trade among the countries of the Western Hemisphere, focusing on: (1) the principal existing subregional trade arrangements in the Western Hemisphere; (2) the current status of Free Trade Area of the Americas (FTAA) discussions; and (3) certain recent developments in regional trade liberalization outside the FTAA process since "fast track" authority. GAO noted that: (1) almost all countries in the region participate in at least one subregional trade grouping; (2) there are now six major subregional multilateral trade groupings among countries in the hemisphere; (3) the two most significant trade blocs, the North American Free Trade Agreement (NAFTA) and the Common Market of the South, known as Mercosur, were both established during the 1990's; (4) NAFTA, the only one of these arrangements to which the United States is a party, created the world's largest free trade area and is the most comprehensive trade agreement in the region; (5) Mercosur has followed a different approach than NAFTA to economic integration through the creation of a customs union; (6) in addition to the major multilateral trade groupings, there are more than 20 smaller trade agreements in the region, most of these have been concluded during the 1990's; (7) U.S. Trade Representative (USTR), Organization of American States (OAS), and Inter-American Development Bank (IDB) officials note that the FTAA working groups have made significant progress to support the launching of formal negotiations; (8) according to these observers, progress in the FTAA process thus far exceeds what had been achieved during the first 2 to 3 years of the Uruguay Round negotiations that led to the establishment of the World Trade Organization (WTO); (9) substantial agreement has been reached on several key issues; (10) disagreement remains, however, regarding the pace and direction of negotiations; (11) the United States and most other countries favor immediate negotiations on all issues; (12) in contrast, Mercosur proposes that negotiations on certain issues such as market access, which is a priority for the United States, be delayed until 2003; (13) following the Miami Summit, the 1995 Mexican financial crisis raised concerns in the United States about pursuing further regional trade liberalization efforts; (14) in the meantime, other countries have moved forward with their own trade liberalizations efforts; (15) Mercosur has strengthened its position, concluding free trade arrangements with Chile and Bolivia, and is beginning trade negotiations with Mexico and the European Union; (16) these agreements have created disadvantages for some U.S. exporters' access to markets in the region; and (17) representatives of several countries in the region generally agree that their countries will continue to advance their own regional free trade initiatives regardless of whether the United States participates in further regional trade liberation.

The Aviation and Transportation Security Act (ATSA) established TSA as the federal agency with primary responsibility for securing the nation's civil aviation system, which includes the screening of all passenger and property transported from and within the United States by commercial passenger aircraft. In accordance with ATSA, all passengers, their accessible property, and their checked baggage are screened pursuant to TSA-established procedures at the 463 airports presently regulated for security by TSA. These procedures generally provide, among other things, that passengers pass through security checkpoints where they and their identification documents, and accessible property, are checked by transportation security officers (TSO), other TSA employees, or by private-sector screeners under TSA's Screening Partnership Program. Airport operators, however, also have direct responsibility for implementing TSA security requirements such as those relating to perimeter security and access controls, in accordance with their approved security programs and other TSA direction. TSA relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers include behavior detection officers (BDOs), who examine passenger behaviors and appearances to identify passengers who might pose a potential security risk at TSA-regulated airports; travel document checkers, who examine tickets, passports, and other forms of identification; TSOs responsible for screening passengers and their carry-on baggage at passenger checkpoints, using x-ray equipment, magnetometers, Advanced Imaging Technology, and other devices; random employee screening; and checked-baggage screening systems. DHS's Science and Technology Directorate (S&T) and TSA have taken actions to coordinate and collaborate in their efforts to develop and deploy technologies for aviation security. For example, they entered into a 2006 memorandum of understanding for using S&T's Transportation Security Laboratory, and they established the Capstone Integrated Product Team for Explosives Prevention in 2006 to help DHS, TSA, and the U.S. Secret Service to, among other things, identify priorities for explosives prevention. Our past work has found that technology program performance cannot be accurately assessed without valid baseline requirements established at the program start. Without the development, review, and approval of key acquisition documents, such as the mission need statement, agencies are at risk of having poorly defined requirements that can negatively affect program performance and contribute to increased costs. For example, in June 2010, we reported that over half of the 15 DHS programs we reviewed awarded contracts to initiate acquisition activities without component or department approval of documents essential to planning acquisitions, setting operational requirements, or establishing acquisition program baselines. For example, TSA's Electronic Baggage Screening Program did not have a department-approved program baseline or program requirements, but TSA is acquiring and deploying next- generation explosive detection technology to replace legacy systems. We made a number of recommendations to help address issues related to these procurements as discussed below. DHS has generally agreed with these recommendations and, to varying degrees, has taken actions to address them. In addition, our past work has found that TSA faces challenges in identifying and meeting program requirements in a number of its programs. For example: In July 2011, we reported that TSA revised its explosive detection system (EDS) requirements to better address current threats and plans to implement these requirements in a phased approach. However, we reported that some number of the EDSs in TSA's fleet are configured to detect explosives at the levels established in the 2005 requirements. The remaining EDSs are configured to detect explosives at 1998 levels. When TSA established the 2005 requirements, it did not have a plan with the appropriate time frames needed to deploy EDSs to meet the requirements. To help ensure that EDSs are operating most effectively, we recommended that TSA develop a plan to deploy and operate EDSs to meet the most recent requirements to ensure new and currently deployed EDSs are operated at the levels in established requirements. DHS concurred with our recommendation and has begun taking action to address them; for example, DHS reported that TSA has developed a plan to evaluate its current fleet of EDSs to determine the extent to which they comply with these requirements. However, our recommendation is intended to ensure that TSA operate all EDSs at airports at the most recent requirements. Until TSA develops a plan identifying how it will approach the upgrades for currently deployed EDSs--and the plan includes such items as estimated costs and the number of machines that can be upgraded--it will be difficult for TSA to provide reasonable assurance that its upgrade approach is feasible or cost- effective. Further, while TSA's efforts are positive steps, it is too early to assess their effect or whether they address our recommendation. In October 2009, we reported that TSA passenger screening checkpoint technologies were delayed because TSA had not consistently communicated clear requirements for testing the technologies. We recommended that TSA evaluate whether current passenger screening procedures should be revised to require the use of appropriate screening procedures until TSA determined that existing emerging technologies meet their functional requirements in an operational environment. TSA agreed with this recommendation. However, communications issues with the business community persist. In July 2011, we reported that vendors for checked-baggage screening technology expressed concerns about the extent to which TSA communicated with the business community about the current EDS procurement. TSA agreed with our July 2011 recommendation to establish a process to communicate information regarding TSA's EDS acquisition to EDS vendors in a timely manner and reported taking actions to address it such as soliciting more feedback from vendors through kickoff meetings, industry days, and classified discussions of program requirements. Our prior work has also shown that not resolving problems discovered during testing can sometimes lead to costly redesign and rework at a later date. Addressing such problems before moving to the acquisition phase can help agencies better manage costs. Specifically: In June 2011 we reported that S&T's Test & Evaluation and Standards Office, responsible for overseeing test and evaluation of DHS's major acquisition programs, reviewed or approved test and evaluation documents and plans for programs undergoing testing, and conducted independent assessments for the programs that completed operational testing. DHS senior-level officials considered the office's assessments and input in deciding whether programs were ready to proceed to the next acquisition phase. However, the office did not consistently document its review and approval of components' test agents--a government entity or independent contractor carrying out independent operational testing for a major acquisition. In addition, the office did not document its review of other component acquisition documents, such as those establishing programs' operational requirements. We recommended, among other things, that S&T develop mechanisms to document its review of component acquisition documentation. DHS concurred and reported actions underway to address them. In July 2011, we reported that TSA experienced challenges in collecting explosives data on the physical and chemical properties of certain explosives needed by vendors to develop EDS detection software. These data are also needed by TSA for testing the machines to determine whether they meet established requirements prior to their procurement and deployment to airports. TSA and S&T have experienced these challenges because of problems associated with safely handling and consistently formulating some explosives. The challenges related to data collection for certain explosives have resulted in problems carrying out the EDS procurement as planned. Specifically, attempting to collect data for certain explosives while simultaneously pursuing the EDS procurement delayed the EDS acquisition schedule. We recommended that TSA develop a plan to ensure that TSA has the explosives data needed for each of the planned phases of the 2010 EDS requirements before starting the procurement process for new EDSs or upgrades included in each applicable phase. DHS stated that TSA modified its strategy for the EDS's competitive procurement in July 2010 in response to the challenges in working with the explosives for data collection by removing the data collection from the procurement process. While TSA's plan to separate the data collection from the procurement process is a positive step, we feel, to fully address our recommendation, a plan is needed to establish a process for ensuring that data are available before starting the procurement process for new EDSs or upgrades for each applicable phase. In July 2011, we also reported that TSA revised EDS explosives detection requirements in January 2010 to better address current threats and plans to implement these requirements in a phased approach. TSA had previously revised the EDS requirements in 2005 though it did not begin operating EDS to meet the 2005 requirements until 2009. Further, TSA deployed a number of EDSs that had the software necessary to meet the 2005 requirements, but because the software was not activated, these EDSs were still detecting explosives at levels established before TSA revised the requirements in 2005. TSA officials stated that prior to activating the software in these EDSs, they must conduct testing to compare the false-alarm rates for machines operating at one level of requirements to those operating at another level of requirements. According to TSA officials, the results of this testing would allow them to determine if additional staff are needed at airports to help resolve false alarms once the EDSs are configured to operate at a certain level of requirements. TSA officials told us that they plan to perform this testing as a part of the current EDS acquisition. In October 2009, we reported that TSA deployed explosives trace portals, a technology for detecting traces of explosives on passengers at airport checkpoints, in January 2006 even though TSA officials were aware that tests conducted during 2004 and 2005 on earlier models of the portals suggested the portals did not demonstrate reliable performance in an airport environment. TSA also lacked assurance that the portals would meet functional requirements in airports within estimated costs and the machines were more expensive to install and maintain than expected. In June 2006, TSA halted deployment of the explosives trace portals because of performance problems and high installation costs. We recommended that to the extent feasible, TSA ensure that tests are completed before deploying checkpoint screening technologies to airports. DHS concurred with the recommendation and has taken action to address it, such as requiring more-recent technologies to complete both laboratory and operational tests prior to deployment. For example, TSA officials stated that, unlike the explosive trace portal, operational testing for the Advanced Imaging Technology (AIT) was successfully completed late in 2009 before its deployment was fully initiated. We are currently evaluating the testing conducted on AIT as part of an ongoing review. According to the National Infrastructure Protection Plan, security strategies should be informed by, among other things, a risk assessment that includes threat, vulnerability, and consequence assessments, information such as cost-benefit analyses to prioritize investments, and performance measures to assess the extent to which a strategy reduces or mitigates the risk of terrorist attacks. Our prior work has shown that cost-benefit analyses help congressional and agency decision makers assess and prioritize resource investments and consider potentially more cost-effective alternatives, and that without this ability, agencies are at risk of experiencing cost overruns, missed deadlines, and performance shortfalls. For example, we have reported that TSA has not consistently included these analyses in its acquisition decision making. Specifically: In October 2009, we reported that TSA had not yet completed a cost- benefit analysis to prioritize and fund its technology investments for screening passengers at airport checkpoints. One reason that TSA had difficulty developing a cost-benefit analysis was that it had not yet developed life-cycle cost estimates for its various screening technologies. We reported that this information was important because it would help decision makers determine, given the cost of various technologies, which technology provided the greatest mitigation of risk for the resources that were available. We recommended that TSA develop a cost-benefit analysis. TSA agreed with this recommendation and has completed a life-cycle cost estimate, but has not yet completed a cost-benefit analysis. In March 2010, we reported that TSA had not conducted a cost- benefit analysis to guide the initial AIT deployment strategy. Such an analysis would help inform TSA's judgment about the optim deployment strategy for the AITs, as well as provide information to inform the best path forward, considering all elements of the screening system, for addressing the vulnerability identified by the attempted December 25, 2009, terrorist attack. We recommended that TSA conduct a cost-benefit analysis. TSA completed a cost- effectiveness analysis in June 2011 and provided it to us in August 2011. We are currently evaluating this analysis as part of our ongoing AIT review. Since DHS's inception in 2003, we have designated implementing and transforming DHS as high risk because DHS had to transform 22 agencies--several with major management challenges--into one department. This high-risk area includes challenges in strengthening DHS's management functions, including acquisitions; the effect of those challenges on DHS's mission implementation; and challenges in integrating management functions within and across the department and its components. Failure to effectively address DHS's management and mission risks could have serious consequences for U.S. national and economic security. In part because of the problems we have highlighted in DHS's acquisition process, implementing and transforming DHS has remained on our high- risk list. DHS currently has several plans and efforts underway to address the high-risk designation as well as the more specific challenges related to acquisition, technology development, and program implementation that we have previously identified. In June 2011, DHS reported to us that it is taking steps to strengthen its investment and acquisition management processes across the department by implementing a decision-making process at critical phases throughout the investment life cycle. For example, DHS reported that it plans to establish a new model for managing departmentwide investments across their life cycles. Under this plan, S&T would be involved in each phase of the investment life cycle and participate in new councils and boards DHS is planning to create to help ensure that test and evaluation methods are appropriately considered as part of DHS's overall research and development investment strategies. According to DHS, S&T will help ensure that new technologies are properly scoped, developed, and tested before being implemented. DHS also reports that it is working with components to improve the quality and accuracy of cost estimates and has increased its staff during fiscal year 2011 to develop independent cost estimates, a GAO best practice, to ensure the accuracy and credibility of program costs. DHS reports that four cost estimates for level 1 programs have been validated to date, but did not explicitly identify whether any of the Life Cycle Cost Estimates were for TSA programs. The actions DHS reports taking or has underway to address the management of its acquisitions and the development of new technologies are positive steps and, if implemented effectively, could help the department address many of these challenges. However, showing demonstrable progress in executing these plans is key. In the past, DHS has not effectively implemented its acquisition policies, in part because it lacked the oversight capacity necessary to manage its growing portfolio of major acquisition programs. Since DHS has only recently initiated these actions, it is too early to fully assess their effect on the challenges that we will need have identified in our past work. Going forward, we believe DHS to demonstrate measurable, sustainable progress in effectively implementing these actions. Chairman Rogers, Ranking Member Jackson Lee, 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. For questions about this statement, please contact Steve Lord at (202) 512-4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last p of this st atement. Individuals making key contributions to this testimony are David M. Bruno, Assistant Director; Robert Lowthian; Scott Behen; Ryan Consaul; Tom Lombardi; Bill Russell; Nate Tranquilli; and Julie Silvers. Key contributors for the previous work that this testimony is based on are listed within each individual product. Aviation Security: TSA Has Made Progress, but Additional Efforts Are Needed to Improve Security. GAO-11-938T. Washington, D.C.: September 16, 2011. Department of Homeland Security: Progress Made and Work Remaining in Implementing Homeland Security Missions 10 Years after 9/11. GAO-11-881. Washington, D.C.: September 7, 2011. Homeland Security: DHS Could Strengthen Acquisitions and Development of New Technologies. GAO-11-829T. Washington, D.C.: July 15, 2011. Aviation Security: TSA Has Taken Actions to Improve Security, but Additional Efforts Remain. GAO-11-807T. Washington, D.C.: July 13, 2011. Aviation Security: TSA Has Enhanced Its Explosives Detection Requirements for Checked Baggage, but Additional Screening Actions Are Needed. GAO-11-740. Washington, D.C.: July 11, 2011. Homeland Security: Improvements in Managing Research and Development Could Help Reduce Inefficiencies and Costs. GAO-11-464T. Washington D.C.: March 15, 2011. High-Risk Series: An Update. GAO-11-278. Washington D.C.: February 16, 2011. Department of Homeland Security: Assessments of Selected Complex Acquisitions. GAO-10-588SP. Washington, D.C.: June 30, 2010. Aviation Security: Progress Made but Actions Needed to Address Challenges in Meeting the Air Cargo Screening Mandate. GAO-10-880T. Washington, D.C.: June 30, 2010. Aviation Security: TSA Is Increasing Procurement and Deployment of Advanced Imaging Technology, but Challenges to This Effort and Other Areas of Aviation Security Remain. GAO-10-484T. Washington, D.C.: March 17, 2010. Aviation Security: DHS and TSA Have Researched, Developed, and Begun Deploying Passenger Checkpoint Screening Technologies, but Continue to Face Challenges. GAO-10-128. Washington, D.C.: October 7, 2009. 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Within the Department of Homeland Security (DHS), the Transportation Security Administration (TSA) is responsible for developing and acquiring new technologies to address homeland security needs. TSA's acquisition programs represent billions of dollars in life-cycle costs and support a wide range of aviation security missions and investments including technologies used to screen passengers, checked baggage, and air cargo, among others. GAO's testimony addresses three key challenges identified in past work: (1) developing technology program requirements, (2) overseeing and conducting testing of new technologies, and (3) incorporating information on costs and benefits in making technology acquisition decisions. This statement also addresses recent DHS efforts to strengthen its investment and acquisition processes. This statement is based on reports and testimonies GAO issued from October 2009 through September 2011 related to TSA's efforts to manage, test, and deploy various technology programs. GAO's past work has found that TSA has faced challenges in developing technology program requirements on a systemic and individual basis. Program performance cannot be accurately assessed without valid baseline requirements established at the program start. In June 2010, GAO reported that over half of the 15 DHS programs (including 3 TSA programs) GAO reviewed awarded contracts to initiate acquisition activities without component or department approval of documents essential to planning acquisitions, setting operational requirements, or establishing acquisition program baselines. At the program level, in July 2011, GAO reported that in 2010 TSA revised its explosive detection systems (EDS) requirements to better address current threats and plans to implement these requirements in a phased approach. However, GAO reported that some number of the EDSs in TSA's fleet are configured to detect explosives at the levels established in the 2005 requirements and TSA did not have a plan with time frames needed to deploy EDSs to meet the current requirements. GAO has also reported DHS and TSA challenges in overseeing and testing new technologies. For example, in July 2011, GAO reported that TSA experienced challenges in collecting data on the physical and chemical properties of certain explosives needed by vendors to develop EDS detection software and needed by TSA before procuring and deploying EDSs to airports. TSA and DHS Science and Technology Directorate have experienced these challenges because of problems associated with safely handling and consistently formulating some explosives. The challenges related to data collection for certain explosives have resulted in problems carrying out the EDS procurement as planned. In addition, in October 2009, GAO reported that TSA deployed explosives trace portals, a technology for detecting traces of explosives on passengers at airport checkpoints, in January 2006 even though TSA officials were aware that tests conducted during 2004 and 2005 on earlier models of the portals suggested the portals did not demonstrate reliable performance in an airport environment. In June 2006, TSA halted deployment of the explosives trace portals because of performance problems and high installation costs. GAO's prior work has shown that cost-benefit analyses help congressional and agency decision makers assess and prioritize resource investments and consider potentially more cost-effective alternatives, and that without this ability, agencies are at risk of experiencing cost overruns, missed deadlines, and performance shortfalls. GAO has reported that TSA has not consistently included these analyses in its acquisition decision making. In June 2011, DHS reported that it is taking steps to strengthen its investment and acquisition management processes by implementing a decision-making process at critical phases throughout the investment life cycle. The actions DHS reports taking to address the management of its acquisitions and the development of new technologies are positive steps and, if implemented effectively, could help the department address many of these challenges. GAO is not making any new recommendations. In prior work, GAO made recommendations to address challenges related to deploying EDS to meet requirements, overseeing and conducting testing of new technologies, and incorporating information on costs and benefits in making technology acquisition decisions. DHS and TSA concurred and described actions underway to address the recommendations.

Our analysis of Army and DFAS data through the end of fiscal year 2005 identified nearly 1,300 separated battle-injured soldiers and soldiers who were killed in combat who had military debts totaling $1.5 million that were reported to DFAS for debt collection action. Of the nearly 1,300 soldiers, almost 900 separated battle-injured soldiers had debts totaling about $1.2 million and about 400 soldiers who died in combat had debts totaling over $300,000. The actual number of separated battle-injured soldiers and fallen soldiers who owed military debts may be greater due to incomplete and inaccurate reporting of some information to the WIA databases. Overpayment of pay and allowances (entitlements), pay calculation errors, and erroneous leave payments caused 73 percent of the reported debts. Remaining debts related to requirements to repay portions of enlistment bonuses and training due to early separation and/or failure to fulfill requirements; unpaid expenses for medical services, household moves, insurance premiums, and travel advances; and lost military equipment. Because the Army lacks a centralized automated system that integrates payroll, personnel, and medical data on its soldiers, the Army and DFAS formed a Wounded in Action Support Team and created WIA databases that included soldier personnel, payroll, and medical information using weekly data calls from five separate Army systems. The Army and DFAS are using ad hoc work-around processes to research, verify, and correct incomplete and inaccurate data. These labor-intensive, manual procedures are necessary due to continuing, uncorrected weaknesses in Army personnel and payroll systems and the growing number of battle-injured soldiers whose pay accounts need to be researched and verified to determine whether overpayments or other problems have resulted in debt. As a policy, DFAS does not pursue collection of debts of fallen soldiers. However, DFAS officials told us that military debt may be satisfied from the final pay and allowances of fallen soldiers and DFAS may pursue collection of debts of other deceased soldiers. During the past 2 fiscal years, the Army pursued hundreds of battle-injured soldiers for collection of their military debts after they left the service. Collection action begins with monthly debt notification letters and escalates to credit bureau reporting and private collection agency and TOP action when there is no response or debts are not paid. At the time we initiated our audit in June 2005, the Army was taking collection action on active debts of over 300 battle-injured soldiers. Our initial analysis of Army and DFAS data as of June 30, 2005, identified 331 battle-injured soldiers, whose military service debts were undergoing collection action, including at least 74 soldiers whose military debts had been reported to credit bureaus and to private collection agencies and TOP. However, in response to our audit, Army and DFAS officials told us that they had suspended collection action on these soldiers' debts and recalled their reports to credit bureaus and their referrals to the Department of the Treasury for private collection agency and TOP collection action until a determination could be made as to whether these soldiers' debts were eligible for relief. We independently confirmed the recall of credit bureau reporting and Treasury referrals with those entities. DFAS records as of September 30, 2005, showed that of the $1.5 million in military service debts incurred by the nearly 1,300 battle-injured and fallen soldiers identified in our analysis, debts totaling almost $959,000 were written off, waived, or cancelled, including debts of fallen soldiers; debts totaling about $124,000 were paid; and debts totaling $420,000 remained open. In addition, at the end of our audit, the Army and DFAS advised us that waivers had been approved for active debts of 202 of the 331 separated battle-injured soldiers' debts that were being pursued for collection when we initiated our audit in June 2005. While many soldiers had only one or two debts, other soldiers had three or more debts. The nearly 1,300 separated battle-injured soldiers and fallen soldiers identified in our analysis had a total of 2,324 debts. Debts for these soldiers grew from 404 debts totaling $128,230 at the end of fiscal year 2002 to 2,324 debts totaling over $1.5 million at the end of fiscal year 2005. As shown in table 1, the number of debts generally has increased each fiscal year as more soldiers have been deployed and Army payroll problems remained unresolved. More than 40 percent of these soldier debts totaling over half of the $1.5 million were incurred during fiscal year 2005. Previously, we reported that most soldier payroll problems related to Army National Guard and Army Reserve soldiers. Our analysis of military service debts of the nearly 1,300 separated Army battle-injured soldiers and fallen soldiers showed that for the first 4 years of the GWOT deployment, 661 (51 percent) of the debts related to active component Army soldiers, 346 (about 27 percent) of the debts related to Army National Guard soldiers, and 248 (about 19 percent) of the debts related to Army Reserve soldiers. The field units that reported debts for the remaining 35 Army soldiers (about 3 percent) did not identify these soldiers by component. Table 2 shows the relative number and amount of debts by component. Because Congress passed legislation that permitted the Secretary of Defense to cancel up to $2,500 in individual soldier debt during Desert Shield/Desert Storm, your offices asked us to determine the dollar amount of debts of separated battle-injured and fallen soldiers by incremental thresholds. Our analysis of the amounts of debt reported for separated battle-injured soldiers and fallen soldiers who served in OIF and OEF during fiscal years 2002 through 2005 showed that about 82 percent of these soldiers had debts that totaled $1,500 or less and the vast majority, about 90 percent of the soldiers, had debts that totaled $2,500 or less. While making this comparison, it is appropriate that debt relief is adjudicated prudently in consideration of individual circumstances. Table 3 shows the stratification of battle-injured and fallen soldier debt in $500 increments up to $3,500 and total amounts over $3,500. Ninety soldiers had debts that totaled more than $3,500, including original soldier debts that ranged from $3,528 to $34,124. Sixty-seven of these soldiers had debts that totaled less than $10,000, 16 soldiers had debts totaling between $10,000 and $20,000, and 7 soldiers had debts that totaled more than $20,000. Consistent with our case studies, which are discussed in the next section, DOD data showed that most of the debts of the nearly 1,300 soldiers who were injured or killed in combat related to errors in pay calculations and overpayment of combat pay entitlements and erroneous payments for unused leave. As illustrated in figure 1, Army and DFAS data for fiscal years 2002 through 2005 showed that 73 percent of the debts for the nearly 1,300 separated battle-injured soldiers and fallen soldiers related to errors in pay calculations, entitlement errors, and erroneous leave payments during fiscal years 2002 through 2005. The remaining 27 percent of these soldiers' debts related to repayment of enlistment bonuses (11 percent) where soldiers did not complete the required term of service or they improperly received more than one bonus; payments for tuition and training (6 percent) where soldiers did not complete their training or they did not fulfill service requirements related to their training; and other expenses (8 percent) related to unpaid bills for medical services, housing and household moves, insurance premiums, travel advances, and loss or damage of government property. The reasons for the remaining debt (2 percent) were not recorded in DDMS. According to DFAS officials, while unit commanders and finance offices are authorized to write off debts for lost and damaged equipment when soldiers who were injured or killed by hostile fire are medically evacuated from the theater of operation, they have not always done so. In addition, because Army units and medical facilities have not always prepared or processed changes in orders when soldier duty status changed, soldiers do not have required documentation needed to submit a voucher for travel reimbursement. Because the travel system is not integrated with the payroll and debt management systems, neither DFAS nor the Army could tell us the amount of soldier debt that could potentially be offset by travel reimbursements owed to soldiers. The new WIA Support Team's standard operating procedures for soldier pay account review require identification and processing of all soldier travel claims. Debt collection actions have caused a variety of problems for separated GWOT battle-injured soldiers. When these soldiers leave the Army, they generally do not have jobs and many of them face continuing medical treatment for battle injuries, making it difficult to hold a job. If these soldiers have military debt that has been identified, their final separation pay may be offset to cover the debt and they may leave the service with no funds to pay immediate expenses. Due to the lack of income, 16 of the 19 soldiers we interviewed told us that they had difficulty paying for basic household expenses. In addition, 3 soldiers told us that they were erroneously identified as AWOL by their units while they were actually in the hospital or receiving outpatient care for their war injuries. The AWOL status for at least 2 of these soldiers created debt because it appeared that the soldiers received pay when they were not in duty status. At the time these soldiers were listed as AWOL by their Army units, they were actually receiving medical treatment. One soldier was receiving outpatient therapy for her knee injury under the care and direction of an Air Force physician based on an Army medical referral and the other soldier was in a military hospital at Fort Campbell. Debt-related experiences of 19 separated battle- injured soldiers who contacted us included the following. Sixteen soldiers had their military debts reported to credit bureaus, 9 soldiers had debts turned over to private collection agencies, and 8 soldiers had their income tax refunds withheld under TOP. Sixteen could not pay their basic household expenses. Four soldiers were unable to obtain loans to purchase a home, meet other needs, or obtain VA educational benefits due to service-related debt on their credit reports. At least 8 soldiers were owed travel reimbursements at the same time they were being pursued for collection of their service-related debts. The Army's failure to record separation paperwork in the pay system and other payment errors resulted in over $12,000 of debt for one severely battle-injured soldier. Although the soldier's family expected that he would receive retirement pay when his Army pay stopped upon his separation, the soldier had no income for several months while the Army attempted to recover his military debt. As a result, his family was unable to pay household bills, the utilities were shut off, and the soldier's dependent daughter was sent out of state to live with relatives. In addition, although the soldier had been receiving treatment at an Army medical center and a VA polytrauma center over a 5-month period, the day the soldier was released to go home, his Army unit called his wife to ask why he was not reporting for duty--an indication that his Army unit had considered him to be AWOL. Table 4 illustrates examples of the effects of debt collection actions on selected separated Army battle-injured soldiers and their families based on our case studies. Five soldiers and family members told us that they had contacted their unit finance offices multiple times for assistance in resolving their pay and debt problems. However, the soldiers said that finance personnel either did not get back to them as promised or the finance personnel they spoke with said they could not help them with their problems. DFAS and Army officials we spoke with acknowledged that finance office personnel at some locations lacked the knowledge needed to accurately input transactions to soldier pay accounts. DFAS officials told us they recently initiated actions to train finance office personnel at several locations. Debts imposed the greatest hardship on battle-injured soldiers who have had to endure financial problems while they cope with adjusting to physical limitations due to their injuries. The following case summaries provide additional details of selected soldier debt experiences. The first soldier, case study #1, battled for 1-1/2 years after he separated from the service to resolve his debts and obtain a reimbursement related to travel expense during his deployment. Soldier Engages in 1-1/2 Year Battle to Resolve Debts An Army Reserve Staff Sergeant who lost his leg in a roadside bomb explosion near the town of Ramadi, Iraq, on July 14, 2003, found himself involved in a lengthy effort to resolve pay-related debts after he separated from the Army in August 2004. The Sergeant's Army debt was the only unpaid debt on his credit report. The first problem occurred in August 2004, when the Army failed to terminate the soldier's active duty pay after he separated from military service, resulting in an overpayment of $2,728. Because the soldier was still owed his final separation pay of $2,230, this amount was used to offset his debt, reducing it to $498. The Army also incorrectly billed the soldier for several months of Servicemen's Group Life Insurance (SGLI) premiums, which should have ceased when the soldier left the service. In attempting to correct the SGLI billings, the soldier's account was mistakenly reactivated in the pay system because a Fort Belvoir finance clerk did not know how to handle this transaction. As a result, the system then generated an erroneous pay check to the soldier totaling $1,733, increasing his debt to $2,231. According to the soldier, around the same time, in January 2005, an Army headquarters official contacted him to say his debt had been resolved, leading the soldier to believe that the $1,733 payment was the result of his pay audit and possibly included his unpaid travel reimbursement. However, shortly thereafter, the soldier began receiving debt collection letters from DFAS for the $2,231 debt, which also appeared on his credit report. The soldier appealed this debt and requested a waiver, but was turned down due to a ruling that he should have known that he was not entitled to another pay check once he had been out of the service for 4 months. Because lenders view unpaid federal debts as a significant problem, the soldier and his wife decided to forego applying for a loan to purchase a house until his Army debt was resolved. According to DFAS officials, it took about 6 months to research changes in the soldier's duty status and pay the soldier's travel reimbursement. Because the soldier had not been issued any orders after his initial deployment, DFAS had to work with the Army to prepare and backdate military orders for each change of status from the time the soldier was medically evacuated to Landstuhl Regional Medical Center in Germany, transferred to Walter Reed Army Medical Center, in Washington, D.C., and entered into the Medical Retention Program. In addition, we learned that the soldier also received erroneous monthly billings for Survivor Benefit Program (SBP) premiums--even though he and his wife had declined participation in writing, as required, when he separated. The monthly SBP billings continued because Walter Reed had not forwarded the soldier's paperwork to the SBP program office at DFAS Cleveland. In December 2005, the soldier's second, more detailed request for debt waiver was accepted. In addition, his travel voucher was approved and he received his contingency travel reimbursement of $2,727--an amount that exceeded his debt by almost $500. However, the soldier's SBP program election was not properly canceled because a change was made to only one of two codes that needed to be changed in the system. As a result, the soldier's final debt was not corrected until February 2006--1-1/2 years after he separated. Case study #2 involved a seriously injured Army National Guard soldier who went without pay for several months when his separation paperwork was not entered in the pay and personnel systems. Brain-Damaged Soldier Goes without Pay Due to Error This Army National Guard Staff Sergeant was injured 3 months after being deployed to Iraq, when his Humvee was hit by another truck during an attack on December 11, 2004. The soldier suffered a crushed jaw and severe head injuries, resulting in permanent brain damage. The soldier was sent to Walter Reed Army Medical Center in Washington, D.C., where he remained in a coma for over 3 months. On March 28, 2005, he was transferred to the Richmond VA Medical Center for care in their polytrauma rehabilitation center. On April 28, 2005, the soldier was sent home on convalescent leave before he returned to Walter Reed for further surgery. The soldier was released to go home in May 2005, pending separation from the service. On the day he was released from Walter Reed and sent home, the soldier's wife got a call from his Army unit asking why her husband was not reporting to active duty--an indication that the soldier's unit believed him to be AWOL. Although the soldier had been through medical board evaluations and was supposed to be retired effective July 23, 2005, his separation paperwork was not entered in the pay and personnel systems. The soldier was rated 80 percent disabled and his family expected to receive disability benefit income of over $3,000 per month. When the sergeant suddenly received no income in October 2005, he learned that he owed the Army a debt of $6,400 and that the paperwork to start his disability benefits had not been processed. About this time, a finance clerk noted that the sergeant had not been paid for his unused leave. Because the finance clerk did not know how to post the leave payment transaction, the clerk put the soldier back on active duty, resulting in an additional overpayment of $6,101, and increasing his debt to $12,501. According to a family member, the soldier's family was without income and could not pay for basic household expenses. As a result, the family's utilities were cut off and the soldier's 11-year-old daughter was sent out of state to live with relatives. After receiving a call from the soldier's family member in mid-October 2005, we alerted Army headquarters to the soldier's debt pay and debt problems. The Army took immediate action to research the soldier's pay account. On January 25, 2006, DOD approved a waiver of $12,662 debt, and DFAS refunded $2,355 in debt previously withheld from the soldier's pay. An Army Reserve soldier, case study #4, was faced with debt due to an erroneous AWOL report while she was receiving treatment at a private health facility under direction of an Air Force physician. Soldier Finds Debt Is Due to Erroneous AWOL Report During Rehabilitation An Army Reserve Specialist was injured during a mortar attack on the outskirts of Baghdad on March 23, 2003, and was awarded a Purple Heart. The soldier underwent a total of six surgeries at a field hospital and military hospitals in Kuwait, Spain, and Germany--none of which were successful in removing shrapnel from her knee. She was then flown to a military hospital in Baltimore, Maryland, and in early April 2003, she was sent to a military hospital at Keesler Air Force Base, in Biloxi, Mississippi, for treatment. At Keesler, the soldier was given the choice of receiving rehabilitative treatment at the Keesler medical facility or at a rehabilitation center near her home in Leakesville, Mississippi. There were no Army facilities near Keesler, and the soldier was told she would have to rent an apartment nearby and pay for it herself. As a result, the soldier decided to return home to begin her rehabilitation sessions at a private facility approved by Keesler. The soldier was required to travel to the Keesler AFB Orthopedic Center (a 2- hour round trip) every 2 weeks to be examined by the referring Air Force physician. The soldier told us the Air Force doctor released her in July 2003, noting that she had completed her rehabilitation treatment. The soldier was medically discharged from her Army Reserve unit on November 18, 2003. The soldier learned she had a military debt of $1,575, including $975 related to a requirement to repay the unearned portion of her enlistment bonus when a collection agent contacted her in January 2004--2 months after she had separated from the Army. As a result of this contact, the soldier learned that her Army unit had lost track of her and had reported her as AWOL while she was being treated for her battle injuries. However, the soldier told us that in April 2003, when she arrived at Keesler, she had made several unsuccessful attempts to let her unit Sergeant know her duty status and whereabouts. When her calls were returned in July 2003, she was told to report to Fort Stewart, Georgia, and to remain there until her unit returned from Iraq and was demobilized. The soldier told us she did as ordered and was placed in Medical Hold status at Fort Stewart. Although the soldier told us she traveled to her unit in Brookhaven, Mississippi, on two occasions in an effort to document that she was not AWOL because she was at an approved medical facility during the time in question, she was unsuccessful because the collection agent continued to call her. As of the end of July 2004, DFAS records showed the soldier's debt totaled $1,575, including $975 related to the unearned portion of her enlistment bonus and $600 in overpayment of her hardship duty pay. Although DFAS had recalled this debt from the soldier's credit report in July 2005, as of October 2005 this debt still showed on her credit report. We confirmed that DFAS recalled the debt from the soldier's credit report a second time. However, in March 2006, the debt reappeared on the soldier's credit report. The soldier told us that she was unable to get a loan for $500 to pay off her credit card balance because the military debt kept showing up on her credit report. At the end of our field work, the Army advised that the reappearance of military debt on the soldier's credit report was due to errors made by both DFAS and the credit bureau. Our past four reports have discussed numerous problems related to Army pay and travel reimbursements and made over 80 recommendations for correcting weaknesses in human capital, processes, and systems that caused these problems. Effective action to address pay and travel reimbursement problems will also help prevent the occurrence of military debts. As a result of concern regarding the indebtedness of soldiers resulting from pay-related problems during deployments, Congress on occasion has provided authority to the Secretary of Defense to cancel such debts. For example, in the Department of Defense Appropriation Acts for fiscal years 1992 through 1996, the Secretary was given authority to cancel military debt up to $2,500 owed by soldiers or former soldiers so long as the indebtedness was incurred in connection with Operation Desert Shield/Desert Storm. Further, these appropriation acts authorized the Secretary to provide refunds to soldiers who had satisfied their debts. Facing similar concerns with military debts incurred by GWOT soldiers, Congress recently gave the Secretary authority, in the National Defense Authorization Act for Fiscal Year 2006, to cancel debts occurring on or after October 7, 2001, the date designated as the beginning of the OIF/OEF deployment. However, unlike the authority granted to provide debt relief for Operation Desert Shield/Desert Storm, the Secretary's discretion under the fiscal year 2006 authorization act is generally more limited. For example, the Secretary was not given authority to issue refunds and he can not uniformly provide debt relief to all GWOT soldiers. Rather, the Secretary may only cancel debts of soldiers who are (1) on active duty or in active status; (2) within 1 year of an honorable discharge; or (3) within 1 year of active release from active status in a Reserve component. Additionally, the Secretary's authority under the fiscal year 2006 authorization act terminates on December 31, 2007, and a more narrow statutory cancellation authority will be revived. There are two primary mechanisms in law to forgive soldier debt, including (1) authority to waive debts that result from payroll, travel, and other payment and allowance errors and (2) authority for remission (forgiveness) of debts involving hardship or fairness. The Fiscal Year 2006 National Defense Authorization Act broadened remission authority to include debts of officers and any soldiers no longer on active duty for up to 1 year. However, the remission authority in the act does not cover soldiers who were released from active duty more than 1 year ago and the waiver authority does not cover cancellation of debts due to error after the applicable 3-year statute of limitations. In addition, unlike waivers, soldiers who paid debts are not eligible for refunds under the remission statute. Further, the debt relief eligibility period for the three case study soldiers who separated in June 2005 will expire in the next few months. Our case studies showed that some battle-injured soldiers did not receive debt notification letters until 8 to 10 months after they separated from the Army. One soldier who separated in October 2004 told us that he received his debt notification letter in November 2005--more than 1 year after he separated from the Army. All but three of our case study soldiers separated from the Army more than 1 year ago and these soldiers' eligibility for debt relief under the fiscal year 2006 authorization act has already expired. Further, the debt relief eligibility period for the three case study soldiers who separated in June 2005 will expire in the next few months. Since the OIF/OEF deployment in October 2001, separated, battle-injured Army soldiers have faced considerable hardships related to collection action on their military service debts through no fault of their own, including forfeiture of separation pay and tax refunds; credit bureau reporting; and action by private collection agencies. The best solution to this problem is for DOD to prevent debts for these soldiers from happening in the first place, and our past reports have included numerous recommendations for correcting weaknesses in Army payroll systems and processes. Over the past year, DOD and the Army have taken a number of actions to identify and relieve debts of separated battle-injured GWOT soldiers, and Congress has enacted broader authority for relief of some soldier debts. There are additional actions available to Congress if it wishes to make debt relief more soldier friendly. Because of a restriction in the current law, injured Army GWOT soldiers who separated from the service at different times have been treated differently, which raises questions of equity. Some of these soldiers may obtain debt relief, while others may not. Further, there is no current authority to issue refunds to battle-injured soldiers who previously paid debts that are now eligible for relief. Because the current debt relief authority expires on December 31, 2007, injured soldiers and their families who have GWOT-incurred military debts could face the prospect of bad credit reports, visits by collection agencies, and offsets of their tax refunds if the authority is not available throughout the OIF/OEF deployment and a reasonable period after the deployment ends. There are several matters that Congress should consider if it wishes to strengthen the Secretary's authority to provide debt relief so that it can be applied uniformly for all GWOT-incurred debt. First, Congress could consider legislation to grant DOD the following authorities. Give the Service Secretaries authority to make debt relief available to all injured GWOT soldiers regardless of when they separate from active duty. Give the Service Secretaries authority to provide refunds to soldiers who have paid debts incurred while in an active status. Ensure that the Secretary of Defense has authority to cancel GWOT- incurred debt throughout, and a reasonable period following, the deployment and thus, can exempt injured soldiers from debt collection action through credit bureau reporting and private collection agency and TOP action. Second, we suggest that Congress consider directing the Secretary of Defense to take the following actions, as appropriate, in concert with any changes to debt relief provisions in law. Take immediate action to make debt relief policy applicable to all GWOT soldiers who sustain battle injuries or are killed in combat-related actions. Identify the military debts of battle-injured soldiers that were previously paid and were not subject to remission or waiver and issue refunds. We provided a draft of our report to DOD for comment. In oral comments received from the Office of the Secretary of Defense, the department concurred with our report. We are sending copies of this letter to interested congressional committees; the Secretary of Defense; the Deputy Under Secretary of Defense for Personnel and Readiness; the Under Secretary of Defense Comptroller; the Secretary of the Army; the Director of the Defense Finance and Accounting Service; and the Director of the Office of Management and Budget. We will make copies available to others upon request. Please contact Gregory D. Kutz at (202) 512-7455 or [email protected], if you or your staffs 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. Major contributors to this report are acknowledged in appendix III. The Federal Claims Collection Act of 1966, the Debt Collection Act of 1982, the Debt Collection Improvement Act of 1996, and related federal regulations provide for collection of debts owed to the federal government, including the debts of battle-injured soldiers who had separated from the Army and fallen Army soldiers who served in the Global War on Terrorism. These laws and related federal regulations establish authority for the Department of Defense (DOD) and the Department of the Treasury to engage in federal debt collection actions. Out-of-service soldier debts occur when a soldier has separated from the service and is not receiving salary or other payments from the department that can be offset to collect debt owed to a defense agency or military service. DOD is authorized to write off debts of fallen soldiers; however, it may pursue collection of other deceased soldiers' debts. Out-of-service debts arise from a large number of circumstances, including overpayments of pay and allowances (entitlements), such as hostile fire pay, hazardous duty pay, and family separation pay; travel advances for which expense vouchers have not been submitted; indebtedness related to public use of the DOD facilities or services, such as family medical services; and loss or damage of government property. Figure 2 illustrates the out-of-service debt collection process, including DOD actions and Department of the Treasury debt collection actions. The purpose of our audit was to determine the (1) extent to which Army soldiers serving in the Global War on Terrorism (GWOT) who were injured or killed by hostile fire and were released from active duty are having debts referred to credit bureaus and collection agencies and (2) the impact of Department of Defense (DOD) debt collection action on these soldiers and their families. You also asked us to discuss ways that Congress could make the process for collecting out-of-service debts more soldier friendly. To determine the extent of debt related to Army soldiers who served in Operation Iraqi Freedom and Operation Enduring Freedom and sustained battle injuries and left the service or were killed in action, we compared Army Wounded in Action and Killed in Action databases (referred to collectively in this report as WIA databases) maintained by the Defense Finance and Accounting Service (DFAS) Wounded-in-Action Support Team and compared the soldier records in these databases with debt records in the Defense Debt Management System (DDMS) for out-of- service personnel. Soldier records are identified by soldier name and social security number in both the WIA databases and DDMS. The data used in our audit covered fiscal years 2002 through 2005--the first 4 years of the Operation Iraqi Freedom and Operation Enduring Freedom deployments. We assessed the reliability of data obtained from the WIA databases and the DDMS systems by obtaining an understanding of the processes used to collect and report the data, verifying control totals of data extracted and used for file comparisons, validating the computer program used to perform the file comparison, asking systems officials to complete our data reliability questionnaire, and analyzing selected transaction data for accuracy. We also considered findings and recommendations related to payroll problems and unidentified soldier debt in our previous audits and our recent Fort Bragg investigation. DFAS and the Army have implemented procedures for reviewing and correcting soldier status and pay account information in the WIA databases and DDMS data is subjected to periodic DOD audits. To determine the impact of debt collection actions on Army battle-injured and fallen soldiers and their families, we reached out to WIA soldiers and invited soldiers to contact us and share their experience. We focused on soldiers whose debts had been reported to credit bureaus and collection agencies. We were contacted by 19 separated battle-injured Army GWOT soldiers. We used the experiences of these soldiers to illustrate the hardships posed by debt collection action on battle-injured soldiers and their families. For all of the soldiers with debt problems who contacted us, we worked with the Army and DFAS to help resolve their debts. Where we were unable to independently validate our case study information, we attributed it to the soldiers and family members. We analyzed the DDMS data to confirm management assertions that DFAS does not pursue collection of debts of fallen soldiers. To determine ways that Congress could help make the debt collection process more soldier friendly, we considered debt relief provisions in current law, DOD and Army policy, and the experience of soldiers who contacted us as well as information obtained for case studies included in our prior reports. We reviewed federal laws and regulations and DOD and Army policies and procedures related to debt collection and relief of debt. We met with Army, DFAS, and DOD officials to discuss their efforts to identify and resolve soldier debt. We also met with Department of the Treasury Financial Management Service (FMS) officials about their processes for collecting Army soldier debt referred by DFAS. In addition, we obtained independent confirmation from credit bureaus and FMS that DFAS had recalled credit bureau reporting and private collection agency and Treasury Offset Program referrals for WIA soldiers for active debt cases. On April 5, 2006, we requested comments on a draft of this report. We worked closely with the Army and DFAS to ensure the accuracy of the factual information in our report. We received oral comments from the Office of the Secretary of Defense on April 21, 2006, and have summarized those comments in the Agency Comments and Our Evaluation section of this report. We conducted our work from June 2005 through March 2006 in accordance with generally accepted government auditing standards. Staff making key contributions to this report include Stephen P. Donahue, Dennis B. Fauber, Gayle L. Fischer, Danielle Free, Gloria Hernandezsaunders, Wilfred B. Holloway, John B. Ledford, Barbara C. Lewis, Renee McElveen, Richard C. Newbold, John P. Ryan, and Barry Shillito.

As part of the Committee on Government Reform's continuing focus on pay and financial issues affecting Army soldiers deployed in the Global War on Terrorism (GWOT), the requesters were concerned that battle-injured soldiers were not only battling the broken military pay system, but faced blemishes on their credit reports and pursuit by collection agencies from referrals of their Army debts. GAO was asked to determine (1) the extent of debt of separated battle-injured soldiers and deceased Army soldiers who served in the GWOT, (2) the impact of DOD debt collection action on separated battle-injured and deceased soldiers and their families, and (3) ways that Congress could make the process for collecting these debts more soldier friendly. Pay problems rooted in the complex, cumbersome processes used to pay Army soldiers from their initial mobilization through active duty deployment to demobilization have generated military debts. As of September 30, 2005, nearly 1,300 separated Army GWOT soldiers who were injured or killed during combat in Iraq and Afghanistan had incurred over $1.5 million in military debt, including almost 900 battle-injured soldiers with debts of $1.2 million and about 400 soldiers who died in combat with debts of $300,000. As a policy, DOD does not pursue collection of debts of soldiers who were killed in combat. However, hundreds of battle-injured soldiers experienced collection action on their debts. The extent of these debts may be greater due to incomplete reporting. GAO's case studies of 19 battle-injured soldiers showed that collection action on military debts resulted in significant hardships to these soldiers and their families. For example, 16 of the 19 soldiers were unable to pay their basic household expenses; 4 soldiers were unable to obtain loans to purchase a car or house or meet other needs; and 8 soldiers' debts were offset against their income tax refunds. In addition, 16 of the 19 case study soldiers had their debts reported to credit bureaus and 9 soldiers were contacted by private collection agencies. Due to concerns about soldier indebtedness resulting from pay-related problems during deployments, Congress recently gave the Service Secretaries authority to cancel some GWOT soldier debts. Because of restrictions in the law, debts of injured soldiers who separated at different times can be treated differently. For example, soldiers who separated more than 1 year ago are not eligible for debt relief and soldiers who paid their debts are not eligible for refunds. Further, because this authority expires in December 2007, injured soldiers and their families could face bad credit reports, visits from collection agents, and tax refund offsets in the future.

Since 1996, Congress has taken important steps to increase Medicare program integrity funding and oversight, including the establishment of the Medicare Integrity Program. Table 1 summarizes several key congressional actions. CMS has made progress in strengthening provider and supplier enrollment provisions, but needs to do more to identify and prevent potentially fraudulent providers and suppliers from participating in Medicare. Additional improvements to prepayment and postpayment claims review would help prevent and recover improper payments. Addressing payment vulnerabilities already identified could further help prevent or reduce fraud. PPACA authorized and CMS has implemented new provider and supplier enrollment procedures that address past weaknesses identified by GAO and HHS's Office of Inspector General (OIG) that allowed entities intent on committing fraud to enroll in Medicare. CMS has also implemented other measures intended to improve existing procedures. Specifically, to strengthen the existing screening activities conducted by CMS contractors, the agency added screenings of categories of provider and supplier enrollment applications by risk level, contracted with new national enrollment screening and site visit contractors, began imposing moratoria on new enrollment of certain types of providers and suppliers, and issued regulations requiring certain prescribers to enroll in Medicare. CMS and OIG issued a final rule in February 2011 to implement many of the new screening procedures required by PPACA. CMS designated three levels of risk--high, moderate, and limited--with different screening procedures for categories of Medicare providers and suppliers at each level. Providers and suppliers in the high-risk level are subject to the most rigorous screening. (See table 2.) Based in part on our work and that of OIG, CMS designated newly enrolling home health agencies and suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) as high risk, and designated other providers and suppliers as lower risk levels. Providers and suppliers at all risk levels are screened to verify that they meet specific requirements established by Medicare, such as having current licenses or accreditation and valid Social Security numbers. High- and moderate-risk providers and suppliers are also subject to unannounced site visits. Further, depending on the risks presented, PPACA authorizes CMS to require fingerprint- based criminal history checks. In March 2014, CMS awarded a contract that is to enable the agency to access Federal Bureau of Investigation information to help conduct those checks of high-risk providers and suppliers. PPACA also authorizes the posting of surety bonds for certain providers and suppliers. CMS has indicated that the agency will continue to review the criteria for its screening levels and will publish changes if the agency decides to update the assignment of screening levels for categories of Medicare providers and suppliers. Doing so could become important because the Department of Justice (DOJ) and HHS reported multiple convictions, judgments, settlements, or exclusions against types of providers and suppliers not currently at the high-risk level, including community mental health centers and ambulance suppliers. CMS's implementation of accreditation for DMEPOS suppliers, and of a competitive bidding program, including in geographic areas thought to have high fraud rates, may be helping to reduce the risk of DMEPOS fraud. While continued vigilance of DMEPOS suppliers is warranted, other types of providers may become more problematic in the future. Specifically, in September 2012 we reported that a range of providers have been the subjects of fraud investigations. According to 2010 data from OIG and DOJ, over 10,000 providers and suppliers that serve Medicare, Medicaid, and Children's Health Insurance Program beneficiaries were involved in fraud investigations, including not only home health agencies and DMEPOS In addition, suppliers but also physicians, hospitals, and pharmacies.the provider type constituting the largest percentage of subjects in criminal health care fraud investigations was medical facilities--including medical centers, clinics, or practices--which constituted almost a quarter of subjects in such investigations. DMEPOS suppliers made up a little over 16 percent of subjects. We are currently examining the ability of CMS's provider and supplier enrollment system to prevent and detect the continued enrollment of ineligible or potentially fraudulent providers and suppliers in Medicare. Specifically, we are assessing the process used to enroll and verify the eligibility of Medicare providers and suppliers in Medicare's Provider Enrollment, Chain, and Ownership System (PECOS) and the extent to which CMS's controls are designed to prevent and detect the continued enrollment of potentially ineligible or fraudulent providers and suppliers in PECOS. We plan to issue a report this winter. CMS contracted with two new types of entities at the end of 2011 to assume centralized responsibility for two functions that had been the responsibility of multiple contractors. One of the new contractors is conducting automated screenings to check that existing and newly enrolling providers and suppliers have valid licensure, accreditation, and a National Provider Identifier (NPI), and are not on the OIG list of providers and suppliers excluded from participating in federal health care programs. The second contractor conducts site visits of providers and suppliers, except for DMEPOS suppliers, to determine whether sites are legitimate and the providers and suppliers meet certain Medicare standards. A CMS official reported that, since the implementation of the PPACA screening requirements, the agency had revoked over 17,000 suspect providers' and suppliers' ability to bill the Medicare program. CMS has suspended enrollment of new home health providers and ground ambulance suppliers in certain fraud "hot spots" and other geographic areas. In July 2013, CMS first exercised its authority granted by PPACA to establish temporary moratoria on enrolling new home health agencies in Chicago and Miami, and new ambulance suppliers in Houston. In January 2014, CMS extended its first moratoria and added enrollment moratoria for new home health agency providers in Fort Lauderdale, Detroit, Dallas, and Houston, and new ambulance suppliers in Philadelphia. These moratoria are scheduled to be in effect until July 2014, unless CMS extends or lifts them. CMS officials cited areas of potential fraud risk, such as a disproportionate number of providers and suppliers relative to beneficiaries and extremely high utilization as rationales for suspending new enrollments of home health providers or ground ambulance suppliers in these areas. CMS recently issued a final rule requiring prescribers of drugs covered within Medicare's prescription drug program, Part D, to enroll in Medicare by June 2015. As a result of this rule, CMS is to screen these prescribers to verify that they meet specific requirements, such as having current licenses or accreditation and valid Social Security numbers. OIG has identified concerns with CMS oversight of fraud, waste, and abuse in Part D, including the contractors tasked with this work. A June 2013 OIG report found that the Part D program inappropriately paid for drugs ordered by individuals who clearly did not have the authority to prescribe, such as massage therapists, athletic trainers, home contractors, and OIG recommended, among other things, that there should interpreters.be verification of prescribers' authority to prescribe drugs, and that CMS should ensure that Medicare does not pay for prescriptions from individuals without such authority. CMS agreed with OIG's recommendations and, in discussing the final rule, stated that this new enrollment requirement is to help ensure that Part D drugs are prescribed only by qualified physicians and eligible professionals. To continue to help address potential vulnerabilities in the Part D program, we are currently examining practices for promoting prescription drug program integrity and the extent to which CMS's oversight of Medicare Part D reflects those practices. We plan to issue a report this fall. Although CMS has taken many needed actions, we and OIG have found that CMS has not fully implemented other enrollment screening actions authorized by PPACA. These actions could help further reduce the enrollment of providers and suppliers intent on defrauding the Medicare program, which is important because identifying and prosecuting providers and suppliers engaged in potentially fraudulent activity is time consuming, resource intensive, and costly. These actions include issuing a rule to implement surety bonds for certain providers and suppliers, issuing a rule on provider and supplier disclosure requirements, and establishing the core elements for provider and supplier compliance programs. PPACA authorized CMS to require a surety bond for certain types of at- risk providers and suppliers. Surety bonds may serve as a source for recoupment of erroneous payments. DMEPOS suppliers are currently required to post a surety bond at the time of enrollment. CMS reported in April 2014 that it had not yet scheduled for publication a proposed rule to implement the PPACA surety bond requirement for other types of at- risk providers and suppliers--such as home health agencies and independent diagnostic testing facilities. In light of the moratoria that CMS has placed on enrollment of home health agencies in fraud "hot spots," implementation of this rule could help the agency address potential concerns for these at-risk providers across the Medicare program. 42 U.S.C. SS 1395m(a)(16)(B). A DMEPOS surety bond is a bond issued by an entity guaranteeing that a DMEPOS supplier will fulfill its obligation to Medicare. If the obligation is not met, the surety bond is paid to Medicare. Medicare Program; Surety Bond Requirement for Suppliers of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS), 74 Fed. Reg. 166 (Jan. 2, 2009). suspension from a federal health care program.indicated that developing the additional disclosure requirements has been complicated by provider and supplier concerns about what types of information will be collected, what CMS will do with it, and how the privacy and security of this information will be maintained. CMS has not established the core elements of compliance programs for providers and suppliers, as required by PPACA. We previously reported that agency officials indicated that they had sought public comments on the core elements, which they were considering, and were also studying criteria found in OIG model plans for possible inclusion.2014, CMS reported that it had not yet scheduled a proposed rule for publication. Medicare uses prepayment review to deny claims that should not be paid and postpayment review to recover improperly paid claims. As claims go through Medicare's electronic claims payment systems, they are subjected to prepayment controls called "edits," most of which are fully automated; if a claim does not meet the criteria of the edit, it is automatically denied. Other prepayment edits are manual; they flag a claim for individual review by trained staff who determine whether it should be paid. Due to the volume of claims, CMS has reported that less than 1 percent of Medicare claims are subject to manual medical record review by trained personnel. Increased use of prepayment edits could help prevent improper Medicare payments. Our prior work found that, while use of prepayment edits saved Medicare at least $1.76 billion in fiscal year 2010, the savings could have been greater had prepayment edits been used more widely. Based on an analysis of a limited number of national policies and local coverage determinations (LCD), we identified $14.7 million in payments in fiscal year 2010 that appeared to be inconsistent with four national policies and therefore improper. We also found more than $100 million in payments that were inconsistent with three selected LCDs that could have been identified using automated edits. Thus, we concluded that more widespread implementation of effective automated edits developed by individual MACs in other MAC jurisdictions could also result in savings to Medicare. CMS has taken steps to improve the development of other types of prepayment edits that are implemented nationwide, as we recommended. For example, the agency has centralized the development and implementation of automated edits based on a type of national policy CMS has also modified its called national coverage determinations.processes for identifying provider billing of services that are medically unlikely to prevent circumvention of automated edits designed to identify an unusually large quantity of services provided to the same patient. We also evaluated the implementation of CMS's Fraud Prevention System (FPS), which uses predictive analytic technologies as required by the Small Business Jobs Act of 2010 to analyze Medicare fee-for-service (FFS) claims on a prepayment basis. FPS identifies investigative leads for CMS's Zone Program Integrity Contractors (ZPIC), the contractors responsible for detecting and investigating potential fraud. in July 2011, FPS is intended to help facilitate the agency's shift from focusing on recovering potentially fraudulent payments after they have been made, to detecting aberrant billing patterns as quickly as possible, with the goal of preventing these payments from being made. However, in October 2012, we found that, while FPS generated leads for investigators, it was not integrated with Medicare's payment-processing system to allow the prevention of payments until suspect claims can be determined to be valid. As of April 2014, CMS reported that while the FPS functionality to deny claims before payment had been integrated with the Medicare payment processing system in October 2013, the system did not have the ability to suspend payment until suspect claims could be investigated. In addition, while CMS directed the ZPICs to prioritize alerts generated by the system, in our work examining the sources of new ZPIC investigations in 2012, we found that FPS accounted for about 5 percent of ZPIC investigations in that year. A CMS official reported in March 2014 that ZPICs are now using FPS as a primary source of leads for fraud investigations, though the official did not provide details on how much of ZPICs' work is initiated through the system. GAO, Medicare Fraud Prevention: CMS Has Implemented a Predictive Analytics System, but Needs to Define Measures to Determine Its Effectiveness, GAO-13-104 (Washington, D.C.: Oct. 15, 2012). Our prior work found that postpayment reviews are critical to identifying and recouping overpayments. The use of national recovery audit contractors (RAC) in the Medicare program is helping to identify underpayments and overpayments on a postpayment basis. CMS began the program in March 2009 for Medicare FFS. CMS reported that, as of the end of 2013, RACs collected $816 million for fiscal year 2014. PPACA required the expansion of Medicare RACs to Parts C and D. CMS has implemented a RAC for Part D, and CMS said it plans to award a contract for a Part C RAC by the end of 2014. Moreover, in February 2014, CMS announced a "pause" in the RAC program as the agency makes changes to the program and starts a new procurement process for the next round of recovery audit contracts for Medicare FFS claims. CMS stated it anticipates awarding all five of these new Medicare FFS recovery audit contracts by the end of summer 2014. Other contractors help CMS investigate potentially fraudulent FFS payments, but CMS could improve its oversight of their work. CMS contracts with ZPICs in specific geographic zones covering the nation. In October 2013, we found that the ZPICs reported that their actions, such as stopping payments on suspect claims, resulted in more than $250 million in savings to Medicare in calendar year 2012. However, CMS lacks information on the timeliness of ZPICs' actions--such as the time it takes between identifying a suspect provider and taking actions to stop that provider from receiving potentially fraudulent Medicare payments-- and would benefit from knowing whether ZPICs could save more money by acting more quickly. Thus we recommended that CMS collect and evaluate information on the timeliness of ZPICs' investigative and administrative actions. CMS did not provide comments on our recommendation. We are currently examining the activities of the CMS contractors, including ZPICs, that conduct postpayment claims reviews, and anticipate issuing a report later this summer. Our work is reviewing, among other things, whether CMS has a strategy for coordinating these contractors' postpayment claims review activities. CMS has taken steps to improve use of two CMS information technology systems that could help analysts identify fraud after claims have been paid, but further action is needed. In 2011, we found that the Integrated Data Repository (IDR)--a central data store of Medicare and other data needed to help CMS program integrity staff and contractors detect improper payments of claims--did not include all the data that were planned to be incorporated by fiscal year 2010, because of technical obstacles and delays in funding. As of March 2014, the agency had not addressed our recommendation, to develop reliable schedules to incorporate all types of IDR data, which could lead to additional delays in making available all of the data that are needed to support enhanced program integrity efforts and achieve the expected financial benefits. However, One Program Integrity (One PI)--a web-based portal intended to provide CMS staff and contractors with a single source of access to data contained in IDR, as well as tools for analyzing those data--is operational, and CMS has established plans and schedules for training all intended One PI users, as we also recommended in 2011. However, as of March 2014, CMS had not established deadlines for program integrity contractors to begin using One PI, as we recommended in 2011. Without these deadlines, program integrity contractors will not be required to use the system, and as a result, CMS may fall short in its efforts to ensure the widespread use and to measure the benefits of One PI for program integrity purposes. Having mechanisms in place to resolve vulnerabilities that could lead to improper payments, some of which are potentially fraudulent, is critical to effective program management, but our work has shown weaknesses in CMS's processes to address such vulnerabilities. Both we and OIG have made recommendations to CMS to improve the tracking of vulnerabilities. In our March 2010 report on the RAC demonstration program, we found that CMS had not established an adequate process during the demonstration or in planning for the national program to ensure prompt resolution of vulnerabilities that could lead to improper payments in Medicare; further, the majority of the most significant vulnerabilities identified during the demonstration were not addressed. In December 2011, OIG found that CMS had not resolved or taken significant action to resolve 48 of 62 vulnerabilities reported in 2009 by CMS contractors specifically charged with addressing fraud. We and OIG recommended that CMS have written procedures and time frames to ensure that vulnerabilities were resolved. CMS has indicated that it is now tracking vulnerabilities identified from several types of contractors through a single vulnerability tracking process, and the agency has developed some written guidance on the process. In 2012, we examined that process and found that, while CMS informs Medicare administrative contractors (MAC) about vulnerabilities that could be addressed through prepayment edits, the agency does not systematically compile and disseminate information about effective local edits to address such vulnerabilities. Specifically, we recommended that CMS require MACs to share information about the underlying policies and savings related to their most effective edits, and CMS generally agreed to do so. In addition, in 2011 CMS began requiring MACs to report on how they had addressed certain vulnerabilities to improper payment, some of which could be addressed through edits. We also made recommendations to CMS to address the millions of Medicare cards that display beneficiaries' Social Security numbers, which In August 2012, we increases beneficiaries' vulnerability to identity theft.recommended that CMS (1) select an approach for removing Social Security numbers from Medicare cards that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS; and (2) develop an accurate, well-documented cost estimate for such an option. In September 2013, we further recommended that CMS (1) initiate an information technology project for identifying, developing, and implementing changes for the removal of Social Security numbers; and (2) incorporate such a project into other information technology initiatives. HHS concurred with our recommendations and agreed that removing the numbers from Medicare cards is an appropriate step toward reducing the risk of identity theft. However, the department also stated that CMS could not proceed with changes without agreement from other agencies, such as the Social Security Administration, and that funding was also a consideration. Thus, CMS has not yet taken action to address these recommendations. We are currently examining other options for updating and securing Medicare cards, including the potential use of electronic-card technologies, and expect to issue a report early next year. In conclusion, although CMS has taken some important steps to identify and prevent fraud through increased provider and supplier screening and other actions, the agency must continue to improve its efforts to reduce fraud, waste, and abuse in the Medicare program. Identifying the nature, extent, and underlying causes of improper payments, and developing adequate corrective action processes to address vulnerabilities, are essential prerequisites to reducing them. As CMS continues its implementation of PPACA and Small Business Jobs Act provisions, additional evaluation and oversight will help determine whether implementation of these provisions has been effective in reducing improper payments. We are investing resources in a body of work that assesses CMS's efforts to refine and improve its fraud detection and prevention abilities. Notably, we are currently assessing potential use of electronic-card technologies, which can help reduce Medicare fraud. We are also examining the extent to which CMS's information system can help prevent and detect the continued enrollment of ineligible or potentially fraudulent providers and suppliers in Medicare. Additionally, we have a study under way examining CMS's oversight of fraud, waste, and abuse in Medicare Part D to determine whether the agency has adopted certain practices for ensuring the integrity of that program. We are also examining CMS's oversight of some of the contractors that conduct reviews of claims after payment. These studies are focused on additional actions for CMS that could help the agency more systematically reduce potential fraud in the Medicare program. Chairman Murphy, Ranking Member DeGette, and Members of the Subcommittee, this concludes my prepared remarks. I would be pleased to respond to any questions you may have at this time. For further information about this statement, please contact Kathleen M. King at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Karen Doran, Assistant Director; Eden Savino; and Jennifer Whitworth were key contributors to this statement. Medicare: Further Action Could Improve Improper Payment Prevention and Recoupment Efforts. GAO-14-619T. Washington, D.C.: May 20, 2014. Medicare Fraud: Progress Made, but More Action Needed to Address Medicare Fraud, Waste, and Abuse, GAO-14-560T. Washington, D.C.: April 30, 2014. Medicare: Second Year Update for CMS's Durable Medical Equipment Competitive Bidding Program Round 1 Rebid. GAO-14-156. Washington, D.C.: March 7, 2014. Medicare Program Integrity: Contractors Reported Generating Savings, but CMS Could Improve Its Oversight. GAO-14-111. Washington, D.C.: October 25, 2013. Health Care Fraud and Abuse Control Program: Indicators Provide Information on Program Accomplishments, but Assessing Program Effectiveness Is Difficult. GAO-13-746. Washington, D.C.: September 30, 2013. Medicare Information Technology: Centers for Medicare and Medicaid Services Needs to Pursue a Solution for Removing Social Security Numbers from Cards. GAO-13-761. Washington, D.C.: September 10, 2013 Medicare Program Integrity: Few Payments in 2011 Exceeded Limits under One Kind of Prepayment Control, but Reassessing Limits Could Be Helpful. GAO-13-430. Washington, D.C.: May 9, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase Savings and Better Ensure Proper Payment. GAO-13-102. Washington, D.C.: November 13, 2012. Medicare Fraud Prevention: CMS Has Implemented a Predictive Analytics System, but Needs to Define Measures to Determine Its Effectiveness. GAO-13-104. Washington, D.C.: October 15, 2012. Health Care Fraud: Types of Providers Involved in Medicare, Medicaid, and the Children's Health Insurance Program Cases. GAO-12-820. Washington, D.C.: September 7, 2012. Medicare: CMS Needs an Approach and a Reliable Cost Estimate for Removing Social Security Numbers from Medicare Cards. GAO-12-831. Washington, D.C.: August 1, 2012. Program Integrity: Further Action Needed to Address Vulnerabilities in Medicaid and Medicare Programs. GAO-12-803T. Washington, D.C.: June 7, 2012. Medicare: Review of the First Year of CMS's Durable Medical Equipment Competitive Bidding Program's Round 1 Rebid. GAO-12-693. Washington, D.C.: May 9, 2012. Medicare Program Integrity: CMS Continues Efforts to Strengthen the Screening of Providers and Suppliers. GAO-12-351. Washington, D.C.: April 10, 2012. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-11-699. Washington, D.C.: September 6, 2011. Medicare Integrity Program: CMS Used Increased Funding for New Activities but Could Improve Measurement of Program Effectiveness. GAO-11-592. Washington, D.C.: July 29, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespread Use. GAO-11-475. Washington, D.C.: June 30, 2011. Medicare Fraud, Waste, and Abuse: Challenges and Strategies for Preventing Improper Payments. GAO-10-844T. Washington, D.C.: June 15, 2010. Medicare Recovery Audit Contracting: Weaknesses Remain in Addressing Vulnerabilities to Improper Payments, Although Improvements Made to Contractor Oversight. GAO-10-143. Washington, D.C.: March 31, 2010. Medicare: Thousands of Medicare Providers Abuse the Federal Tax System. GAO-08-618. Washington, D.C.: June 13, 2008. Medicare: Improvements Needed to Address Improper Payments for Medical Equipment and Supplies. GAO-07-59. Washington, D.C.: January 31, 2007. Medicare: More Effective Screening and Stronger Enrollment Standards Needed for Medical Equipment Suppliers. GAO-05-656. Washington, D.C.: September 22, 2005. Medicare: CMS's Program Safeguards Did Not Deter Growth in Spending for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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GAO has designated Medicare as a high-risk program, in part because the program's size and complexity make it vulnerable to fraud, waste, and abuse. In 2013, Medicare financed health care services for approximately 51 million individuals at a cost of about $604 billion. The deceptive nature of fraud makes its extent in the Medicare program difficult to measure in a reliable way, but it is clear that fraud contributes to Medicare's fiscal problems. More broadly, in fiscal year 2013, CMS estimated that improper payments--some of which may be fraudulent--were almost $50 billion. This statement focuses on the progress made and important steps to be taken by CMS and its program integrity contractors to reduce fraud in Medicare. This statement is based on relevant GAO products and recommendations issued from 2004 through 2014 using a variety of methodologies. Additionally, in June 2014, GAO updated information based on new regulations regarding enrollment of certain providers in Medicare by examining public documents. The Centers for Medicare & Medicaid Services (CMS)--the agency within the Department of Health and Human Services (HHS) that oversees Medicare--has made progress in implementing several key strategies GAO identified or recommended in prior work as helpful in protecting Medicare from fraud; however, implementing other important actions that GAO recommended could help CMS and its program integrity contractors combat fraud. These strategies are: Provider and Supplier Enrollment : The Patient Protection and Affordable Care Act (PPACA) authorized, and CMS has implemented, actions to strengthen provider and supplier enrollment that address past weaknesses identified by GAO and HHS's Office of Inspector General. For example, CMS has hired contractors to determine whether providers and suppliers have valid licenses and are at legitimate locations. CMS could further strengthen enrollment screening by issuing a rule to require additional provider and supplier disclosures of information, such as any suspension of payments from a federal health care program, and establishing core elements for provider and supplier compliance programs, as authorized by PPACA. Prepayment and Postpayment Claims Review : Medicare uses prepayment review to deny claims that should not be paid and postpayment review to recover improperly paid claims. GAO has found that increased use of prepayment edits could help prevent improper Medicare payments. For example, prior GAO work identified millions of dollars of payments that appeared to be inconsistent with selected coverage and payment policies and therefore improper. Postpayment reviews are also critical to identifying and recouping overpayments. GAO recommended better oversight of both (1) the information systems analysts use to identify claims for postpayment review, in a 2011 report, and (2) the contractors responsible for these reviews, in a 2013 report. CMS has taken action or has actions under way to address these recommendations. Addressing Identified Vulnerabilities : Having mechanisms in place to resolve vulnerabilities that could lead to improper payments is critical to effective program management and could help address fraud. However, prior GAO work has shown weaknesses in CMS's processes to address such vulnerabilities. For example, GAO has made multiple recommendations to CMS to remove Social Security numbers from beneficiaries' Medicare cards to help prevent identity theft. HHS agreed with these recommendations, but reported that CMS could not proceed with the changes for a variety of reasons, including funding limitations, and therefore has not taken action. GAO work under way addressing these key strategies includes examining: (1) how well CMS's information system can prevent and detect the continued enrollment of ineligible or potentially fraudulent providers and suppliers in Medicare, (2) the potential use of electronic-card technologies to help reduce Medicare fraud, (3) CMS's oversight of program integrity efforts for prescription drugs, and (4) CMS's oversight of some of the contractors that conduct reviews of claims after payment. These studies could help CMS more systematically reduce potential fraud in the Medicare program.

Technological advances continue to transform the U.S. workforce, and workers must improve their skills to meet employers' changing needs. Many employers report difficulties in finding qualified workers, and many unemployed workers lack the skills they need to find jobs. Training programs can help workers gain the skills needed for today's jobs, and employment placement programs can help employers find qualified employees. In 2002, the federal government funded 44 employment and training programs that provided services, such as job search assistance, employment counseling, basic adult literacy, and vocational training, to over 30 million people at a cost of approximately $12 billion. Although these programs were administered by nine federal agencies, many of the programs provided services to the public through one-stop centers in communities throughout the country. When the Congress passed the Workforce Investment Act (WIA) in 1998, it mandated that at least 17 federally funded programs provide employment and training services through a one-stop center system (see table 1). WIA also established workforce investment boards. Each state workforce investment board is responsible for developing statewide workforce policies and overseeing its local workforce investment boards. The local workforce investment boards, in turn, are responsible for developing local workforce policies and overseeing one-stop center operations (see fig. 1). Some of the federal employment and training programs are not required to provide services through the one-stop centers. These include the Temporary Assistance for Needy Families program (TANF) and the H-1B Technical Skills Training Grant Program. The TANF program is administered by the Department of Health and Human Services and assists needy adults with children in finding and retaining employment. The H-1B Technical Skills Training Grants are administered by the Department of Labor, and the funds are distributed to select local workforce investment boards to increase the supply of skilled workers in occupations identified as needing more workers. In addition to federally funded programs, states use their own revenues to expand employment placement and training opportunities. For example, states create unemployment insurance (UI) tax offsets by decreasing the UI tax amount paid by employers and at the same time imposing a separate tax on employers for the same amount as the UI tax deduction. In addition, states use other employer taxes, and revenues from each states' UI interest fund or from UI penalty fees imposed on employers. Employers may be charged UI penalty fees for late payments, for failing to file a UI return for an employee, or for failing to report an employee's wages. While all of these revenues are generated through employer taxes, states also commit general revenue funds to expand employment placement and training opportunities. A study for the National Governors' Association Center for Best Practices found that state-funded worker training programs are operating in 48 states. States have increased the availability of employment placement and training opportunities in various ways. Some states have used their revenues to expand federally funded programs. In fact, a recent national study by National Association of State Workforce Agencies found that 19 states used these revenues to supplement WIA job training services. Other states have used their revenues, including employer tax funds, to create their own employment placement and training programs; however, little is known about these programs. Some employers invest their own resources in training their workers. The exact amount of money that employers spend every year to train their workers is difficult to estimate; a study of trends in employer-provided training suggests that employers' financial commitment to training has recently increased. Some individuals, as well, invest their own funds for training as a way to either upgrade their job-related skills or to become employable. Impact evaluations for public programs, like employment and training programs, produce findings that allow conclusions about the effectiveness of the programs to be made. These evaluations may be implemented using a few different design strategies. Two designs that are used to isolate a program's effects, such as those on participants, are experimental designs and quasi-experimental designs. Experimental designs. These are characterized by the use of random selection and control groups. All individuals have an equal chance of being assigned to either the intervention group or the control group. The intervention group contains individuals who will receive the intervention, or program's services, while the control group does not receive the intervention or services. This research design produces findings that allow conclusions about the effectiveness, or impact, of the intervention to be made. However, conducting experimental designs may be problematic because of the need to treat intervention and control groups differently. For example, to determine the impact of a training program on workers' wages, a program would need to randomly provide services to some and randomly deny services to others, and track subsequent earnings for both groups of people. This approach requires services to be denied to some workers who qualify for training. Due to these difficulties, as well as the amount of time and money it takes to conduct experimental designs, quasi- experimental research designs are often preferable for their practicality. Quasi-experimental designs. These designs are characterized by comparison groups that are not randomly selected. For training programs, a quasi-experimental design would compare a group of people who have elected to take the training courses with nonparticipants who may have characteristics, such as wage or education levels, that are comparable to the group receiving services. Comparing the two groups allows researchers to account for other factors, such as the local economy, that may have influenced outcomes. The Department of Labor's Employment and Training Administration (ETA) Office of Policy Development, Evaluation and Research has valuable resources related to designing and implementing evaluations. Labor has established evaluation coordination liaisons in each state to help with evaluations of federal programs. These liaisons can help states access logistical support and technical assistance for program evaluations. Such resources include ETA's recent review of alternative research methodologies, which contains guidance on conducting experimental and quasi-experimental evaluations of workforce programs to determine the social and economic values of the programs. Twenty-three states reported using employer tax revenues in 2002 from a variety of employer taxes to fund their own employment placement and training programs. States most often provided job-specific training for workers. States reported spending a total of $278 million to provide these training and employment placement services. Some states established their programs as a way to address a variety of specific workforce and economic issues, such as chronic shortages of skilled workers. Twenty-three states reported using a variety of employer taxes in 2002 to fund employment placement and training services to address specific workforce issues (see fig 2). These states reported spending a total of $278 million on their workforce programs. Expenditures in 2002 varied dramatically from state to state, ranging from $100,000 in Kansas to over $84 million in California (see fig. 3). In 18 of the states, employer tax revenues completely funded these employment and training programs, while in 3 of the states employer tax revenues made up at least 50 percent of the funding for these programs. Only 1 state reported that employer tax dollars constituted less than 50 percent of its program's funds. (For more information on individual state employment placement and training program budgets in 2002, see app. II.) States used various types of employer taxes to fund employment placement and training services (see table 2). Eleven states reported using a UI tax offset. Eight states funded their programs through a separate state employer tax. For example, Delaware employers were taxed $12.75 for the first $8,500 of each employee's annual salary. Similarly, Massachusetts's employers were taxed up to $8.10 per employee annually. Five states used UI penalty and interest funds. One state, California, reported combining funds from more than one employer tax source and funded its program through revenues generated by a UI tax offset and a separate state employer tax of up to $7 per employee. (For more information on the total funds collected by states through these employer taxes in 2002, see app. II.) California was the first state to use employer taxes for employment placement and worker training in 1982 and other states have followed suit (see fig. 4). In addition to California, 6 other states started using employer taxes to fund employment placement and training services by the end of the 1980s. New Hampshire most recently started to use these tax revenues to fund its program in 2001. Texas is the only state in our survey of programs operating in 2002 that has since terminated its worker training program. Some states established their programs as a way to address a variety of specific workforce and economic issues, such as chronic shortages of skilled workers. For example, Louisiana used $1.3 million to create an emergency medical services training program at a local community college after one of the state's largest providers of paramedics and emergency medical care staff reported needing to hire most of its staff from out of state due to a lack of qualified workers. Similarly, to increase the supply of elder care providers, California funded training to certified nurses' assistants so that they could become vocational nurses. In addition, other states noted that their employment placement and training programs address service and eligibility gaps in federally funded workforce programs. For example, Rhode Island officials said that because federal funds could not be used to provide training to employed workers prior to the passage of WIA, their employer tax-funded program provided employers with training funds specifically to improve employed worker skills. New Jersey and Washington officials also noted that their states used employer tax funds to provide employment placement and training services that are not offered through federally funded workforce programs. Other states, such as Louisiana, used employer taxes to fund training services for individuals who do not meet the income eligibility requirements used in WIA programs. Most states focused on certain industries, particularly manufacturing, because of their overall benefit to the state's economy. California's worker training program specifically targets manufacturing industries because these industries tend to offer high-paying, stable employment. Other industries that were also frequently targeted for training include: information; health care or social assistance; professional, scientific, or technical; and construction. Our earlier study examining how states and local areas are training employed workers found similar results: manufacturing along with health care and social assistance are two of the most commonly targeted economic sectors for training workers. Our survey of employer tax-funded state programs also showed that industries that were least often targeted included wholesale and retail trade, finance and insurance, and accommodation and food service (see fig. 5). States also targeted their services to certain employers as part of their workforce and economic development strategies. Over 11,000 employers were provided training services, and most states provided services for employers with 100 or fewer employees (see fig. 6). Rhode Island, for example, offered employers with 100 or fewer employees training grants of up to $10,000. Rhode Island officials said that they targeted smaller employers because these employers often do not have the resources to provide their workers with training and that smaller employers make up the majority of the companies in the state. States provided services in a variety of ways. States reported providing worker training either directly or through grants awarded to employers or training providers. For example, Louisiana generally awarded grants in amounts that covered an employer's entire training costs. Employers could use these funds to provide training themselves, hire private training contractors, or contract with public training providers. Funded training could occur either during normal working hours or off the clock. Louisiana officials noted that they encouraged employers to use public training providers, most often the state's technical colleges. On the other hand, California required employers to contribute to training-related costs. Employers were expected to match up to 100 percent of the training grant to pay for related expenses, such as worker wages during training or training materials. Officials from California reported that most training grants are awarded contingent upon workers being trained on the job, as opposed to off the clock. States funding employment placement services, such as interview technique and resume writing workshops, provided services directly or through other service providers. States most often reported that worker training was the primary emphasis of their employer tax-funded programs and spent more on worker training services than on employment placement services (see fig. 7). Fourteen states reported that worker training was the primary emphasis of their programs, and 10 of these states funded worker training exclusively. States spent approximately $202 million on worker training services; this represents 72 percent of the total funds spent on employment placement and training services (see fig. 8). States used these funds to provide a variety of training services. For example, in Louisiana funds were used to provide training related to automobile services and repairs, welding, painting, and sandblasting. Funds were also used in Louisiana to purchase training equipment, such as a Bridge Resource Management Simulator, which was used for river navigation training. States reported providing training services to about 200,000 people and were more likely to focus on the provision of training services to employed workers as opposed to dislocated workers or those receiving UI benefits (see fig. 9). (For a detailed review of states' primary service focus, expenditures by service area, and the number of individuals served in 2002, see app. III.) States were most likely to provide job-specific training--such as on new production methods and computer software--and 17 states reported funding these types of services with employer tax revenues (see fig. 10). Officials from Louisiana said that they focus on job-specific training because this type of training contributes to increased worker productivity and company growth. State officials also noted that fostering company growth creates new jobs that can lower state unemployment rates. States were less likely to use employer taxes to provide nonjob-specific training, including conflict resolution, team building, or how to dress appropriately for the workplace. Twelve of the 23 states reported providing this type of training. These findings echo our previous study on worker training that found similar trends: states were more likely to focus state and federal funds on occupational training as compared to nonjob- specific training. Basic skills training--such as math, GED preparation, and English as a second language--is least often provided, with only 10 states reporting they used employer tax revenues to fund this type of training. Fewer state employer tax-funded programs emphasized employment placement services, such as career counseling, skill assessments, and self- access employment services like Internet job listings and career planning videos. Eight states reported that employment placement was their primary focus, and 6 of these states funded employment placement services exclusively. States reported spending approximately $77 million to provide employment placement services to approximately 1.17 million individuals. Despite the fact that fewer states reported emphasizing employment placement services, the total number of individuals receiving employment placement services is approximately six times as great as the total number of individuals receiving training services. The difference in the number of people served may be attributed to the time and resource intensity of training services compared with employment placement services. For example, Louisiana awards training grants that are up to 2 years in length. In comparison with training services, many of the employment placement services that states reported providing are far less time- and resource-intensive. Twenty-one of the 23 states with employment placement and training programs funded through employer taxes reported some coordination with federal workforce programs in 2002. The most common coordination activity reported by states was the joint promotion of state and federally funded workforce programs through outreach or referrals (see fig. 11). These promotion activities occurred in various ways. For example, in California, a local workforce investment board and its one-stop center hired staff to make cold calls to companies advertising the benefits of participating in the state-funded training program. In Louisiana, on the other hand, state officials provided information packets to employers about how to upgrade their employees' skills or fill job openings using state and federally funded workforce programs. In addition, many states reported that they coordinated with federal workforce programs by sharing technical assistance and administrative resources. Technical assistance involves the exchange of program information to improve program practices. For example, in California, staff from both state and federally funded workforce programs worked together on a task force and provided each other with technical assistance to improve services to small businesses. Sharing administrative resources, on the other hand, can involve activities such as using a common management information system, or sharing office space or staff. In Rhode Island, for example, staff at the local workforce investment boards were responsible for administering some of the training grants funded by the state program. Fewer states reported co-funding employment and training services or jointly developing policies with federal workforce programs. The number of partnerships between employer tax-funded programs and the federal workforce system varied from state to state. Some state programs coordinated with only one federal partner. For example, New Hampshire's program chose to coordinate exclusively with its state workforce investment board. Other state programs coordinated with many federal partners. For example, Delaware's program coordinated with a one-stop center, TANF, the H1-B technical skill grants program, and other federal workforce programs. (For additional information on each state's partnerships with federal programs, see app. IV.) Although state employer tax-funded programs vary in their relationships with federal workforce programs, some patterns are evident regarding the most common federal partners. The majority of the states (19) reported coordinating with at least one one-stop center during 2002. However, several one-stop centers can operate in a state, and we do not know if states coordinated with more than one of these centers. Thus, it is difficult to gauge the degree of coordination between state-funded programs and one-stop centers within each state. Nevertheless, we do know that many states also reported coordinating with state workforce investment boards, of which there is only one per state (see fig. 12). The number of federal partners that state employer-funded programs have does not seem to be closely associated with the number of years that the state programs have operated. Although Delaware's program is older than New Hampshire's and coordinated with more federal workforce programs, this is not a consistent pattern across the country. For example, Kansas reported fewer federal partners than Louisiana, despite the fact that Kansas's employer tax-funded program has been in existence for about a decade longer. As a result of their various partnerships with workforce investment boards and one-stop centers, almost all states reported an increase in awareness of their employer tax-funded programs. In addition, some state officials noted that coordination had improved service quality and availability. For example, officials from Michigan and New Jersey's state programs, as well as an official from an Oregon workforce investment board, noted that co- locating staff from the state-funded programs at the one-stop centers improved the services delivered to individuals. By co-locating these programs, state officials said that they can help these individuals learn about a broader range of employment and training services and job opportunities. The Oregon official also pointed out that such co-location can reduce transportation and child care barriers for clients. Coordination can also assist states in improving services to employers. For example, a state official from Idaho reported that having staff members who are knowledgeable about both the state-funded program and WIA programs enables them to better meet the needs of employers looking to expand their businesses or move to the state. Although many state officials noted that coordination had improved services, they were less likely to report increases in funding for employment and training services as a result of these collaborative relationships (see fig. 13). Twenty-two of the 23 states with employer-funded employment placement and training programs reported assessing the performance of their programs in 2002, though program impacts could not be determined. States reported using a range of approaches to assess their employment placement and training programs, including variations in who conducted the assessments, data collection methods used for the assessments, and the frequency of the assessments. Of the 18 states that could provide assessments of their individual employment placement and training programs, 4 assessed their programs exclusively using process-oriented indicators, while the other 14 used outcome-oriented indicators in their assessments. However, none of the states used sufficiently rigorous research designs to allow them to make conclusive statements about the impact of their programs. Twenty-two of the 23 states with employer-funded employment placement and training programs reported assessing the performance of their programs in 2002. States reported using a variety of data collection methods for their assessments, and most states used a combination of data sources for their assessments. For example, Tennessee's assessment was based on data collected from site visits to training locations and surveys administered to employers, while self-reported feedback and a fiscal audit were the data sources used for Texas's assessment. The most commonly used data sources were: surveys, self-reported feedback, and on-site visits. Only 2 states relied solely on quantitative data, such as program expenditures and employment statistics. For example, Alabama used its UI wage database to track how program participants fared in finding jobs. Most states used a combination of internal and external evaluators for their assessments (see fig. 14). For example, California used both in- house program staff and external evaluators from several state universities to evaluate its program. On the other hand, 9 states used in-house evaluators exclusively, while only 1 state, Indiana, used external evaluators exclusively. Furthermore, states conducted their assessments at varying intervals. About two-thirds of the states (14) regularly conducted assessments-- annually, quarterly, and monthly. Eight states conducted assessments once training contracts were completed. For example, Tennessee sent surveys to employers once the contracts it awarded were completed. None of the state assessments used sufficiently rigorous research designs to allow them to make conclusive statements about the impact of their programs. We asked states to provide us with copies of recent assessments of their programs. Although 5 states could not provide us with assessments of their individual employment and training programs, 18 of the 23 states shared recent assessments with us. On the basis of the 28 assessments received from 18 states, we examined indicators used by the states and found that 4 assessed their programs exclusively using process-oriented indicators. For example, Hawaii and New Hampshire collected data on the number of businesses served. Likewise, Alabama and Texas both collected data on how many people participated in their programs. Process-oriented indicators help assess a number of factors, including who uses the program, how funds are spent, and how well a program is being implemented. Fourteen states included outcome-oriented indicators along with process- oriented indicators in their assessments, with 11 states measuring worker wages (see table 3). States also used a variety of other outcome-oriented indicators, including job placement and retention rates of trainees. Outcome-oriented indicators provide important data for states related to changes, such as those in: worker wages, employment stability, and advancement rates. Although 14 states used outcome-oriented indicators, none used sufficiently rigorous research designs to allow them to make conclusive statements about the impact of their programs. Twelve of the 14 states that used outcome-oriented indicators did not use comparison groups in their evaluation design. Without comparing a program's participants to similar nonparticipants, it is not possible to account for other factors, such as an upturn in the local economy, which may have influenced participant outcomes. While 2 states used comparison groups, their methodological design did not allow for the identification of conclusive impacts of these programs because their comparison groups were not comparable enough to their participant groups. To help close the gap between employer needs and employee skills, both federal- and state-funded workforce programs are providing skills training to employees and helping employers find qualified employees. Twenty- three states used employer taxes in 2002 to fund their own employment placement and training programs. These state programs have the potential to enhance the federal workforce system by filling service and eligibility gaps. However, the impact of these programs is unknown because states have not adequately studied them. Because these programs contribute to our nation's ability to provide comprehensive workforce development services to meet employers' needs for skilled workers, it would be helpful to have information on the impact of these efforts. The Department of Labor's Employment and Training Administration (ETA) Office of Policy Development, Evaluation and Research has valuable resources related to designing and implementing evaluations that might help address this lack of information. Labor has established evaluation coordination liaisons in each state and, although this position was designed to help with evaluations for federal programs, the liaison may be able to direct state program administrators to resources such as ETA's recent review of alternative research methodologies. Furthermore, this liaison could help state administrators access other program evaluation expertise, such as logistical support and technical assistance. We provided a draft of this report to the Department of Labor for its review, and Labor provided technical comments. Labor expressed an interest in state employment placement and training programs funded by employer taxes. In addition, Labor acknowledged the importance of collaboration between these state-funded programs and federally funded programs, by noting that it may seek opportunities to better assist states in coordinating their programs with federal Workforce Investment Act programs. We will send copies of this report to the Secretary of Labor, relevant congressional committees, and other interested parties. Copies will be made available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Please contact me on (202) 512-7215 if you or your staffs have any questions about this report. Other major contributors to this report are listed in appendix VII. We were asked to determine (1) How many states use employer taxes to fund their own employment placement and training programs, and what type of services do they provide; (2) The extent to which these state employment placement and training programs are coordinating with federal workforce programs; and (3) How states are assessing the performance of their employment placement and training programs. To address these questions, we conducted three surveys, reviewed program evaluations, and visited 3 states. First, we surveyed all 50 states and the District of Columbia and Puerto Rico to identify those that were using employer tax revenues to provide their own employment placement or training programs in 2002. We then conducted a follow-up survey with the 23 states that reported using employer taxes to fund their own programs during state fiscal year 2002. Specifically, we surveyed the state programs that reported receiving the largest portion of employer tax revenues collected in their state to provide employment placement and training services. To gain a perspective on service coordination with federally funded workforce programs, we surveyed staff from workforce investment boards in 6 states that began to fund their employment placement and training programs through employer taxes in the 1980s. We also requested recent assessments from the 23 states we surveyed and reviewed the assessments from the 18 states that could provide them to us. Finally, we conducted site visits to 3 states--California, Louisiana, and Rhode Island. To determine how many states used employer taxes to fund their own employment placement and training programs, we surveyed workforce officials from the 50 states, the District of Columbia, and Puerto Rico. This structured survey was administered via e-mail and the telephone and had a 100 percent response rate. Twenty-three states reported that they used employer tax revenues to fund their own employment placement and training programs in state fiscal year 2002. To determine the types of employment placement and training services states offered, we conducted a second survey of the 23 states that reported using employer taxes to fund these services in our first survey. This survey was designed to obtain information related to program mission, services provided, populations served (individuals and industries), budget size, and expenditures. To determine if states assessed their programs, we also asked questions related to the frequency of program performance assessments and the types of methods used to measure program performance. In addition, we requested copies of recent program assessment reports. To determine the extent to which state programs coordinated with federal workforce programs, we also asked states to report how their employment placement and training programs worked with federal organizations and programs, including workforce investment boards, one-stop centers, TANF, Welfare-to-Work, H1-B grants, employment placement and training programs administered by the U.S. Department of Education, and other federally funded programs. In addition, we asked states how these coordination efforts affected program awareness, quality of service, available funding, and the amount of employment placement and training services available. To gain the perspective of officials from federally funded programs on coordination with these state programs, we administered a structured telephone survey to representatives from workforce investment boards operating in 6 states that began their employer tax-funded employment placement or training programs during the 1980s (see table 4). We chose these states with older programs, because we believed that they would have more established partnerships with federal programs and would be able to provide in-depth information on coordination. We surveyed representatives from 5 of the state workforce investment boards. We also surveyed a total of 10 purposively and randomly selected local workforce investment boards. At least one local workforce investment board was surveyed from each state that began operating its employer tax-funded program during the 1980s. We included steps in both the survey data collection and data analysis stages to account for and minimize the variability that occurs when respondents interpret questions differently or have different information available to them. For example, survey specialists along with subject matter specialists designed each questionnaire, and we pre-tested each questionnaire with the appropriate target audience to ensure that questions were clear. We pre-tested our workforce investment board survey with representatives from state workforce investment boards and a local workforce investment board. We also reviewed survey questionnaire responses for consistency and in several cases contacted respondents to resolve inconsistencies. However, we did not otherwise verify the information provided in the responses. In order to increase our response rate for each survey, we followed up with program officials through e-mail and telephone contact. We analyzed these survey data by calculating descriptive statistics. We reviewed recent assessments from the 18 states that could provide them to us. Two of those states shared more than one recent assessment with us, all of which we used in our analysis. The assessments we collected ranged from annual reports to budget briefings to strategic plans to external evaluations. We analyzed these reports by performing a content analysis in which we coded the assessment indicators as outputs (process-oriented data) or outcomes (outcome-oriented data). Furthermore, when provided, we analyzed the research designs states used to assess their programs against standard evaluation research design characteristics as described by Rossi and Freeman (1993) and McBurney (1994). We selected 3 states for site visits according to several criteria, including the year employer taxes were first used to fund their employment placement and training program. We chose states that were early, mid- and late implementers. Site selection was also based on diverse program funding levels and geographic diversity (see table 5). In each state, we interviewed officials responsible for administering each state's employer tax-funded employment placement or training program to gain further insight into the types of services provided and populations served by these programs. To learn more about the extent to which these state-funded employment placement and training programs coordinate with federally funded workforce programs, we also interviewed officials from each state's workforce investment board. We also interviewed officials from two one-stop career centers operating in each state we visited. We purposively selected these one-stop career centers because they coordinated with employer-funded state programs. Program solely funded through employer taxes Yes These states' program budgets for state fiscal year 2002 were greater than the amount collected through each state's employer tax. Reasons for this disparity varied and included rollovers of unspent funds from previous years. Some states, specifically Delaware, Indiana, Michigan, Oregon, and South Dakota, also used other funding sources in addition to employer tax revenues to pay for these programs. In Indiana, Michigan, and South Dakota at least 50 percent of the funding for these programs came from employer taxes. However, in Oregon employer taxes constituted less than half of the funds used for the program. Delaware did not specify the portion of its program budget funded by employer taxes. Our survey permitted states to report "DK" or "Don't Know." Applicable data not provided. Delaware, Indiana, Michigan, and South Dakota reported that their program budgets included funds from other sources, making it difficult to isolate expenditures from their state employer tax revenues. While Oregon also reported that its program budget included funds from other sources, Oregon provided us with additional data. Oregon's expenditures included in this figure are those that were solely funded through employer tax revenues. Texas was unable to provide us with the number of individuals that received training services in 2002. Idaho reported its program emphasis as "other." Indiana and Michigan reported expenditures that exceeded their program budgets. Board(s) In addition, 22 states responded to the survey questions regarding coordination with one-stop centers and the H1-B program, while 20 states responded to the question regarding coordination with local workforce investment boards. N/A signifies not applicable and is listed for Del, N.H., S.Dak., and Wyo. These are states that have a single workforce investment board, which functions as both the state and local board. The Welfare-to-Work program is a mandated partner of the one-stop centers. While all states that reported coordinating with the Welfare-to-Work program also reported coordinating with a one-stop center, not all states that reported coordinating with a one-stop center also reported coordinating with the Welfare-to-Work program. States had the option to list multiple programs under both the "Department of Education Employment and Training" category and the "Other Federal Employment and Training" category. For the "Department of Education" category, states noted programs such as Adult Education and Literacy, and Vocational Education. For the "Other Federal Employment and Training" category, programs ranged from Veterans' Employment and Training Service to Job Corps. Both the "Department of Education" category and the "Other Federal Employment and Training" category included some programs that are mandated one-stop partners. Denotes that a state did not respond to this question. In-house program staff and contract recipient staff In-house program staff and contract recipient staff In-house program staff and contract recipient staff In-house program staff, external evaluators, and contract recipient staff In-house program staff and contract recipient staff Michigan's performance assessments were conducted against agreed upon goals and objectives for each of the program's local areas. New Jersey is the only state that reported it did not regularly assess its program in 2002. Irene J. Barnett and Holly C. Ciampi made significant contributions to this report, in all aspects of the work throughout the assignment. In addition, Debra Waterstone and Shirley Hwang contributed to the administration of our survey of state programs and Kevin Murphy assisted in the initial planning of the assignment. Avrum Ashery, Michele Fejfar, Alison Martin, Corinna Nicolaou, Audrey Ruge, Daniel Schwimer, and Shana Wallace provided key technical assistance.

As technological and other advances transform the U.S. economy, many of the nation's six million employers may have trouble finding employees with the skills to do their jobs well. Some experts indicate that such a skill gap already affects many employers. To help close this skill gap, both federal- and state-funded programs are providing training and helping employers find qualified employees. In 2002, the federal government spent about $12 billion on workforce programs, and there are various studies on these programs. States also raised revenues in 2002--from taxes levied on employers--to fund their own workforce programs. However, little is known about these state programs. GAO was asked to provide information on how many states use these employer taxes to fund their own employment placement and training programs, what services are provided, the extent to which these state programs coordinate with federal programs, and how states assess the performance of these programs. Twenty-three states reported using employer tax revenues in 2002 to fund their own employment placement and training programs, and states most often provided job-specific training for workers. States used various types of employer taxes and reported spending a total of $278 million to address state-specific workforce issues. States invested in a variety of industries, but manufacturing was the most frequently targeted. Most states with employment placement and training programs funded through employer taxes reported some coordination with federal workforce programs in 2002. States were most likely to coordinate with federal workforce programs by jointly promoting programs through outreach and referrals. According to most state officials, coordination with federal workforce programs raised awareness of their state-funded programs. Some state officials also reported that coordination improved the quality and availability of services. Twenty-two of the 23 states reported assessing the performance of their programs in 2002. However, none have used sufficiently rigorous research designs to allow them to make conclusive statements about the impact of their programs, such as their effect on worker wages or company earnings. Because these programs contribute to our nation's ability to provide comprehensive workforce development services to meet employers' needs for skilled workers, it would be helpful to have information on the impact of these efforts. The Department of Labor has valuable resources that might help states evaluate the impact of their programs.

The federal adoption tax credit was first authorized in the Small Business and Job Protection Act of 1996, which provided for a nonrefundable credit for adoption expenses, not to exceed $5,000, or $6,000 for children with special needs. Special needs children are defined as those children who a state determined cannot or should not be returned to a parent, and using specified criteria, the state can reasonably assume that the child will not be adopted without state assistance. Parents of adoptive children with special needs are also eligible for direct assistance under Title IV-E of the Social Security Act. Although the federal Department of Health and Human Services (HHS) oversees state administration of the payments for direct adoption assistance, the state agencies designate which children are considered to have special needs. State adoption agency managers provide guidance to adoptive families on how to manage the adoption process and frequently receive inquiries about documentation and other administrative requirements. Documentation certifying adoptions varies from state to state. In its oversight role for state adoption programs, HHS provides information to states through guidance and technical assistance. It also provides information to states and families on adoption-related issues through websites. When the credit was first enacted in 1996, families that had qualifying expenses greater than the maximum limit for the credit could carry over that amount and claim those expenses for up to 5 years. Also, the law phased out the credit for taxpayers above an upper income limit (which was $182,520 in adjusted gross income for tax year 2010). Families adopting non-special needs children can claim only the amount of documented qualified expenses up to the maximum limit. However, since 2002, families adopting special needs children have been able to claim the maximum tax credit without having to document adoption expenses. For tax years 2010 and 2011, the Patient Protection and Affordable Care Act (PPACA) of 2010 made the adoption credit refundable and set the maximum credit at $13,170 for 2010, with the maximum amount for 2011 indexed for inflation. The credit is scheduled to revert to a nonrefundable credit with a $10,000 maximum for tax year 2012. For 2013 and beyond, the credit will be available only for special needs adoptions and may only be claimed for qualified expenses incurred up to a maximum of $6,000. See appendix I for detailed information on adoption tax credit legislation. Since the original provision was adopted in 1996, taxpayers have claimed about $4.28 billion in adoption tax credits. For tax year 2010, taxpayers filed almost 100,000 returns claiming the credit, with over $1.2 billion claimed as of August 2011. Figure 1 shows the total number of claimants and amount of claims for each year since 1998. We have previously reported that refundable tax credits have presented a challenge to IRS. Because taxpayers can claim refundable credits in excess of their tax liability, those attempting to commit fraud may file false claims in efforts to get improper payments from the Treasury. For example, IRS has had to deal with fraudulent claims and improper payments involving the Earned Income Tax Credit and First-Time Homebuyer Credit (FTHBC), both of which are refundable. In such cases, Congress and IRS have taken steps to reduce the amount of fraud and improper payments while trying to minimize the number of returns that need to be audited. Audits are reviews of taxpayers' records to determine if they paid the correct amount of taxes. As we have also previously reported, audits are costly to IRS and can create delays in delivering refunds to taxpayers because, in some cases, IRS holds the portion of the refund being audited until the audit is complete. As an alternative to the standard audit process, Congress can approve math error authority (MEA) to allow IRS to automatically deny claims, without doing an audit, in cases where the taxpayer did not provide required documentation. In 2009, Congress approved MEA for the FTHBC, which helped significantly reduce improper payments. Having MEA allows IRS to automatically deny credit claims in instances where IRS can tell with virtual certainty that the taxpayer did not provide all of the required information and allows IRS to devote costly audit resources to other priorities. In cases where taxpayers disagree with the credit disallowance, they may request an abatement. After the changes to the adoption tax credit took effect in 2010, IRS adopted a compliance strategy to minimize improper payments and maximize accurate returns. This strategy included the following major elements: Communicating and reaching out to taxpayers, tax professionals, Congress, the states, and adoption organizations, with the objective of conveying information about changes in the law and documentation requirements. Requiring taxpayers claiming the credit to submit documentation that the adoption of the child for whom credit was being claimed was already completed or in progress (an adoption order or decree for a completed adoption, or a home study, placement agreement, hospital or court document, or lawyer's affidavit for an adoption in progress), along with IRS Form 8839. Requiring taxpayers claiming special needs status for their child to submit documentation from their state or local adoption authority certifying that status. Requiring taxpayers claiming the credit to file on paper rather than electronically so that required documentation could be included with the return. Screening returns for proper documentation and possible audit, as shown in figure 2. IRS's strategy included monitoring the success of its efforts in processing tax year 2010 adoption credit claims during the 2011 filing season. IRS officials met in early October 2011 to discuss lessons learned concerning the execution of its tax year 2011 adoption credit strategy and consider changes in the strategy for next year's filing season. To inform taxpayers, paid preparers, state agencies, adoption advocacy groups, and other stakeholders about the new law and documentation requirements, IRS planned to use various means of communication, such as its website, media releases, phone forums, webinars, Twitter accounts, and YouTube recordings. IRS aimed its communications at interested parties, such as paid tax preparers and adoption advocates and agencies, through, for example, specially directed e-mails, articles in professional publications, and appearances at meetings and conferences. However, IRS missed some opportunities to communicate on matters that later became areas of concern. For example, while IRS held a webinar on the adoption tax credit for tax professionals, IRS officials reported that because of a lack of resources they canceled the single scheduled webinar for adoption agencies and organizations that may have clarified IRS's documentation requirements for claiming the adoption credit. In addition, IRS did not make an effort to communicate to state adoption program managers or convey information about documentation requirements for claims involving special needs children, which could have helped state adoption managers better inform adoptive parents who asked them what documentation to provide to IRS. Because of this, according to officials from adoption advocacy groups and state adoption agencies, key information about the credit did not reach some taxpayers and stakeholders, especially concerning the requirements for certification of children with special needs. As a result, according to state adoption officials and adoption organization representatives who received calls from taxpayers, IRS sent notices to many adoptive families that their returns would be subject to audit and their refunds delayed. When adoption organizations contacted IRS, the agency acknowledged a problem with its communications and the clarity of its guidance and took some corrective steps, including placing additional information about the adoption credit and special needs documentation on its website. IRS plans to take additional steps, including revising the adoption credit claim form (Form 8839) and related instructions for the 2012 filing season. However, IRS has not indicated that it plans to target future communications specifically to state and local adoption officials. In addition, IRS did not adequately inform its tax examiners regarding certain aspects of the adoption tax credit. In particular, IRS did not specify in its examiner training materials what documentation it required and would accept to verify that adopted children had special needs status. While, in March 2011, IRS provided examiners with some examples of state adoption assistance agreements, which certify special needs status, it did not include any such examples in its training materials, even after the materials were revised in June. According to the state adoption officials with whom we spoke, the inadequate preparation of examiners led to difficulties getting IRS to accept adoption assistance agreements as proof of special needs status. For example, in response to audits and in order to get IRS to accept documentation, adoption assistance representatives from Wisconsin had to prepare a letter certifying special needs status and provide it to the families that were waiting on refunds. In June 2011, IRS revised its training materials and the Internal Revenue Manual to indicate that a state agreement to provide adoption assistance under Title IV-E of the Social Security Act was sufficient proof of special needs status, but did not include examples of adoption assistance agreements in the revised materials. IRS left the question of whether certification was sufficient in the absence of such an agreement up to the examiner's judgment. According to adoption advocacy organization officials, problems persist even after the steps IRS took, with some examiners still not recognizing assistance agreements from some states as proof of special needs eligibility. Because adoption assistance agreements vary from state to state and, in some states, adoption assistance agreements are executed at the county level, adoption advocacy representatives acknowledged that IRS examiners faced challenges in identifying what documentation would be acceptable as proof of special needs status in each state. IRS took some steps to clarify what constituted sufficient documentation throughout the filing season. However, more could be done to clarify for taxpayers or its examiners what would be acceptable documentation, such as providing copies of acceptable adoption assistance agreements for each state in the revised training materials. Providing copies of state adoption assistance agreements would likely be relatively low cost, particularly since representatives from an adoption organization told us that they had provided IRS with agreements from about 40 states. Because of its role in overseeing state adoption agencies, HHS may also be able to aid IRS in reaching out to state adoption agencies. Further, if IRS were to provide examiners with examples of adoption assistance agreements for each state, it could also post such information on its website to help taxpayers and paid tax preparers understand what constitutes acceptable documentation. The incremental cost of providing such information would likely be negligible. For the 2011 filing season, IRS screeners automatically directed all returns on which taxpayers claimed the adoption tax credit and where documentation was either missing or of uncertain validity to correspondence audit (audits by mail). A senior IRS official acknowledged that this process resulted in a large number of adoption credit-related correspondence audits and diverted IRS resources from other more productive audits. As of August 6, 2011, IRS had sent 68 percent of almost 100,000 returns it had processed on which taxpayers claimed adoption credits to correspondence audit. Of those returns sent to audit, 83 percent were sent because of missing documentation or documentation IRS could not determine to be valid. IRS reported that it ended up disallowing all or a portion of the credit for only about 6,000 (17 percent) of the approximately 35,000 returns on which audits have been completed and assessed $17.7 million in additional tax. This means that for 83 percent of adoption tax credit returns audited thus far, there was no change in the tax owed or refund due. Reducing the number of adoption tax credit audits would allow IRS to do more correspondence audits of other returns where the chance of assessing additional tax would be greater. To this end, all correspondence audits conducted in 2010 resulted in additional tax being assessed 86 percent of the time, compared to 17 percent for the adoption credit in 2011. Further, IRS officials also told us that they had not found any fraudulent adoption tax credit claims, and there had been no referrals of adoption tax credit claims to its Criminal Investigation unit. Through September 10, 2011, IRS used a disproportionate share of its audit resources on the adoption credit. IRS reported spending 32,000 staff days on adoption tax credit audits during the 2011 filing season. This represents about 3.5 percent of all staff days expended on initial review and correspondence audits. By comparison, the almost 100,000 returns filed on which taxpayers claimed the adoption tax credit as of August 20, 2011, represent less than one-tenth of 1 percent of all individual returns filed up to that point. According to IRS officials, data for audits completed through September 2011 show that an adoption credit correspondence audit takes, on average, 74 calendar days. This delays refunds, which, according to adoption agency officials, can create difficulties for families expecting to cover adoption costs with the refund. According to IRS officials, there are several options, each with advantages and disadvantages, for how returns on which adoption credits are claimed could be handled in the 2012 filing season. These include alternatives that could reduce costs and refund delays for claims submitted without any documentation--41 percent of claims processed as of August 2011--by either employing MEA or by sending a notice without an audit. If IRS retains its 2011 strategy, it would risk again sending a relatively large proportion of adoption credit claims to audit that generate relatively low dollar amounts of assessed taxes. Doing so would likely ensure that all claims are properly documented, but would divert IRS resources from other priorities and continue to delay refunds to taxpayers. Alternatively, IRS could seek to obtain MEA from Congress permitting IRS to disallow the adoption tax credit without audit if a taxpayer did not supply any documentation, similar to authority granted earlier to IRS for returns on which taxpayers claimed the FTHBC. TIGTA suggested to IRS in October 2010 that it seek MEA for the adoption tax credit, and IRS and Treasury Department officials considered requesting such authority prior to the 2011 filing season. However, IRS and Treasury officials determined that current compliance tools would be sufficient. As a result, they did not request the additional authority. Finally, IRS could institute a procedure by which, immediately following initial screening of the return, it would send a letter to taxpayers who did not provide any documentation, notifying them of what documentation is needed. In this case, IRS would not disallow the credit, but would instruct the taxpayer to respond to the letter within 20 days while IRS holds the return until the taxpayer responds. If the taxpayer is able to produce adequate documentation in response to the letter, the IRS examiner initially screening the return could approve the return for processing without further audit and taxpayers would receive refunds faster than they would if their returns were audited. However, current procedure specifies that if the taxpayer is unable to produce the requested documentation, the return would be sent for audit so that IRS can resolve the issue. Thus, if a taxpayer did not send in documentation, his or her return would also be sent to audit, possibly creating a longer delay than with IRS's current strategy, since there would be additional time spent while IRS waited for the taxpayer to send in documentation. IRS has not yet determined whether sending a letter upon initial screening would lead to a significant number of taxpayers submitting documentation after receiving the letter, thus reducing processing time and the number of audits. IRS officials told us that data from the 2011 filing season on the number of claimants who submitted documentation while undergoing a correspondence audit should help determine whether sending an initial letter after screening the return would be more effective. Table 1 summarizes the options and the potential advantages and disadvantages of each. The adoption tax credit provides a significant source of financial assistance to adoptive families. In part because of the amount of money at stake and potential for improper payments, IRS developed a strategy for reviewing claims and administering the credit and devoted significant resources to ensuring compliance. However, in implementing this strategy IRS missed opportunities to clarify important information about what documentation it deemed acceptable, increasing the burden on taxpayers legitimately seeking the credit. Confusion about the documentation combined with the process used to send returns for correspondence audits has resulted in delaying refunds to taxpayers and the use of IRS resources that could likely be better spent elsewhere. In reviewing its strategy for the 2012 filing season, IRS has an opportunity to reduce the time and resources spent on correspondence audits of adoption tax credit claims as well as the number and length of refund delays while still maintaining a robust enforcement strategy. For the 2012 filing season, we recommend that the Commissioner of Internal Revenue instruct appropriate officials to ensure that the communications effort specifically includes state and local adoption officials, and clarifies acceptable documentation for the certification of special needs adoptees; provide examples of adoption assistance agreements that meet the requirements for documenting special needs status, from each state and the District of Columbia, in training materials given to reviewers and examiners; place the agreements on its website to help taxpayers better understand what constitutes acceptable documentation; and determine whether requesting documentation in cases where no documentation is provided before initiating an audit would reduce the number of audits without significantly delaying refunds and, if so, implement such a strategy for the 2012 filing season. We provided a draft of this report to the Commissioner of Internal Revenue. In written comments on a draft of this report (which are reprinted in app. II) the IRS Deputy Commissioner for Services & Enforcement agreed with our recommendations to extend outreach to state adoption managers and to determine whether requesting documentation before initiating audits would reduce the number of audits without significantly delaying refunds. However, although he agreed that reviewers and examiners should be provided examples of adoption assistance agreements, he indicated that IRS believes current examples of state adoption assistance agreements available to examiners on an internal website are sufficient to permit them to accurately evaluate adoption records. As we stated in our report, we believe making additional examples of state adoption assistance agreements available to examiners would impose minimal incremental costs. Providing additional examples would give examiners greater certainty that taxpayers submitted the correct documentation on a state- by-state basis. Doing so would also give IRS's examiners a more comprehensive list of acceptable documentation. In developing a more comprehensive set of examples for examiners, IRS could also list the states where documentation originates from the county or local level without collecting documentation from each jurisdiction. IRS also expressed concern that posting the agreements on IRS's external website might enable unscrupulous individuals to submit fraudulent documentation in support of a false claim. We understand this possibility; however, any claim for a tax credit must also be accompanied by proof that an adoption has taken place or is in progress, which would not be available on the website. Given these additional documentation requirements already in place, we believe that the benefits of making state assistance agreements available to adoptive parents on the IRS website outweigh the risks. 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 Chairmen and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We will also send copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS Oversight Board, and the Director of the Office of Management and Budget. 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) 512-9110 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. As shown in table 2, since 1996, an adoption credit has existed. The credit has been expanded several times since 1996 and was made refundable for tax years 2010 and 2011. However, for tax year 2012 the credit is nonrefundable with a reduced maximum and reverts to the 1996 law (nonrefundable maximum of $6,000 for special needs only) for tax year 2013 and thereafter. In addition to the contact named above, Joanna Stamatiades, Assistant Director; Steven J. Berke; Abbie David; David Fox; Tom Gilbert; Inna Livits; Kirsten Lauber; and Sabrina Streagle made key contributions to this report.

The federal adoption tax credit, established in 1996, was amended in 2010. These amendments included making the credit refundable (meaning taxpayers could receive payments in excess of their tax liability) and increasing the maximum allowable credit to $13,170 of qualified adoption expenses for tax year 2010. As of August 20, 2011, taxpayers filed just under 100,000 returns, claiming about $1.2 billion in adoption credits. Following these changes, the Internal Revenue Service (IRS) developed a strategy for processing adoption credit claims. GAO was asked to (1) describe IRS's strategy for ensuring compliance with the adoption credit for the 2011 filing season, (2) assess IRS's related communication with taxpayers and stakeholders, and (3) assess its processing and audit of claims. To conduct its analysis, GAO analyzed IRS data and documents, interviewed IRS officials, observed IRS examiners, and interviewed other stakeholders. IRS's strategy for ensuring taxpayer compliance with the adoption credit included the following: (1) Communicating and reaching out to taxpayers and other stakeholders, including tax professionals and adoption organizations, about new requirements. (2) Requiring taxpayers seeking the adoption credit to submit proof of a completed or in-progress adoption with their return. Because taxpayers claiming the credit for a special needs child (meaning that a state determined the child cannot or should not be returned to a parent, and using specified criteria, the state can reasonably assume that the child will not be adopted without state assistance) are allowed to claim the full credit without providing documentation of adoption expenses, they also needed to provide documentation certifying the special needs status of the child. (3) Requiring that returns and supporting documentation be filed on paper. (4) Automatically sending returns with missing or invalid documentation for correspondence audits (audits that IRS conducts by mail). To inform taxpayers, paid preparers and other stakeholders about new adoption credit requirements, IRS used various tools including its website, Twitter accounts, and YouTube recordings. However, IRS did not make a specific effort to communicate or convey information about documentation requirements for special needs children to state adoption managers, who administer state adoption programs. Further, IRS did not specify in training materials for its audit examiners what documentation was required to prove special needs status. IRS later revised its training materials to say that a state adoption assistance agreement (an agreement between the state and adoptive parents) was sufficient proof but did not provide samples of such agreements in the materials or place any on its website. As a consequence, taxpayers submitted a majority of returns with either no documentation or insufficient documentation. As of August 2011, 68 percent of the nearly 100,000 returns on which taxpayers claimed the adoption credit were sent to correspondence audit. However, of the approximately 35,000 returns on which audits have been completed as of August, IRS only assessed additional tax about 17 percent of the time. The equivalent rate for all correspondence audits in 2010 was 86 percent. The time it has taken IRS to audit these predominantly legitimate adoption credit claims has resulted in considerable delays in the payment of the related refunds. For the 2012 filing season, IRS has options that might allow it to reduce the number of costly audits and issue refunds faster while still maintaining a robust enforcement strategy. One option is for IRS to immediately send a letter to taxpayers who submit returns without any documentation requesting it before initiating an audit. This could potentially reduce the number of audits and delayed refunds, but IRS has not yet determined the extent of this impact. IRS officials acknowledged that data from the 2011 filing season experience should allow them to determine whether sending an initial letter requesting documentation would be more effective than initiating a correspondence audit. GAO recommends that IRS communicate with state and local adoption officials, provide examiners with examples of adoption assistance agreements, place the agreements on its website, and determine whether sending a letter before initiating an audit would reduce the need for audits. IRS generally agreed with three of GAO's recommendations, but had concerns that placing sample agreements on its website may enable fraud. However, since other proof of adoption must accompany a tax credit claim, GAO believes the benefits of making these agreements available to adoptive parents outweigh the risks.

For 16 years, DOD's supply chain management processes, previously identified as DOD inventory management, have been on our list of high- risk areas needing urgent attention because of long-standing systemic weaknesses that we have identified in our reports. We initiated our high- risk program in 1990 to report on government operations that we identified as being at high risk for fraud, waste, abuse, and mismanagement. The program serves to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. The department's inventory management of supplies in support of forces was one of the initial 14 operational areas identified as high risk in 1990 because, over the previous 20 years, we had issued more than 100 reports dealing with specific aspects and problems in DOD's inventory management. These problems included excess inventory levels, inadequate controls over items, and cost overruns. As a result of this work, we had suggested that DOD take some critical steps to correct the problems identified. Since then, our work has shown that the problems adversely affecting supply support to the warfighter--such as requirements forecasts, use of the industrial base, funding, distribution, and asset visibility--were not confined to the inventory management system, but also involved the entire supply chain. In 2005, we modified the title for this high-risk area from "DOD Inventory Management" to "DOD Supply Chain Management." In the 2005 update, we noted that during Operation Iraqi Freedom, some of the supply chain problems included backlogs of hundreds of pallets and containers at distribution points, millions of dollars spent in late fees to lease or replace storage containers because of distribution backlogs and losses, and shortages of such items as tires and radio batteries. Removal of the high-risk designation is considered when legislative and agency actions, including those in response to our recommendations, result in significant and sustainable progress toward resolving a high-risk problem. Key determinants include a demonstrated strong commitment to and top leadership support for addressing problems, the capacity to do so, a corrective action plan that provides for substantially completing corrective measures in the near term, a program to monitor and independently validate the effectiveness of corrective measures, and demonstrated progress in implementing corrective measures. Last year, with the encouragement of OMB, DOD developed a plan for improving supply chain management that could reduce its vulnerability to fraud, waste, abuse, and mismanagement and place it on the path toward removal from our list of high-risk areas. This plan, initially released in July 2005, contains 10 initiatives proposed as solutions to address the root causes of problems DOD identified in the areas of forecasting requirements, asset visibility, and materiel distribution. By committing to improve these three key areas, DOD has focused its efforts on the areas we frequently identified as impeding effective supply chain management. For each of the initiatives, the plan contains implementation milestones that are tracked and updated monthly. Since October 2005, DOD has continued to make progress implementing the initiatives in its supply chain management improvement plan, but it will be several years before the plan can be fully implemented. Progress has been made in implementing several of the initiatives, including its Joint Regional Inventory Materiel Management, Readiness Based Sparing, and the Defense Transportation Coordination Initiative. For example: Within the last few months, through its Joint Regional Inventory Materiel Management initiative, DOD has begun to streamline the storage and distribution of defense inventory items on a regional basis, in order to eliminate duplicate materiel handling and inventory layers. Last year, DOD completed a pilot for this initiative in the San Diego region and, in January 2006, began a similar transition for inventory items in Oahu, Hawaii. Readiness Based Sparing, an inventory requirements methodology that the department expects to enable higher levels of readiness at equivalent or reduced inventory costs using commercial off-the- shelf software, began pilot programs in each service in April 2006. Finally, in May 2006, the U.S. Transportation Command held the presolicitation conference for its Defense Transportation Coordination Initiative, a long-term partnership with a transportation management services company that is expected to improve the predictability, reliability, and efficiency of DOD freight shipping within the continental United States. DOD has sought to demonstrate significant improvement in supply chain management within 2 years of the plan's inception in 2005; however, the department may have difficulty meeting its July 2007 goal. Some of the initiatives are still being developed or piloted and have not yet reached the implementation stage, others are in the early stages of implementation, and some are not scheduled for completion until 2008 or later. For example, according to the DOD supply chain management improvement plan, the contract for the Defense Transportation Coordination Initiative is scheduled to be awarded during the first quarter of fiscal year 2007, followed by a 3-year implementation period. The War Reserve Materiel Improvements initiative, which aims to more accurately forecast war reserve requirements by using capability-based planning and incorporating lessons learned in Operation Iraqi Freedom, is not scheduled to begin implementing an improved requirements forecasting process for consumable items as a routine operation until October 2008. The Item Unique Identification initiative, which involves marking personal property items with a set of globally unique data elements to help DOD track items during their life cycles, will not be completed until December 2010 under the current schedule. While DOD has generally stayed on track, DOD has reported some slippage in meeting scheduled milestones for certain initiatives. For example, a slippage of 9 months occurred in the Commodity Management initiative because additional time was required to develop a departmentwide approach. This initiative addresses the process of developing a systematic procurement approach to the department's needs for a group of items. Additionally, the Defense Transportation Coordination Initiative experienced a slippage in holding the presolicitation conference because defining requirements took longer than anticipated. Given the long-standing nature of the problems being addressed, the complexities of the initiatives, and the involvement of multiple organizations within DOD, we would expect to see further milestone slippage in the future. In our October testimony, we also identified challenges to implementation such as maintaining long-term commitment for the initiatives and ensuring sufficient resources are obtained from the organizations involved. Although the endorsement of DOD's plan by the Under Secretary of Defense for Acquisition, Technology, and Logistics is evidence of a strong commitment to improve DOD's supply chain management, DOD will have to sustain this commitment as it goes forward in implementing this multiyear plan while also engaged in departmentwide business transformation efforts. Furthermore, the plan was developed at the Office of the Under Secretary of Defense level, whereas most of the people and resources needed to implement the plan are under the direction of the military services, DLA, and other organizations such as U.S. Transportation Command. Therefore, it is important for the department to obtain the necessary resource commitments from these organizations to ensure the initiatives in the plan are properly supported. While DOD has incorporated several broad performance measures in its supply chain management improvement plan, the department continues to lack outcome-focused performance measures for many of the initiatives. Therefore, it is difficult to track and demonstrate DOD's progress toward improving its performance in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. Performance measures track an agency's progress made towards goals, provide information on which to base organizational and management decisions, and are important management tools for all levels of an agency, including the program or project level. Outcome-focused performance measures show results or outcomes related to an initiative or program in terms of its effectiveness, efficiency, impact, or all of these. To track progress towards goals, effective performance measures should have a clearly apparent or commonly accepted relationship to the intended performance, or should be reasonable predictors of desired outcomes; are not unduly influenced by factors outside a program's control, measure multiple priorities, such as quality, timeliness, outcomes, and cost; sufficiently cover key aspects of performance; and adequately capture important distinctions between programs. Performance measures enable the agency to assess accomplishments, strike a balance among competing interests, make decisions to improve program performance, realign processes, and assign accountability. While it may take years before the results of programs become apparent, intermediate measures can be used to provide information on interim results and show progress towards intended results. In addition, when program results could be influenced by external factors, intermediate measures can be used to identify the programs' discrete contribution to the specific result. For example, DOD could show near-term progress by adding intermediate measures for the DOD supply chain management improvement plan, such as outcome-focused performance measures for the initiatives or for the three focus areas. DOD's supply chain management improvement plan includes four high- level performance measures that are being tracked across the department, but these measures do not necessarily reflect the performance of the initiatives or explicitly relate to the three focus areas. DOD's supply chain materiel management regulation requires that functional supply chain metrics support at least one enterprise-level metric. In addition, while not required by the regulation, the performance measures DOD has included in the plan are not explicitly linked to the three focus areas, and it has not included overall cost metrics that might show efficiencies gained through supply chain improvement efforts. The four measures are as follows: Backorders--number of orders held in an unfilled status pending receipt of additional parts or equipment through procurement or repair. Customer wait time--number of days between the issuance of a customer order and satisfaction of that order. On-time orders--percentage of orders that are on time according to DOD's established delivery standards. Logistics response time--number of days to fulfill an order placed on the wholesale level of supply from the date a requisition is generated until the materiel is received by the retail supply activity. The plan also identifies fiscal year 2004 metric baselines for each of the services, DLA, and DOD overall, and specifies annual performance targets for these metrics for use in measuring progress. For example, one performance target for fiscal year 2005 was to reduce backorders by 10 percent from the fiscal year 2004 level. Table 1 shows each performance measure with the associated fiscal year 2005 performance targets and actuals and whether the target was met. As table 1 shows, DOD generally did not meet its fiscal year 2005 performance targets. However, the impact to the supply chain as a result of implementing the initiatives contained in the plan will not likely be reflected in these high-level performance metrics until the initiatives are broadly implemented across the department. In addition, the high-level metrics reflect the performance of the supply chain departmentwide and are affected by other variables; therefore, it will be difficult to determine if improvements in the high-level performance metrics are due to the initiatives in the plan or other variables. For example, implementing Radio Frequency Identification--technology consisting of active or passive electronic tags that are attached to equipment and supplies being shipped from one location to another and enable shipment tracking--at a few sites at a time has only a very small impact on customer wait time. However, variables such at natural disasters, wartime surges in requirements, or disruption in the distribution process could affect that metric. DOD's plan lacks outcome-focused performance metrics for many of the specific initiatives. We noted this deficiency in our prior testimony, and since last October, DOD has not added outcome-focused performance metrics. DOD also continues to lack cost metrics that might show efficiencies gained through supply chain improvement efforts, either at the initiative level or overall. In total, DOD's plan continues to identify a need to develop outcome-focused performance metrics for 6 initiatives, and 9 of the 10 initiatives lack cost metrics. For example, DOD's plan shows that it expects to have radio frequency identification technology implemented at 100 percent of its U.S. and overseas distribution centers by September 2007, but noted that it has not yet identified additional metrics that could be used to show the impact of implementation on expected outcomes, such as receiving and shipping timeliness, asset visibility, or supply consumption data. Two other examples of initiatives lacking outcome- focused performance measures are War Reserve Materiel, discussed earlier, and Joint Theater Logistics, which is an effort to improve the ability of a joint force commander to execute logistics authorities and processes within a theater of operations. Although the plan contains some performance metrics, many have not been fully defined or are intended to show the status of a project. Measures showing project status are useful and may be most appropriate for initiatives in their early stages of development, but such measures will not show the impact of initiatives on the supply chain during or after implementation. DOD officials noted that many of the initiatives in the supply chain management improvement plan are in the early stages of implementation and that they are working to develop performance measures for them. For example, an official involved with the Joint Theater Logistics initiative stated that the processes necessary for each joint capability needed to be defined before performance metrics could be developed. The recently issued contract solicitation for the Defense Transportation Coordination Initiative contains a number of performance measures, such as on-time pickup and delivery, damage-free shipments, and system availability, although these measures are not yet included in DOD's supply chain management improvement plan. Additionally, we observed that DOD's plan does not identify departmentwide performance measures in the focus areas of requirements forecasting, asset visibility, and materiel distribution. Therefore, it currently lacks a means to track and assess progress in these areas. Although DOD has made efforts to develop supply chain management performance measures for implementation across the department, DOD has encountered challenges in obtaining standardized, reliable data from noninteroperable systems. The four high-level performance measures in DOD's plan were defined and developed by DOD's supply chain metrics working group. This group includes representatives from the services, DLA, and the U.S. Transportation Command, and meets monthly under the direction of the Office of the Under Secretary of Defense. For example, the working group developed a common definition for customer wait time which was included in DOD guidance. The DOD Inspector General has a review underway to validate the accuracy of customer wait time data and expects to issue a report on its results later this summer. One of the challenges the working group faces in developing supply chain performance measures is the ability to pull standardized, reliable data from noninteroperable information systems. For example, the Army currently does not have an integrated method to determine receipt processing for Supply Support Activities, which could affect asset visibility and distribution concerns. Some of the necessary data reside in the Global Transportation Network while other data reside in the Standard Army Retail Supply System. These two databases must be manually reviewed and merged in order to obtain the information for accurate receipt processing performance measures. DOD recognizes that achieving success in supply chain management is dependent on developing interoperable systems that can share critical supply chain data. The Business Management Modernization Program, one of the initiatives in DOD's supply chain improvement plan that has been absorbed into the Business Transformation Agency, is considered to be a critical enabler that will provide the information technology underpinning for improving supply chain management. As part of this initiative, DOD issued an overarching business enterprise architecture and an enterprise transition plan for implementing the architecture. We previously reported that Version 3.1 of the business enterprise architecture reflects steps taken by DOD to address some of the missing elements, inconsistencies, and usability issues related to legislative requirements and relevant architecture guidance, but additional steps are needed. For example, we said that the architecture does not yet include a systems standards profile to facilitate data sharing among departmentwide business systems and promote interoperability with departmentwide information technology infrastructure systems. Furthermore, we also stated that the military services' and defense agencies' architectures are not yet adequately aligned with the departmental architecture. DOD has multiple plans aimed at improving aspects of logistics, including supply chain management, but it is unclear how all these plans are aligned with one another. In addition to the supply chain management improvement plan, current DOD plans that address aspects of supply chain management include DOD's Logistics Transformation Strategy, Focused Logistics Roadmap, and Enterprise Transition Plan; and DLA's Transformation Roadmap. In December 2004, DOD issued its Logistics Transformation Strategy. The strategy was developed to reconcile three logistics concepts--force- centric logistics enterprise, sense and respond logistics, and focused logistics--into a coherent transformation strategy. The force-centric logistics enterprise is OSD's midterm concept (2005-2010) for enhancing support to the warfighter and encompasses six initiatives, one of which includes "end-to-end distribution." Sense and respond logistics is a future logistics concept developed by the department's Office of Force Transformation that envisions a networked logistics system that would provide joint strategic and tactical operations with predictive, precise, and agile support. Focused logistics, a concept for force transformation developed by the Joint Chiefs of Staff, identifies seven key joint logistics capability areas such as Joint Deployment/Rapid Distribution. In September 2005, DOD issued its Focused Logistics Roadmap, also referred to as the "As Is" roadmap. It documents logistics-enabling programs and initiatives directed toward achieving focused logistics capabilities. It is intended to provide a baseline of programs and initiatives for future capability analysis and investment. Seven of the 10 initiatives in the DOD supply chain management improvement plan and some of the systems included in the initiative to modernize the department's business systems--under the Business Transformation Agency--are discussed in the Focused Logistics Roadmap. In September 2005, DOD's Enterprise Transition Plan was issued as part of the Business Management Modernization Program. The Enterprise Transition Plan is the department's plan for transforming its business operations. One of the six DOD-wide priorities contained in the Enterprise Transition plan is Materiel Visibility, which is focused on improving supply chain performance. The Materiel Visibility priority is defined as the ability to locate and account for materiel assets throughout their life cycle and provide transaction visibility across logistics systems in support of the joint warfighting mission. Two of the key programs targeting visibility improvement are Radio Frequency Identification and Item Unique Identification, which also appear in the supply chain management improvement plan. The Defense Logistics Agency's Fiscal Year 2006 Transformation Roadmap contains 13 key initiatives underway to execute DLA's role in DOD's overarching transformation strategy. The majority of the initiatives are those that affect supply chain management, and several are found in DOD's supply chain management improvement plan. For example, the Integrated Data Environment, Business Systems Modernization, and Reutilization Modernization Program initiatives found in DLA's Transformation Roadmap are also in the department's supply chain management improvement plan under the initiative to modernize the department's business systems. These plans were developed at different points of time, for different purposes, and in different formats. Therefore, it is difficult to determine how all the ongoing efforts link together to sufficiently cover requirements forecasting, asset visibility, and materiel distribution and whether they will result in significant progress toward resolving this high-risk area. Moreover, DOD's supply chain management improvement plan does not account for initiatives outside OSD's direct oversight that may have an impact on supply chain management. The initiatives chosen for the plan were joint initiatives under the oversight of OSD in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. However, the U. S. Transportation Command, DLA, and the military services have ongoing and planned supply chain improvement efforts in those areas that are not included in the plan. For example, the U.S. Transportation Command's Joint Task Force - Port Opening initiative seeks to improve materiel distribution by rapidly extending the distribution network into a theater of operations. Furthermore, DLA is implementing a National Inventory Management Strategy, which is an effort to merge distinct wholesale and retail inventories into a national inventory, provide more integrated management, tailor inventory to services' requirements, and reduce redundant inventory levels. Another example is the Army's efforts to field two new communications and tracking systems, the Very Small Aperture Terminal and the Mobile Tracking System, to better connect logisticians on the battlefield and enable them to effectively submit and monitor their supply requisitions. DOD officials told us they would be willing to consider adding initiatives that impact the three focus areas. Until DOD clearly aligns the supply chain management improvement plan with other department plans and ongoing initiatives, supply chain stakeholders will not have a comprehensive picture of DOD's ongoing efforts to resolve problems in the supply chain. Although we are encouraged by DOD's planning efforts, DOD lacks a comprehensive, integrated, and enterprisewide strategy to guide logistics programs and initiatives. In the past, we have emphasized the need for an overarching logistics strategy that will guide the department's logistics planning efforts. Without an overarching logistics strategy, the department will be unable to most economically and efficiently support the needs of the warfighter. To address this concern and guide future logistics programs and initiatives, DOD is in the process of developing a new strategic plan--the "To Be" roadmap. This plan is intended to portray where the department is headed in the logistics area, how it will get there, and monitor progress toward achieving its objectives, as well as institutionalize a continuous assessment process that links ongoing capability development, program reviews, and budgeting. According to DOD officials, the initiatives in the supply chain management improvement plan will be incorporated into the "To Be" logistics roadmap. The roadmap is being developed by a working group representing the four services, DLA, the U.S. Transportation Command, the U.S. Joint Forces Command, the Joint Staff, the Business Transformation Agency, and the Office of the Secretary of Defense. The working group reports to a Joint Logistics Group comprised of one-star generals and their equivalents representing these same organizations. Additionally, the Joint Logistics Board, Defense Logistics Board, and the Defense Logistics Executive (the Under Secretary of Defense for Acquisition, Technology, and Logistics) would provide continuous feedback and recommendations for changes to the roadmap. Regarding performance measures, the roadmap would link objective, quantifiable, and measurable performance targets to outcomes and logistics capabilities. The first edition of the "To Be" roadmap is scheduled for completion in February 2007, in conjunction with the submission of the President's Budget for Fiscal Year 2008. Updates to the roadmap will follow on an annual basis. Efforts to develop the "To Be" roadmap show promise. However, until it is completed, we will not be able to assess how the roadmap addresses the challenges and risks DOD faces in its supply chain improvement efforts. DOD faces significant challenges in improving supply chain management over the coming years. As it develops its "To Be" roadmap for logistics, DOD would likely benefit from including outcome-focused performance measures demonstrating near-term progress in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. With outcome-focused performance measures, DOD will be able to show results in these areas that have been long identified as systemic weaknesses in the supply chain. While we recognize the challenge to developing outcome- focused performance measures at the department level, DOD could show near-term progress with intermediate measures. These measures could include outcome-focused measures for each of the initiatives or for the three focus areas. To be most effective, the roadmap also would reflect the results of analysis of capability gaps between its "As Is" and "To Be" roadmaps, as well as indicate how the department intends to make this transition. DOD would also benefit by showing the alignment among the roadmap, the supply chain management improvement plan, and other DOD strategic plans that address aspects of supply chain management. Clearer alignment of the supply chain management improvement plan with other department plans and ongoing initiatives could provide greater visibility and awareness of actions DOD is taking to resolve problems in the supply chain. In the long term, however, a plan alone will not resolve the problems that we have identified in supply chain management. Actions must result in significant progress toward resolving a high-risk problem before we will remove the high-risk designation. Mr. Chairman and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at 202- 512-8365 or [email protected]. Individuals making contributions to this testimony include Tom Gosling, Assistant Director; Michael Avenick; Susan Ditto; Marie Mak; Thomas Murphy; Janine Prybyla; and Matthew Spiers. Technology consisting of active or passive electronic tags that are attached to equipment and supplies that are shipped from one location to another and enable shipment tracking. Marking of personal property items with a machine- readable Unique Item Identifier, or set of globally unique data elements, to help DOD value and track items throughout their life cycle. Streamlining of the storage and distribution of materiel within a given geographic area in order to eliminate duplicate materiel handling and inventory layers. An inventory requirements methodology that produces an inventory investment solution that enables higher levels of readiness at an equal or lower cost. An improved war reserve requirements forecasting process. Process of developing a systematic procurement approach to the entire usage cycle of a group of items. Improving the ability of a joint force commander to execute logistics authorities and processes within a theater of operations. Provides Combatant Commands with a joint theater logistics capability (supply, transportation, and distribution) for command and control of forces and materiel moving into and out of the theater. Long-term partnership with a coordinator of transportation management services to improve the reliability, predictability, and efficiency of DOD materiel moving within the continental United States by all modes. Departmentwide initiative to advance business transformation efforts, particularly with regard to business systems modernization. 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The Department of Defense (DOD) maintains a military force with unparalleled logistics capabilities, but it continues to confront decades-old supply chain management problems. The supply chain can be the critical link in determining whether our frontline military forces win or lose on the battlefield, and the investment of resources in the supply chain is substantial. Because of weaknesses in DOD's supply chain management, this program has been on GAO's list of high-risk areas needing urgent attention and transformation since 1990. Last year, DOD developed a plan to resolve its long-term supply chain problems in three focus areas: requirements forecasting, asset visibility, and materiel distribution. In October 2005, GAO testified that the plan was a good first step. GAO was asked to provide its views on DOD's progress toward (1) implementing the supply chain management improvement plan and (2) incorporating performance measures for tracking and demonstrating improvement, as well as to comment on the alignment of DOD's supply chain management improvement plan with other department logistics plans. This testimony is based on prior GAO reports and ongoing work in this area. It contains GAO's views on opportunities to improve DOD's ability to achieve and demonstrate progress in supply chain management. Since October 2005, DOD has continued to make progress implementing the 10 initiatives in its supply chain management improvement plan, but it will take several years to fully implement these initiatives. DOD's stated goal for implementing its plan is to demonstrate significant improvement in supply chain management within 2 years of the plan's inception in 2005, but the time frames for substantially implementing some initiatives are currently 2008 or later. While DOD has generally stayed on track, it has reported some slippage in the implementation of certain initiatives. Factors such as the long-standing nature of the problems, the complexities of the initiatives, and the involvement of multiple organizations within DOD could cause the implementation dates of some initiatives to slip farther. DOD has incorporated several broad performance measures in its supply chain management improvement plan, but it continues to lack outcome-focused performance measures for many of the initiatives. Therefore, it is difficult to track and demonstrate progress toward improving the three focus areas of requirements forecasting, asset visibility, and materiel distribution. Although DOD's plan includes four high-level performance measures that are being tracked across the department, these measures do not necessarily reflect the performance of the initiatives and do not relate explicitly to the three focus areas. Further, DOD's plan does not include cost metrics that might show efficiencies gained through supply chain improvement efforts. In their effort to develop performance measures for use across the department, DOD officials have encountered challenges such as a lack of standardized, reliable data. Nevertheless, DOD could show near-term progress by adding intermediate measures. These measures could include outcome-focused measures for each of the initiatives or for the three focus areas. DOD has multiple plans aimed at improving aspects of logistics, including supply chain management, but it is unclear how these plans are aligned with one another. The plans were developed at different points of time, for different purposes, and in different formats, so it is difficult to determine how all the ongoing efforts link together to sufficiently cover requirements forecasting, asset visibility, and materiel distribution and whether they will result in significant progress toward resolving this high-risk area. Also, DOD's supply chain management improvement plan does not account for initiatives outside the direct oversight of the Office of the Secretary of Defense, and DOD lacks a comprehensive strategy to guide logistics programs and initiatives. DOD is in the process of developing a new plan, referred to as the "To Be" roadmap, for future logistics programs and initiatives. The roadmap is intended to portray where the department is headed in the logistics area, how it will get there, and what progress is being made toward achieving its objectives, as well as to link ongoing capability development, program reviews, and budgeting. However, until it is completed, GAO will not be able to assess how the roadmap addresses the challenges and risks DOD faces in its supply chain improvement efforts.

The federal financial regulators are responsible for examining and monitoring the safety and soundness of approximately 22,000 financial institutions, which, together, manage more than $13 trillion in assets and hold over $7 trillion in deposits. Specifically: The Federal Reserve System is responsible for overseeing the Year 2000 activities of 1,618 entities, including 990 state member banks, 349 bank holding companies, 221 foreign bank offices, and 9 Edge Act corporations. According to FRS, these organizations have assets totaling over $7.7 trillion and hold deposits of about $3.6 trillion. FRS' oversight responsibilities also include 49 service providers, software vendors, and data centers. The Office of the Comptroller of the Currency supervises about 2,600 federally-chartered, national banks and federal branches and agencies of foreign banks, which comprise about $3.5 trillion in assets. OCC is also responsible for monitoring the Year 2000 activities of 109 service providers, software vendors, and data centers. The Federal Deposit Insurance Corporation supervises about 6,000 state-chartered, nonmember banks, which are responsible for about $1 trillion in assets. It is also the deposit insurer of approximately 11,000 banks and savings institutions that have insured deposits totaling upwards of $3.8 trillion. FDIC also oversees 146 service providers, software vendors, and data centers. The Office of Thrift Supervision oversees about 1,200 savings and loan associations (thrifts), which primarily emphasize residential mortgage lending and are an important source of housing credit. These institutions hold approximately $737 billion in assets. The National Credit Union Administration supervises about 7,000 federally-chartered credit unions. It is also the deposit insurer of more than 11,000 federally- and state-chartered credit unions whose assets total about $371 billion. Credit unions are nonprofit financial cooperatives organized to provide their members with low-cost financial services. As part of their goal of maintaining safety and soundness, these regulators are responsible for assessing whether the institutions they supervise are adequately mitigating the risks associated with the century date change. To ensure consistent and uniform supervision on the Year 2000 issue, the five regulators are coordinating their supervisory efforts through FFIEC. Additionally, under the auspices of the FFIEC, the regulators are jointly examining 28 major data service providers and software vendors that support the financial institutions. Each of the regulators, except NCUA, is responsible for a specified number of these joint examinations. Addressing the Year 2000 problem in time has been, and will continue to be, a tremendous challenge for financial institutions and their regulators. Virtually every insured financial institution relies on computers--either their own or those of a contractor--to process and update records and for a variety of other functions. To complicate matters, most institutions have computer systems that interface with systems belonging to payment systems partners, such as wire transfer systems, automated clearinghouses, check clearing providers, credit card merchant and issuing systems, automated teller machine (ATM) networks, electronic data interchange systems, and electronic benefits transfer systems. Because of these interdependencies, financial institutions systems are also vulnerable to failure caused by incorrectly formatted data provided by other systems that are not Year 2000 compliant. In addition, financial institutions depend on public infrastructure, such as telecommunications and power networks, to carry out critical business operations, such as making electronic fund transfers, verifying credit card transactions, and making ATM transactions. However, these networks are also susceptible to Year 2000 problems. Thus, financial institutions must also assess the Year 2000 readiness efforts of their local utilities and telecommunications providers. Financial institutions and their regulators cannot afford to neglect any of these issues. If they do, the impact of Year 2000 failures could be potentially disruptive to vital bank operations and harmful to customers. For example, loan systems could make errors in calculating interest and amortization schedules. In turn, these miscalculations may expose institutions and data centers to financial liability and loss of customer confidence. Moreover, ATMs may malfunction, performing erroneous transactions or refusing to process transactions. Other supporting systems critical to the day-to-day business of financial institutions may be affected as well. For example, telephone systems, vaults, and security and alarm systems could malfunction. Since June 1996, when their Year 2000 oversight efforts began, the five financial institution regulators have taken a number of important steps to alert financial institutions of the risks associated with the Year 2000 problem and to assess what these institutions are doing to mitigate the risks. To raise awareness, the regulators issued letters to financial institutions that described the Year 2000 problem and special risks facing financial institutions and recommended approaches to planning and managing effective Year 2000 programs. In addition, the regulators provided extensive guidance to assist financial institutions in critical Year 2000 tasks, including guidance on (1) contingency planning, (2) mitigating risks associated with critical bank customers (e.g., large borrowers and capital providers), (3) mitigating risks of using data processing servicers and software vendors to perform financial institution operations, (4) testing to demonstrate Year 2000 compliance, (5) establishing effective Year 2000 customer awareness programs, and (6) addressing Year 2000 risks associated with fiduciary services. The regulators have also undertaken extensive outreach efforts--such as establishing Internet sites and conducting seminars nationwide--to raise the Year 2000 awareness of banking industry personnel and the public. To assess what institutions are doing to mitigate Year 2000 risks, the regulators performed a high-level and detailed assessment of bank, thrift, and credit union efforts. The high-level assessment consisted primarily of administering FFIEC's Year 2000 questionnaire via telephone and on-site visits and was completed during November and December 1997. During this assessment, the regulators examined whether institutions had established a structured process for correcting the problem; estimated the costs of remediation; prioritized systems for correction; and determined the Year 2000 impact on other internal systems important to day-to-day operations, such as vaults, security and alarm systems, elevators, and telephones. The more detailed Year 2000 assessment involved on-site visits to the institutions and was completed in June 1998. These examinations focused on whether institutions were appropriately planning for the Year 2000 effort and addressing risks posed by service providers, software vendors, and large customers. They also began to assess whether institutions had effective customer awareness programs. These exams found the majority of financial institutions are doing an adequate job in addressing the Year 2000 issue. Specifically, according to the regulators, they found that of the over 22,000 institutions with examinations completed by June 30, 1998, almost 93 percent were doing a satisfactory job of addressing their Year 2000 problems, about 7 percent needed improvement, and 0.3 percent were performing unsatisfactorily. The regulators plan to follow up with additional on-site visits that will address the unique--and more difficult--challenges that the testing and implementation phases will present. These exams, which the regulators plan to complete by March 31, 1999, are expected to identify institutions that are experiencing difficulties completing their testing and implementation programs or have not developed sufficient contingency plans. In addition to overseeing the efforts of financial institutions to address the Year 2000 problem, the federal regulators must also ensure that their internal computer systems are Year 2000 compliant. This is especially critical for FRS which operates systems on which the financial institutions heavily rely. For example, according to FRS, the Fedwire system was used by financial institutions in 1997 to make about 89 million funds transfers valued at $288 trillion. While systems belonging to the other regulators are not critical to the day-to-day operation of the banking industry, they support the essential business functions of the regulators, such as personnel management, accounting, budget, travel, and program tracking. As noted earlier, we are currently reviewing FRS' efforts to remediate its internal systems and plan to report the results of our review separately. However, we have reviewed the efforts of the four other regulators to remediate their systems and found that they have taken many actions that are crucial to successfully dealing with the Year 2000 problem. For example, they have established a good foundation for managing their remediation efforts by developing Year 2000 strategies, designating Year 2000 program managers, inventorying systems, and developing tracking systems to monitor progress and prepare status reports. They are acting or have acted to ensure that core business operations are not disrupted by identifying core business operations, assessing the potential impact of Year 2000-induced failures (including public infrastructure failures) on those operations, prioritizing conversion efforts, and developing contingency plans. The regulators also have identified their data exchanges and are working with their data exchange partners to prevent noncompliant systems from introducing Year 2000 errors into compliant systems. Finally, to ensure that their systems are adequately tested, the regulators have developed Year 2000 testing guidance and have begun or are well underway in testing their systems. In September 1998, each of the regulators reported to the Congress that they are on schedule to meet the Office of Management and Budget's March 1999 implementation date for their mission-critical systems. Their data indicate that, with continued good management, the regulators should be able to meet this milestone. While the regulators have been working hard to achieve industrywide compliance and remediate their own systems, we have identified concerns and problems with their efforts during the course of our reviews. Specifically, we found that all the regulators were late in initiating their Year 2000 oversight of institutions and in issuing key guidance on business continuity and contingency planning, corporate borrowers, and service providers and software vendors. We also found that the regulators had not assessed whether they had enough information system examiners to adequately oversee the Year 2000 efforts of the institutions they supervise. In addition to these general concerns, we also found problems specific to each agency. However, the regulators have been quick to respond to our recommendations and to implement corrective actions. For example, in October 1997, we made recommendations to NCUA to help it ensure that credit unions were adequately mitigating Year 2000 risks. Among other things, NCUA responded by (1) implementing a quarterly reporting process whereby credit unions would communicate the status of their remediation efforts between examinations, (2) developing a formal, detailed plan for contingencies, (3) instructing credit union management to have their auditors address Year 2000 issues in the scope of their work, and (4) hiring additional contractor support to assist with exams of credit unions and service providers. We also made specific recommendations to FDIC to (1) work with the other FFIEC members to enhance the content of their assessment work program, (2) ensure that adequate resources are allocated to complete the corporation's internal systems' assessment by the end of March 1998, and (3) develop contingency plans for each of FDIC's mission-critical systems and core business processes. Similarly, we recommended that OTS develop contingency plans for each of its mission-critical systems and core business processes. Again, both agencies agreed with our recommendations and took immediate steps to implement them. Despite the regulators' strong efforts to assess industrywide compliance and remediate their own systems, several complex and difficult challenges remain in achieving Year 2000 compliance. First: the challenge of time. Regardless of good practices and good progress, less than 16 months remain to the century date change. With over 22,000 institutions, vendors, and service providers to examine and monitor, the regulators face a formidable task in continuing to provide adequate coverage. Second: the challenge to provide effective oversight during the later and more complicated stages of the remediation effort. By December 1998, FFIEC expects financial institutions to be well into the testing phase. As noted in our Year 2000 Test Guide, because Year 2000 conversions often involve numerous, large interconnecting systems with many external interfaces and extensive supporting technology infrastructures, testing needs to be approached in a structured and disciplined fashion. According to OCC, for many banks, testing will consume upwards of 60 percent of the cost and time spent to correct Year 2000 problems. Nevertheless, the regulators have a small window of opportunity for assessing institutions during this critical phase: they generally expect to complete on-site exams of service providers, software vendors, and institutions with in-house or complex systems by December 31, 1998, and plan to complete on-site exams for the remaining institutions by March 31, 1999. At the same time, however, they have a limited number of technical examiners to conduct these reviews. OCC, for example, has 79 full-time bank information system examiners responsible for providing assistance to 575 safety and soundness examiners and for examining institutions with complex systems. FRS currently has 73 such examiners--31 full time and 42 part time--that conduct complex examinations while supporting 106 other examiners during their exams. Because of the limited number of technical examiners and the large number of entities to be examined, we have recommended to the regulators that they (1) determine how many technical examiners are needed to adequately oversee the Year 2000 efforts of the institutions, data processing servicers, and software vendors and (2) develop a strategy for obtaining these resources and maintaining their availability. Third: the challenge to develop an effective strategy for dealing with institutions that by all indications will not be viable by the Year 2000. The regulators have not yet (1) defined the criteria for finding that a financial institution will not be viable due to Year 2000 problems or (2) developed a strategy for when and how they will handle such troubled institutions. The regulators have been working on these issues. For example, they are querying data centers and service providers on their capacity to service new clients due to Year 2000 problems and putting together a "bidders list" for Year 2000 purposes that will include institutions that have demonstrated, well-managed Year 2000 programs and are capable of processing acquisitions of other institutions. However, none of these efforts have been finalized. Developing these plans promptly is paramount to minimizing the risk of not having enough time to implement a viable plan for dealing with institutions that cannot successfully complete their efforts. Fourth: the challenge to protect U.S. banks from international Year 2000 risks. U.S. banks have many external links to financial institutions and markets around the world. For example, overseas financial institutions and markets depend on our electronic funds transfer systems and clearinghouses. Unfortunately, it has been reported that many countries are well behind their U.S. counterparts in Year 2000 remediation. For example, a survey of 15,000 companies in 87 countries by the Gartner Group found that nations including Germany, India, Japan, and Russia were 12 months or more behind the United States. Given the fact that many countries are behind schedule in addressing the Year 2000 problem, it will be essential for regulators to (1) ensure that financial institutions have adequately identified and mitigated their international risks and (2) prepare contingency plans for handling disruptions caused by problems abroad. Fifth: the challenge to protect financial institutions from Year 2000 disruptions caused by their telecommunications and power service providers. The most vital business operations of financial institutions--ATM transactions, fund transfers, and credit card authorizations, for example--are dependent on telecommunications and power networks. In fact, according to the President's National Security Telecommunications Advisory Committee, the financial services industry may be the telecommunications industry's most demanding customer: over $2 trillion is sent by international wire transfers every day. In June 1998 testimony on the Year 2000 readiness of the telecommunications sector, we reported that most major telecommunications carriers expect to achieve Year 2000 network compliance by December 1998. For a few though, the planned date for compliance is either later than December 1998, or we were unable to obtain this information. The carriers are working to test their networks but until the tests are completed and the results made public, it is not clear to what degree--if any--financial institutions and the public will be subject to telecommunications disruptions. The situation for electric power companies is similar. At the request of the Department of Energy, the North American Electric Reliability Council (NERC) is assessing the readiness of the critical systems within the nation's electric infrastructure. The Secretary of Energy requested that NERC provide written assurances by July 1, 1999, that critical power systems have been tested, and that such systems will be ready to operate in the year 2000. Until such assessments are completed and results made public, the precise status of this sector is not completely clear. Because of the uncertain nature of electric power and telecommunications Year 2000 readiness, it is essential for regulators and institutions to plan for contingencies should there be service disruptions due to the Year 2000 date change. In conclusion, the regulators have made significant progress in assessing the readiness of member institutions; raising awareness on important issues such as contingency planning, testing, and dealing with service providers, software vendors, and large customers; and remediating their own systems. Looking forward, the challenge is for the regulators to make the best use of limited resources in the time remaining and to ensure that they are ready to take swift actions to address those institutions that falter in the later phases of correction and to address disruptions caused by international and public infrastructure Year 2000 failures. To their credit, the regulators have spent the last year developing a picture of how their industry stands, including which institutions are at high risk of not being ready for the millennium and require immediate attention, which service providers and vendors are likely to be problematic, and the extent of problems remaining. In addition, they have undertaken efforts to determine what conditions will constitute Year 2000 failures and what actions can be taken to quickly address failures. Nevertheless, more needs to be done to prepare for major potential disruptions caused by domestic and international financial institutions, as well as power and telecommunications companies, experiencing processing problems at the century date rollover. Accordingly, we are now recommending that the regulators, working through the FFIEC, (1) finalize by December 1, 1998, their plans for dealing with institutions that will be not be viable due to Year 2000 problems and (2) develop contingency plans that address international and public infrastructure Year 2000 risks. Mr. Chairman, this concludes my statement. We welcome any questions that you or Members of the Committee may have. 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 year 2000 risks facing financial institutions and the federal regulators, focusing on the: (1) actions taken to date to mitigate these risks; and (2) challenges that lay ahead as institutions and regulators face the more complex and difficult activities of their year 2000 programs. GAO noted that: (1) the regulators have made good progress in assisting banks, thrifts, and credit unions in their year 2000 efforts as well as identifying which institutions are at a high risk of not remediating their systems on time; (2) they have also recognized the risk and potential impact of year 2000-induced system failures on their own core business processes and have implemented rigorous efforts to mitigate these risks; (3) nevertheless, there are still serious challenges ahead that could threaten the financial institution industry's ability to successfully meet the year 2000 deadline; (4) with less than 16 months remaining before the year 2000 deadline, the regulators are faced with the daunting task of overseeing the efforts of more than 22,000 financial institutions, service providers, and software vendors with a relatively finite number of examination personnel; (5) in the next few months, many of these entities will be undertaking the most complex and difficult stage of correction--testing; (6) it will be necessary for regulators to ensure that they have enough technical resources to review institution efforts during this crucial phase; (7) beginning in early 1999, regulators will be pressed to take quick actions against institutions that cannot successfully complete their year 2000 efforts; (8) but before they can do so, they need to determine what will constitute financial institution year 2000 failures, what regulatory options can be effectively used, and when they would be implemented; (9) the U.S. economy is intrinsically linked to the international banking and financial services sector, yet many countries and their financial institutions are reported to be behind schedule in addressing their year 2000 problem; (10) working with their foreign counterparts, the regulators will need to identify and define global year 2000 risks and work cooperatively to mitigate those risks; (11) the regulators will also need to develop contingency plans in case there are unforeseen problems; (12) financial institution credit, deposit, and payment flows are critically dependent on public infrastructure such as telecommunications and electric power networks; (13) however, until critical readiness assessments and tests are completed and made available to the public, it is not clear whether there will be uninterrupted telecommunications and power service; and (14) regulators will need to develop contingency plans that anticipate year 2000-related disruptions in the public infrastructure.

Traditionally, real estate brokers have offered a full, "bundled" package of services to sellers and buyers, including marketing the seller's home or assisting in the buyer's search, holding open houses and showing homes, preparing offers and assisting in negotiations, and coordinating the steps to close the transaction. Because real estate transactions are complex and infrequent for most people, many consumers benefit from a broker's specialized knowledge of the process and of local market conditions. Still, some consumers choose to complete real estate transactions without a broker's assistance, including those who sell their properties on their own, or "for-sale-by-owner." For many years, the industry has used a commission-based pricing model, with sellers paying a percentage of the sales price as a brokerage fee. Brokers acting for sellers typically invite other brokers to cooperate in the sale of the property and offer a portion of the total commission to whoever produces the buyer. Agents involved in the transaction may be required to split their shares of the commission with their brokers. Under this approach, brokers and agents receive compensation only when sales are completed. In recent years, alternatives to this traditional full-service brokerage model have become more common, although industry analysts and participants told us that these alternatives still represented a small share of the overall market in 2005. Discount full-service brokerages charge a lower commission than the prevailing local rate, but offer a full package of services. Discount limited-service brokerages offer a limited package of services or allow clients to choose from a menu of "unbundled" services and charge reduced fees on a commission or fee-for-service basis. Most local real estate markets have an MLS that pools information about homes that area brokers have agreed to sell. Participating brokers use an MLS to "list" the homes they have for sale, providing other brokers with detailed information on the properties ("listings"), including how much of the commission will be shared with the buyer's agent. An MLS serves as a single, convenient source of information that provides maximum exposure for sellers and facilitates the home search for buyers. Each MLS is a private entity with its own membership requirements and operating policies and procedures. According to NAR, approximately 900 MLSs nationwide were affiliated with the trade association in 2005. These NAR- affiliated MLSs are expected to follow NAR's model guidelines for various operational and governance issues, such as membership requirements and rules for members' access to and use of listing information. An MLS that is not affiliated with NAR is not bound by these guidelines. Individual states regulate real estate brokerage, establishing licensing and other requirements for brokers and agents. Of the two categories of state- licensed real estate practitioners, brokers generally manage their own offices, and agents, or salespeople, must work for licensed brokers. States generally require brokers to meet more educational requirements than agents, have more experience, or both. For the purposes of this statement, I will generally refer to all licensed real estate practitioners as brokers. Some economists have observed that brokers typically compete more on nonprice factors, such as service quality, than on price. While comprehensive price data are lacking, evidence from academic literature and industry participants with whom we spoke highlight several factors that could limit the degree of price competition, including broker cooperation, largely through MLSs, which can discourage brokers from competing with one another on price; resistance from traditional full- service brokers to brokers who offer discounted prices or limited services; and state antirebate and minimum service laws and regulations, which some argue may limit pricing and service options for consumers. The real estate brokerage industry has a number of attributes that economists normally associate with active price competition. Most notably, the industry has a large number of brokerage firms and individual licensed brokers and agents--approximately 98,000 active firms and 1.9 million active brokers and agents in 2004, according to the Association of Real Estate License Law Officials. Although some local markets are dominated by 1 or a few large firms, market share in most localities is divided among many small firms, according to industry analysts. In addition, the industry has no significant barriers to entry, since obtaining a license to engage in real estate brokerage is relatively easy and the capital requirements are relatively small. While real estate brokerage has competitive attributes, with a large number of players competing for a limited number of home listings, much of the academic literature and some industry participants we interviewed described this competition as being based more on nonprice variables, such as quality, reputation, or level of service, than on price. One reason for this characterization is the apparent uniformity of commission rates. Comprehensive data on brokerage fees are lacking. However, past analyses and anecdotal information from industry analysts and participants indicate that, historically, commission rates were relatively uniform across markets and over time. Various studies using data from the late 1970s through the mid-1980s found evidence that the majority of listings in many communities clustered around the same rate, exactly 6 percent or 7 percent. Although these studies and observations do not indicate that there has been complete uniformity in commission rates, they do suggest that variability has been limited. Many of the industry analysts and participants we interviewed said that commissions still cluster around a common rate within most markets, and they generally cited rates of 5 percent to 6 percent as typical. Some economists have cited certain advantages to the commission-based model that is common in real estate brokerage, most notably that it provides sellers' brokers with an incentive to get the seller the highest possible price. Moreover, uniformity in commission rates within a market at a given time does not necessarily indicate a lack of price competition. But some economists have noted that in a competitive marketplace, real estate commission rates could reasonably be expected to vary across markets or over time--that is, to be more sensitive to housing market conditions than has been traditionally observed. For example, commission rates within a market at a given time do not appear to vary significantly on the basis of the price of the home. Thus, the brokerage fee, in dollar terms, for selling a $300,000 home is typically about three times the fee for selling a $100,000 home, although the time or effort required to sell the two homes may not differ substantially. Similarly, commission rates do not appear to have changed as much as might be expected in response to rapidly rising home prices in recent years. Between 1998 and 2005, the national median sales price of existing homes, as reported by NAR, increased about 74 percent, while inflation over the same period was about 16 percent, leaving an increase of some 58 percent in the inflation- adjusted price of housing. According to REAL Trends, average commission rates among the largest brokerage firms fell from an estimated 5.5 percent in 1998 to an estimated 5.0 percent in 2005, a decrease of about 9 percent. Thus, with the increase in housing prices, the brokerage fee (in dollars) for selling a median-priced home increased even as the commission rate fell. Some economists have suggested that uniformity in commission rates can lead brokers to compete on factors other than price in order to gain market share. For example, brokers might hire more agents in an effort to win more sellers' listings. Brokers may also compete by spending more on advertising or offering higher levels of service to attract clients. Although some of these activities can benefit consumers, some economic literature suggested that such actions lead to inefficiency because brokerage services could be provided by fewer agents or at a lower cost. To the extent that commission rates may have declined slightly in recent years, the change may be the result in part of rapidly rising home prices, which have generated higher brokerage industry revenues even with lower commission rates. However, competition from increasing numbers of discount, fee-for-service, and other nontraditional brokerage models may have also contributed to the decline. These nontraditional models typically offer lower fees, and although NAR consultants estimated that nontraditional firms represented only about 2 percent of the market in 2003, these firms may be putting some downward pressure on the fees charged by traditional brokerages. Factors related to the cooperation among brokers facilitated by MLSs, some brokers' resistance to discounters, and consumer attitudes may inhibit price competition within the real estate brokerage industry. First, while MLSs provide important benefits to consumers by aggregating data on homes for sale and facilitating brokers' efforts to bring buyers and sellers together, the cooperative nature of the MLS system can also in effect discourage brokers from competing with one another on price. Because participating in an MLS in the areas where they exist is widely considered essential to doing business, brokerage firms may have an incentive to adopt practices that comply with MLS policies and customs. As previously noted, MLSs facilitate cooperation in part by enabling brokers to share information on the portion of the commission that sellers' brokers are offering to buyers' brokers. In the past, some MLSs required participating brokers to charge standard commission rates, but this practice ended after the Supreme Court ruled, in 1950, that an agreement to fix minimum prices was illegal under federal antitrust laws. Subsequently, some MLSs adopted suggested fee schedules, but this too ended after DOJ brought a series of antitrust actions in the 1970s alleging that this practice constituted price fixing. Today, MLSs no longer establish standard commission rates or recommend how commissions should be divided among brokers. MLS listings do show how much sellers' brokers will pay other brokers for cooperating in a sale, according to industry participants. When choosing among comparable homes for sale, brokers have a greater incentive--all else being equal--to first show prospective buyers homes that offer other brokers the prevailing commission rate, rather than homes that offer a lower rate. Therefore, even without formal policies to maintain uniform rates, individual brokers' reliance on the cooperation of other brokers to bring buyers to listed properties may help maintain a standard commission rate within a local area, at least for buyers' brokers. FTC, in a 1983 report, concluded that the cooperative nature of the industry and the interdependence among brokers were the most important factors explaining the general uniformity in commission rates that it had observed in many markets in the late 1970s. Second, traditional brokers may discourage price competition by resisting cooperation with brokers and firms whose business models depart from charging conventional commission rates, according to several industry analysts and participants with whom we spoke. A discount broker may advertise a lower commission rate to attract listings, but the broker's success in selling those homes, and in attracting additional listings in the future, depends in part on other brokers' willingness to cooperate (by showing the homes to prospective buyers) in the sale of those listings. Some discount full-service and discount limited-service brokerage firms we interviewed said that other brokers had refused to show homes listed by discounters. In addition, traditional brokers may in effect discourage discount brokers from cooperating in the sale of their listings by offering discounters a lower buyer's broker commission than the prevailing rate offered to other brokers. This practice can make it more difficult for discount brokers to recruit new agents because the agents may earn more working for a broker who receives the prevailing commission from other brokers. Some traditional full-service brokers have argued that discount brokers often do less of the work required to complete the transaction and, thus, deserve a smaller portion of the seller's commission. Representatives of discount brokerages told us they believed that reduced commission offers are in effect "punishment" for offering discounts to sellers and are intended as signals to other brokers to conform to the typical pricing in their markets. Finally, pressure from consumers for lower brokerage fees appears to have been limited, although it may be increasing, according to our review of economics literature and to several industry analysts and participants. Some consumers may accept a prevailing commission rate as an expected cost, in part because that has been the accepted pricing model for so long, and others may not realize that rates can be negotiated. Buyers may have little concern about commission rates because sellers directly pay the commissions. Sellers may be reluctant to reduce the portion of the commission offered to buyers' brokers because doing so can reduce the likelihood that their homes will be shown. In addition, home sellers who have earned large profits as housing prices have climbed in recent years may have been less sensitive to the price of brokerage fees. However, some brokers and industry analysts noted that the growth of firms offering lower commissions or flat fees has made an increasing number of consumers aware that there are alternatives to traditional pricing structures and that commission rates are negotiable. Although state laws and regulations related to real estate licensing can protect consumers, DOJ and FTC have expressed concerns that laws and regulations that restrict rebates to consumers or require minimum levels of service by brokers may also unnecessarily hinder competition among brokers and limit consumer choice. As of July 2006, at least 12 states appeared to prohibit, by law or regulation, real estate brokers from giving consumers rebates on commissions or appeared to place restrictions on this practice. Proponents said such laws and regulations help ensure that consumers choose brokers on the basis of the quality of service as well as price, rather than just on the rebate being offered. Opponents of antirebate provisions argued that such restrictions serve only to limit choices for consumers and to discourage price competition by preventing brokers from offering discounts. Opponents also noted that offering a rebate is one of the few ways to reduce the effective price of buyer brokerage services, since commissions are typically paid wholly by the seller. In November 2005, DOJ and the Kentucky Real Estate Commission settled a suit in which DOJ had alleged that the commission's administrative regulation banning rebates violated federal antitrust law. In its complaint, DOJ argued that the regulation unreasonably restrained competition to the detriment of consumers, making it more difficult for them to obtain lower prices for brokerage services. Pursuant to the approved settlement agreement, the commission put in place emergency regulations permitting rebates and other inducements as long as they are disclosed in writing. In addition, as of July 2006, 12 states appeared to be considering or to have passed legislation that requires brokers to provide a minimum level of service when they represent consumers. Such provisions generally require that when a broker agrees to act as a consumer's exclusive representative in a real estate transaction, the broker must provide such services as assistance in delivering and assessing offers and counteroffers, negotiating contracts, and answering questions related to the purchase and sale process. Advocates of minimum service standards argued that they protect consumers by ensuring that brokers provide a basic level of assistance. Furthermore, full-service brokers argued that such standards prevent them from having to unfairly shoulder additional work when the other party uses a limited-service broker. Opponents of these standards argued that they restrict consumer choice and raise costs by impeding brokerage models that offer limited services for a lower price. Between April and November 2005, DOJ wrote to state officials in Oklahoma and New Mexico, and DOJ and FTC jointly wrote to officials in Alabama, Michigan, Missouri, and Texas discouraging adoption of these states' proposed minimum service laws and regulations. The letters argued that the proposed standards in these states would likely harm consumers by preventing brokers from offering certain limited-service options and therefore requiring some sellers to buy brokerage services they would otherwise choose to perform themselves. They also cited a lack of evidence that consumers have been harmed by limited-service brokerage. Despite the concerns raised by DOJ and FTC, the governors in Alabama, Missouri, Oklahoma, and Texas subsequently signed minimum service standards into law. The Internet has increased consumers' access to information about properties for sale and has facilitated new approaches to real estate transactions. Whether the Internet will be more widely used in real estate brokerage depends in part on the extent to which listing information is widely available. Like discount brokerages, Internet-oriented brokerage firms, especially those offering discounts, may also face resistance from traditional brokers and especially may be affected by state laws that prohibit them from offering rebates to consumers. The Internet allows consumers direct access to listing information that has traditionally been available only from brokers. Before the Internet was widely used to advertise and display property listings, MLS data (which comprise a vast majority of all listings) were compiled in an "MLS book" that contained information on the properties listed for sale with MLS- member brokers in a given area. In order to view the listings, buyers generally had to use a broker, who provided copies of listings that met the buyer's requirements via hard copy or fax. Today, information on properties for sale--either listed on an MLS or independently, such as for- sale-by-owner properties--is routinely posted on Web sites, often with multiple photographs or virtual tours. Thus, the Internet has allowed buyers to perform much of the search and evaluation process independently, before contacting a broker. Sellers of properties can also benefit from the Internet because it can give their listings more exposure to buyers. Sellers may also use the Internet to research suitable asking prices for their homes by comparing the attributes of their houses with others listed in their areas. Although Internet-oriented brokerages and related firms represented only a small portion of the real estate brokerage market in 2005, the Internet has made different service and pricing options more widely available to consumers. Among these options are full-service and limited-service discount brokerages, information and referral companies, and alternative listing Web sites. Full-service discount brokerages offer buyers and sellers full-service real estate brokerage services but advertise lower than traditional commissions, for example between 3 percent and 4.5 percent. These types of brokerages existed before widespread use of the Internet, but many have gained exposure and become more viable as a result of the Internet. In addition, by posting listings online, displaying photographs and virtual tours of homes for sale, and communicating with buyers and sellers by e- mail, some of these companies say that they have been able to cut brokerage costs. Limited-service discount brokerages provide fewer services than full- service brokerages but also charge lower commissions or offer their services for flat fees. For example, some firms charge a flat fee for marketing and advertising homes and, for additional fees, will list a property in the MLS and show the home to prospective buyers. The Internet has allowed these firms to grow in number and size in recent years, in part because they can market their services to a larger population of buyers and sellers. Information and referral companies provide resources for buyers and sellers--such as home valuation tools and access to property listings--and make referrals of those consumers to local brokers. Some of these companies charge referral fees to brokers and then rebate a portion of that fee back to buyers and sellers. The Internet allows these companies to efficiently reach potential consumers and offer those customers services and access to brokers. Alternative listing Web sites offer alternatives to the MLS, allowing sellers who want to sell their homes themselves to advertise their properties to buyers and giving buyers another source of information on homes for sale. These alternative listing sites include the Web sites of local newspapers, Craigslist, and "for-sale-by-owner" Web sites. Several factors could limit the extent to which the Internet is used in real estate transactions. A key factor is the extent to which information about properties listed in an MLS is widely available. Currently, buyers may view MLS-listed properties on many Web sites, including broker and MLS Web sites and on NAR's Realtor.com Web site. The real estate brokerage industry has faced controversy over the public availability of listings on the Internet and over whether brokers can restrict the display of their listings on other brokers' Web sites. Proponents of allowing such restrictions argued that listings are the work product, and thus the property, of the selling broker, who should have control over how the listings are used. Opponents argued that such control would unfairly limit Internet-oriented brokers' ability to provide their clients with access to MLS listings through their Web sites. Even with few restrictions on the availability of information about properties for sale, Internet-oriented brokerage firms may face other challenges. First, Internet-oriented brokers with whom we spoke described resistance, similar to that previously described, involving some traditional brokerages that refused to show the Internet-oriented brokerages' listed properties or offered them buyers' brokers commissions that were less than those offered to other brokers. However, the online availability of listing information may discourage such behavior by enabling buyers to more easily detect whether a broker is avoiding other brokers' listings that are of interest. Second, some Internet-oriented companies said that state antirebate laws and regulations could affect them disproportionately, since their business models often were built around such rebates. Finally, other factors, such as the lack of a uniform technology to facilitate related processes--such as inspection, appraisal, financing, title search, and settlement--may inhibit the use of the Internet for accomplishing the full range of activities needed for real estate transactions. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678. 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 Jason Bromberg, Tania Calhoun, Julianne Stephens Dieterich, and Cory Roman. This bibliography includes articles from our review of literature on the structure and competitiveness of the residential real estate brokerage industry. Anglin, P. and R. Arnott. "Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis." Real Estate Economics, vol. 27, no. 4 (1999): 719-749. Arnold, M.A. "The Principal-Agent Relationship in Real Estate Brokerage Services." Journal of the American Real Estate and Urban Economics Association, vol. 20, no. 1 (1992): 89-106. Bartlett, R. "Property Rights and the Pricing of Real Estate Brokerage." The Journal of Industrial Economics, vol. 30, no. 1 (1981): 79-94. Benjamin, J.D., G.D. Jud and G.S. Sirmans. "Real Estate Brokerage and the Housing Market: An Annotated Bibliography." Journal of Real Estate Research, vol. 20, no. 1/2 (2000): 217-278. ----- "What Do We Know about Real Estate Brokerage?" Journal of Real Estate Research, vol. 20, no. 1/2 (2000): 5-30. Carney, M. "Costs and Pricing of Home Brokerage Services." AREUEA Journal, vol. 10, no. 3 (1982): 331-354. Crockett, J.H. "Competition and Efficiency in Transacting: The Case of Residential Real Estate Brokerage." AREUEA Journal, vol. 10, no. 2 (1982): 209-227. Delcoure, N. and N.G. Miller. "International Residential Real Estate Brokerage Fees and Implications for the US Brokerage Industry." International Real Estate Review, vol. 5, no. 1 (2002): 12-39. Epley, D.R. and W.E. Banks. "The Pricing of Real Estate Brokerage for Services Actually Offered." Real Estate Issues, vol. 10, no. 1 (1985): 45-51. Federal Trade Commission. The Residential Real Estate Brokerage Industry, vol. 1 (Washington, D.C.: 1983). Goolsby, W.C. and B.J. Childs. "Brokerage Firm Competition in Real Estate Commission Rates." The Journal of Real Estate Research, vol. 3, no. 2 (1988): 79-85. Hsieh, C. and E. Moretti. "Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry." The Journal of Political Economy, vol. 111, no. 5 (2003): 1076-1122. Jud, G.D. and J. Frew. "Real Estate Brokers, Housing Prices, and the Demand for Housing." Urban Studies, vol. 23, no. 1 (1986): 21-31. Knoll, M.S. "Uncertainty, Efficiency, and the Brokerage Industry." Journal of Law and Economics, vol. 31, no. 1 (1988): 249-263. Larsen, J.E. and W.J. Park. "Non-Uniform Percentage Brokerage Commissions and Real Estate Market Performance." AREUEA Journal, vol. 17, no. 4 (1989): 422-438. Mantrala, S. and E. Zabel. "The Housing Market and Real Estate Brokers." Real Estate Economics, vol. 23, no. 2 (1995): 161-185. Miceli, T.J. "The Multiple Listing Service, Commission Splits, and Broker Effort." AREUEA Journal, vol. 19, no. 4 (1991): 548-566. ----- "The Welfare Effects of Non-Price Competition Among Real Estate Brokers." Journal of the American Real Estate and Urban Economics Association, vol. 20, no. 4 (1992): 519-532. Miceli, T.J., K.A. Pancak and C.F. Sirmans. "Restructuring Agency Relationships in the Real Estate Brokerage Industry: An Economic Analysis." Journal of Real Estate Research, vol. 20, no. 1/2 (2000): 31-47. Miller, N.G. and P.J. Shedd. "Do Antitrust Laws Apply to the Real Estate Brokerage Industry?" American Business Law Journal, vol. 17, no. 3 (1979): 313-339. Munneke, H.J. and A. Yavas. "Incentives and Performance in Real Estate Brokerage." Journal of Real Estate Finance and Economics, vol. 22, no. 1 (2001): 5-21. Owen, B.M. "Kickbacks, Specialization, Price Fixing, and Efficiency in Residential Real Estate Markets." Stanford Law Review, vol. 29, no. 5 (1977): 931-967. Schroeter, J.R. "Competition and Value-of-Service Pricing in the Residential Real Estate Brokerage Market." Quarterly Review of Economics and Business, vol. 27, no. 1 (1987): 29-40. Sirmans, C.F. and G.K. Turnbull. "Brokerage Pricing under Competition." Journal of Urban Economics, vol. 41, no. 1 (1997): 102-117. Turnbull, G.K. "Real Estate Brokers, Nonprice Competition and the Housing Market." Real Estate Economics, vol. 24, no. 3 (1996): 293-316. Yavas, A. "Matching of Buyers and Sellers by Brokers: A Comparison of Alternative Commission Structures." Real Estate Economics, vol. 24, no. 1 (1996): 97-112. Yinger, J. "A Search Model of Real Estate Broker Behavior." The American Economic Review, vol. 71, no. 4 (1981): 591-605. Zumpano, L.V. and D.L. Hooks. "The Real Estate Brokerage Market: A Critical Reevaluation." AREUEA Journal, vol. 16, no. 1 (1988): 1-16. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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Consumers paid an estimated $65.7 billion in residential real estate brokerage fees in 2005. Observing that commission rates have remained relatively uniform--regardless of market conditions, home prices, or the effort required to sell a home--some economists have questioned the extent of price competition in the residential real estate brokerage industry. Furthermore, while the Internet offers time and cost savings to the process of searching for homes, Internet-oriented brokerage firms account for only a small share of the brokerage market. This has raised concerns about potential barriers to greater use of the Internet in real estate brokerage. In this testimony, which is based on a report issued in August 2005, GAO discusses (1) factors affecting price competition in the residential real estate brokerage industry and (2) the status of the use of the Internet in residential real estate brokerage and potential barriers to its increased use. The residential real estate brokerage industry has competitive attributes, but its competition appears to be based more on nonprice factors, such as reputation or level of service, than on brokerage fees, according to a review of the academic literature and interviews with industry analysts and participants. Although comprehensive data on brokerage fees are lacking, past analyses and anecdotal information suggest that commission rates have persisted in the same range over long periods, regardless of local market conditions, housing prices, or the cost or the effort required to sell a home. One potential cause of limited price variation in the industry is the use of multiple listing services (MLS), which facilitates cooperation among brokers in a way that can benefit consumers but may also discourage participating brokers from deviating from conventional commission rates. For instance, an MLS listing gives brokers information on the commission that will be paid to the broker who brings the buyer to that property. This practice potentially creates a disincentive for home sellers or their brokers to offer less than the prevailing rate, since buyers' brokers may show high-commission properties first. In addition, some state laws and regulations may also affect price competition, such as those prohibiting brokers from giving clients rebates on commissions and those requiring brokers to provide consumers with a minimum level of service. Although such provisions can protect consumers, the Department of Justice and the Federal Trade Commission have argued that they may prevent price competition or reduce consumers' choice of brokerage services. The Internet has changed the way consumers look for real estate and has facilitated the growth of alternatives to traditional brokers. A variety of Web sites allows consumers to access property information that once was available only by contacting brokers directly. The Internet also has fostered the growth of nontraditional residential real estate brokerage models, including discount brokers and broker referral services. However, industry participants and analysts cited several potential obstacles to more widespread use of the Internet in real estate transactions, including restrictions on listing information on Web sites, some traditional brokers' resistance to cooperating with nontraditional firms, and certain state laws and regulations that prohibit or restrict commission rebates to consumers.

The concept of the single audit was created to replace multiple grant audits with one audit of an entity as a whole. The single audit is an organizationwide audit that focuses on internal control and the recipient's compliance with laws and regulations governing the federal financial assistance received. The objectives of the Single Audit Act, as amended, are to promote sound financial management, including effective internal controls, with respect to federal awards administered by nonfederal entities; establish uniform requirements for audits of federal awards administered by nonfederal entities; promote the efficient and effective use of audit resources; reduce burdens on state and local governments, Indian tribes, and ensure that federal departments and agencies, to the maximum extent practicable, rely upon and use audit work done pursuant to the act. We studied the single audit process, and in June 1994, we reported on financial management improvements resulting from single audits, areas in which the single audit process could be improved, and ways to maximize the usefulness of single audit reports. We recommended refinements to improve the usefulness of single audits through more effective use of single audit resources and enhanced single audit reporting, and in March 1996, we testified before this Subcommittee on the proposed refinements. Subsequently, in July 1996, the refinements to the 1984 act were enacted. The 1996 amendments were effective for audits of recipients for fiscal years ending June 30, 1997, and after. The refinements cover a range of fundamental areas affecting the single audit process and single audit reporting, including provisions to extend the law to cover all recipients of federal financial assistance, ensure a more cost-beneficial threshold for requiring single audits, more broadly focus audit work on the programs that present the greatest financial risk to the federal government, provide for timely reporting of audit results, provide for summary reporting of audit results, promote better analyses of audit results through establishment of a federal clearinghouse and an automated database, and authorize pilot projects to further streamline the audit process and make it more useful. In June 1997, OMB issued Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The Circular establishes policies to guide implementation of the Single Audit Act 1996 amendments and provides an administrative foundation for uniform audit requirements for nonfederal entities that administer federal awards. OMB also issued a revised OMB Circular A-133 Compliance Supplement. The Compliance Supplement identifies for single auditors the key program requirements that federal agencies believe should be tested in a single audit and provides the audit objective and suggested audit procedures for testing those requirements. We reported in our 1994 report that the Compliance Supplement had not kept pace with changes to program requirements, and had only been updated once since it was issued in 1985. We recommended that the Compliance Supplement be updated at least every 2 years. OMB is now updating this supplement on a more regular basis. The initial Compliance Supplement for audits under the 1996 amendments was issued in June 1997. A revision was issued for June 1998 audits in May 1998, and a revision for June 1999 audits was just recently finalized. We commend OMB for its leadership in developing and issuing the guidance and the collaborative efforts of the federal inspectors general, federal and state program managers, the state auditors, and the public accounting profession in working with OMB proactively to ensure that the guidance effectively implements the 1996 refinements. Highlighted below are several of the key refinements and some of the actions taken to implement them. The 1984 act did not cover colleges, universities, hospitals, or other nonprofit recipients of federal assistance. Instead, audit requirements for these entities were established administratively in a separate OMB audit circular, which in some ways was inconsistent with the audit circular that covered state and local governments. For example, the criteria for determining which programs received detailed audit coverage were different between the circulars. The 1996 amendments expanded the scope of the act to include nonprofit organizations. To implement the 1996 amendments, OMB combined the two audit circulars into one that provided consistent audit requirements for all recipients. The 1996 refinements and OMB Circular A-133 require a single audit for entities that spend $300,000 or more in federal awards, and exempt any entity that spends less than that amount in federal awards. Also, the threshold is based on expenditures rather than receipts. The Congress intended for the entities receiving the greatest amount of federal financial assistance disbursed each year to be audited while exempting entities receiving comparatively small amounts of federal assistance. To achieve this, a $100,000 single audit threshold was included in the 1984 act. The fixed threshold, however, did not take into account future increases in amounts of federal financial assistance. As a result, over time, audit resources were being expended on entities receiving comparatively small amounts of federal financial assistance. In 1984, we reported that setting the threshold for requiring single audits at $100,000 would result in 95 percent of all direct federal financial assistance being covered by single audits. In 1994, we reported that coverage at the same 95 percent level could be achieved with a $300,000 threshold. Also, the refinements require the Director of OMB to biennially review the threshold dollar amount for requiring single audits. The Director may adjust upward the dollar limitation consistent with the Single Audit Act's purpose. We supported such a provision when the amendments were being considered by the Congress. Exercising this authority in the future will allow the flexibility for the OMB Director to administratively maintain the single audit threshold at a reasonable level without the need for further periodic congressional intervention. As a result of these changes, audit attention is focussed more on entities receiving the largest amounts of federal financial assistance, while the audit burden is eliminated for many entities receiving relatively small amounts of assistance. For example, Pennsylvania reported that this change will still provide audit coverage for 94 percent of the federal funds spent at the local level in the state, while eliminating audit coverage for approximately 1,200 relatively smaller entities in the state. The 1996 amendments require auditors to use a risk-based approach to determine which programs to audit during a single audit. The 1984 act's criteria for selecting entities' programs for testing were based only on dollar amounts. The 1996 amendments require OMB to prescribe the risk-based criteria. OMB Circular A-133 prescribes a process to guide auditors based not only on dollar limitations but also on risk factors associated with programs, including entities' current and prior audit experience with federal programs; the results of recent oversight visits by federal, state, or local agencies; inherent risk of the program. For practical reasons related to the audit procurement process, OMB Circular A-133 allowed auditors to forgo using the risk criteria in the first year audits under the 1996 amendments. Therefore, the risk-based approach will be fully implemented in the second cycle of audits under the 1996 amendments, which started with audits for fiscal years ending June 30, 1998, and is currently in progress. When fully and effectively implemented, this refinement is intended to give auditors greater freedom in targeting risky programs by allowing auditors to use their professional judgment in weighing risk factors to decide whether a higher risk program should be covered by the single audit. Under the 1984 act, OMB guidance provided entity management with a maximum of 13 months from the close of the period audited to submit the audit report to the federal government. The 1996 refinements reduce this maximum time frame to 9 months after the end of the period audited. The amendments provide for a 2-year transition period for meeting the 9-month submission requirement. OMB's guidelines call for the first audits subject to the revised reporting time frame to be those covering entities' fiscal years beginning on or after July 1, 1998, and ending June 30, 1999, or after. This means that March 31, 2000, will be the first due date under the new time frame. When fully implemented, this change will improve the timeliness of single audit report information available to federal program mangers who are accountable for administering federal assistance programs. The Congress and federal oversight officials will receive more current information on the recipients' stewardship of federal assistance funds they receive. The 1996 amendments require that the auditor include in a single audit report a summary of the auditor's results regarding the nonfederal entity's financial statements, internal controls, and compliance with laws and regulations. This should allow recipients of single audit reports to focus on the message and critical information resulting from the audit. OMB Circular A-133 requires that a summary of the audit results be included in a schedule of findings and questioned costs. In 1994, we reported that neither the Single Audit Act nor OMB's implementing guidance then in effect prescribed the format for conveying the results of the auditors' tests and evaluations. At that time, we found that single audit reports contained a series of as many as eight or more separate reports, including five specifically focused on federal financial assistance, and that significant information was scattered throughout the separate reports. OMB Circular A-133 provides greater flexibility on the organization of the auditor's reporting than was previously provided. Taking advantage of this flexibility, the American Institute of Certified Public Accountants has issued guidance for practitioners conducting single audits that allows all auditor reporting on federal assistance programs to be included in one report and a schedule of findings and questioned costs. The 1996 refinements call for single audit reports to be provided to a federal clearinghouse designated by the Director of OMB to receive the reports and to assist OMB in carrying out its responsibilities through analysis of the reports. The Bureau of the Census was identified as the Federal Audit Clearinghouse in OMB Circular A-133. In our 1994 report, we noted that data on the results of single audits were not readily accessible and discussed the benefits of compiling the results in an automated database. The clearinghouse has developed a database and is now entering data from the single audit reports it has received. As this initiative progresses, it is expected to become a valuable source of information for OMB, federal oversight officials, and others regarding the expenditure of federal assistance. The 1996 amendments allow the Director of OMB to authorize pilot projects to test ways of further streamlining and improving the usefulness of single audits. We understand that OMB has recently approved the first pilot project under this authority. This first pilot, which was proposed by and will be carried out by the State of Washington, provides for auditing the state education agency and all school districts in the state as one combined entity, rather than having about 200 separate single audits. The Washington State Auditor's office has submitted a statement for the record that describes in more detail the pilot project. Our preliminary view is that the pilot has the potential to both streamline the audit process and to provide a single report that is more useful to users than the approximately 200 reports it will replace. We fully support testing options for streamlining and increasing the effectiveness of single audits and will monitor this and any other pilot projects that are approved in the future. We are committed to overseeing the successful implementation of the 1996 amendments, working closely with all stakeholders in the single audit process and periodically providing information to the Congress on the progress being made on all of the refinements. Mr. Chairman, this concludes my statement. I will be glad to answer any questions you or other Members 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.

Pursuant to a congressional request, GAO discussed the status of efforts to implement the Single Audit Act Amendments of 1996, focusing on: (1) the importance of the 1996 amendments; (2) the actions taken to implement them; and (3) ways in which the refinements will continue to evolve and benefit future single audit efforts. GAO noted that: (1) the concept of the single audit was created to replace multiple grant audits with one audit of an entity as a whole; (2) the objectives of the Single Audit Act, as amended, are to: (a) promote sound financial management, including effective internal controls, with respect to federal awards administered by non-federal entities; (b) establish uniform requirements for audits of federal awards administered by non-federal entities; (c) promote the efficient and effective use of audit resources; (d) reduce burdens on state and local governments, Indian tribes, and nonprofit organizations; and (e) ensure that federal departments and agencies rely upon and use audit work done pursuant to the act; (3) the 1996 amendments were effective for audits of recipients' fiscal years ending June 30, 1997, and after; (4) the refinements cover a range of fundamental areas affecting the single audit process and single audit reporting, including provisions to: (a) extend the law to cover all recipients of federal financial assistance; (b) ensure a more cost-beneficial threshold for requiring single audits; (c) more broadly focus audit work on the programs that present the greatest financial risk to the federal government; (d) provide for timely and summary reporting of audit results; (e) promote better analyses of audit results through establishment of a federal clearinghouse and an automated database; and (f) authorize pilot projects to further streamline the audit process and make it more useful; (5) in June 1997, the Office of Management and Budget (OMB) issued Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations; (6) the Circular establishes policies to guide implementation of the Single Audit Act 1996 amendments and provides an administrative foundation for uniform audit requirements for nonfederal entities that administer federal awards; (7) OMB also issued a revised OMB Circular A-133 Compliance Supplement; (8) the Compliance Supplement identifies for single auditors the key program requirements that federal agencies believe should be tested in a single audit and provides the audit objective and suggested audit procedures for testing those requirements; (9) GAO reported in its 1994 report that the Compliance Supplement had not kept pace with changes to program requirements, and had only been updated once since it was issued in 1985; (10) GAO recommended that the Compliance Supplement be updated at least every 2 years; and (11) OMB is now updating this supplement on a more regular basis.

DHS's National Protection and Programs Directorate leads the country's effort to protect and enhance the resilience of the nation's physical and cyber infrastructure. The directorate includes the Office of Infrastructure Protection, which leads the coordinated national effort to reduce risk to U.S. critical infrastructure posed by acts of terrorism. Within the Office of Infrastructure Protection, ISCD leads the nation's effort to secure high-risk chemical facilities and prevent the use of certain chemicals in a terrorist act on the homeland; ISCD also is responsible for implementing and managing the CFATS program, including its EAP. The CFATS program is intended to ensure the security of the nation's chemical infrastructure by identifying, assessing the risk posed by, and requiring the implementation of measures to protect high-risk chemical facilities. Section 550 of the DHS Appropriations Act, 2007, required DHS to issue regulations establishing Risk-Based Performance Standards for chemical facilities that, as determined by DHS, present high levels of risk; the act also required vulnerability assessments and development and implementation of site security plans for such facilities. DHS published the CFATS interim final rule in April 2007 and appendix A to the rule, published in November 2007, lists 322 chemicals of interest and the screening threshold quantities for each. According to DHS, subject to certain statutory exclusions, all facilities that manufacture chemicals of interest, as well as facilities that store or use such chemicals as part of their daily operations, may be subject to CFATS. However, only chemical facilities determined to possess a requisite quantity of chemicals of interest (i.e., the screening threshold quantity) and subsequently determined to present high levels of security risk are subject to the more substantive requirements of the CFATS regulation. The CFATS regulation outlines a specific process for how ISCD is to administer the CFATS program. A chemical facility that possesses any of the 322 chemicals of interest in the quantities that meet or exceed a threshold quantity is required to use ISCD's Chemical Security Assessment Tool, a web-based application through which owners and operators of chemical facilities provide information about the facility to ISCD. If ISCD determines that a facility is high risk, the facility must complete and submit to ISCD a standard security plan, expedited security plan, or Alternative Security Program. Tier 1 and tier 2 facilities must use the standard security plan or Alternative Security Program, while tier 3 and tier 4 facilities also have the option to use the expedited security plan. For a facility that submits a standard security plan or Alternative Security Program, ISCD reviews it for compliance with CFATS. If compliant, ISCD issues a letter of authorization and conducts an authorization inspection. If the facility passes the authorization inspection, ISCD issues a letter of approval and the facility implements the approved security plan or program. Subsequently, ISCD conducts compliance inspections to confirm that the facility has implemented its approved security plan or program. For tier 3 or tier 4 facilities that choose to submit the expedited security plan, ISCD reviews the expedited plan to determine if it is sufficient and, if so, issues a letter of acceptance. If the expedited plan is determined to be facially deficient, the facility is no longer eligible to participate in the EAP and must submit a standard security plan or Alternative Security Program. For expedited facilities that receive a letter of acceptance, ISCD does not conduct an authorization inspection because the CFATS Act of 2014 does not provide for this inspection at expedited facilities. However, ISCD intends to subsequently conduct compliance inspections to confirm that the expedited facility has implemented its approved security plan. Regarding the EAP, the CFATS Act of 2014 states that, among other things, DHS is to issue guidance for EAP facilities not later than 180 days after enactment of the act that identifies specific security measures sufficient to meet Risk-Based Performance Standards; approve a facility's expedited security plan if it is not facially deficient based upon a review of the expedited plan; verify a facility's compliance with its expedited security plan through a compliance inspection; require the facility to implement additional security measures or suspend the facility's certification if, during or after a compliance inspection, security measures are insufficient to meet Risk-Based Performance Standards based on misrepresentation, omission, or an inadequate description of the site; and conduct a full evaluation of the EAP and submit a report on the EAP not later than 18 months after the date of enactment of the act to Congress. On May 12, 2015, DHS issued EAP guidance for eligible facilities to use to prepare their expedited plans. DHS fully implemented the EAP about a month later when facilities could submit expedited security plans and certification forms to ISCD. Consistent with the act, DHS developed the guidance within 180 days after the date the act was enacted and identified specific security measures that are sufficient to meet Risk- Based Performance Standards applicable to facilities under DHS's standard security plan process. The guidance is intended to help facilities prepare and submit their expedited security plans and certifications to ISCD, and includes an example that identifies specific (i.e., prescriptive) security measures that facilities are to have in place. Appendix I provides an example of the EAP's prescriptive security measures and shows the measures that an EAP facility is to have in place to respond to a threat or actual theft or release of a chemical of interest. ISCD officials told us that, in developing prescriptive security measures for the EAP, they considered various sources, including: lessons learned from approving prior standard security plans and Alternative Security Programs for tier 3 and tier 4 facilities and conducting inspections at these facilities; Risk-Based Performance Standards used to develop a standard security plan or Alternative Security Program; and relevant academic literature, and security directives, guidelines, standards, and regulations issued by other federal agencies, such as the U.S. Army and the Department of Labor. ISCD officials told us that they developed the EAP security measures with clear, specific guidance, so that facility officials would have the information needed to successfully obtain approval of their expedited security plan upon submission. The CFATS Act of 2014 allows facilities to submit only one expedited plan to DHS. Specifically, if ISCD determines that an expedited plan is facially deficient due to an error, the act does not allow facility officials to correct the error and resubmit the plan. In addition, ISCD officials said that prescriptive, clear, and easily understood EAP security measures are needed because the act requires DHS to approve an expedited plan that has all applicable prescribed security measures and does not provide for an authorization inspection under the EAP. Therefore, ISCD's goal in developing required security measures for an expedited security plan was to ensure that a facility had adequate security in place until inspectors could conduct a compliance inspection at the facility approximately 1 year after approving the plan. ISCD officials also stated that, before and after implementing the EAP, they reached out to industry representatives to ensure that eligible facilities were aware of the EAP and its availability as an option to the standard security plan and Alternative Security Program. Specifically, ISCD held meetings with officials representing the Chemical Sector Coordinating Council, the Food and Agriculture Sector Coordinating Council, and the Oil and Natural Gas Subsector Coordinating Council before issuing the EAP guidance and also contacted them after doing so. ISCD also made presentations about the EAP at the Chemical Sector Security Summit in July 2015, and to other groups, including three labor unions prior to implementing the EAP. In addition, ISCD chemical security inspectors and other staff routinely discuss the EAP when conducting CFATS-related outreach. Officials we interviewed at the three coordinating councils confirmed that DHS had contacted them about the EAP. Also, officials from 8 of the 11 industry organizations we interviewed said they have been generally pleased with DHS's efforts to communicate with them about the CFATS program in recent years. However, officials from a Sector Coordinating Council stated that ISCD did not accept the council's offers to assist in developing the EAP guidance and were concerned that ISCD may not accept future offers to work on CFATS issues. A senior ISCD official stated that ISCD did not accept the council's offers to assist in developing the EAP guidance because the CFATS Act of 2014 required DHS to develop the guidance within 6 months of enactment, which did not allow time to involve all interested stakeholders in developing it. The ISCD official stated that ISCD continues to value stakeholder input, appreciates the desire of Sector Coordinating Council members and other stakeholders to provide input on CFATS materials, and plans to seek input from Sector Coordinating Councils and other stakeholders, as appropriate, on future relevant issues. ISCD officials also told us that they developed draft, standard operating procedures to evaluate expedited security plans and conduct compliance inspections, and that officials used the draft procedures to evaluate expedited plans since the EAP's implementation. ISCD staff who review expedited security plans have received training on how to do this and vetting an expedited plan is relatively simple and straightforward because it does not require extensive analysis, according to ISCD officials. Specifically, ISCD staff review an expedited security plan to determine if facility officials have checked all required boxes for applicable security measures, adequately explained any planned security measures or material deviations, and signed the required certification. If ISCD staff concludes that all of these things have been done, they recommend that the ISCD Director approve the expedited security plan. ISCD staff prepares a summary of the review, including the recommendation, and provides it to the Director. These standard operating procedures were approved on May 25, 2017. DHS's report to Congress on the EAP, issued on August 2, 2016, discussed all elements listed in the CFATS Act of 2014, but did not quantify costs associated with the EAP because most of DHS's initial costs were for salary and benefits and DHS did not require its employees to track the hours they worked on the EAP. DHS also did not quantify associated costs to the regulated community, but stated that it expects that these costs were very low. In addition, DHS's report did not include a recommended frequency of compliance inspections at facilities that use the program because, currently, there is no mandated frequency for any facility regardless of the type of security plan submitted. DHS noted that it would prioritize conducting an initial compliance inspection at an expedited facility over inspection of a similar facility that received approval of a traditional (i.e., standard) security plan or Alternative Security Program, in part, because that would be the first inspection conducted at the expedited facility. In addition, the report stated that, among other things, it was difficult to assess the effect of the EAP on DHS operations and the operations of facilities because only a single facility had participated in the EAP at the time the report was issued. Our analysis of the DHS report and follow-up discussions with ISCD officials is discussed below. Assess the number of eligible facilities that used the EAP versus the standard process to develop and submit a site security plan. DHS reported that, as of June 2, 2016, it assigned a final tier of 3 or 4 to 2,244 facilities (806 tier 3 facilities and 1,438 tier 4 facilities). Of these facilities, only one facility (a tier 4 facility) submitted an expedited security plan, while 2,194 facilities had submitted a security plan or Alternative Security Program using the standard process, and 49 facilities had yet to submit a security plan or Alternative Security Program. Assess the EAP's impact on the backlog for site security plan approvals and authorization inspections. DHS reported that, with only a single facility electing to submit an expedited security plan, the EAP had no noticeable impact on DHS's projected completion date for all authorization inspections and site security plan approvals. ISCD officials told us that if enough facilities use the EAP in the future, DHS would evaluate the EAP's effect on its CFATS operations. Assess the ability of EAP facilities to submit sufficient site security plans. DHS reported that the only facility to submit an expedited security plan was able to submit a sufficient plan. Assess any impact of the EAP on the security of chemical facilities. DHS reported that it is difficult to assess the impact of the EAP on the security of chemical facilities because only one facility submitted an expedited security plan. DHS noted that the public availability of the EAP guidance would likely have a positive impact on chemical facility security because the guidance can serve as reference material for any facility looking to develop a security plan, regardless of whether that facility is regulated under CFATS. ISCD officials told us that if enough facilities use the EAP in the future, DHS would evaluate the EAP's effect on the security of chemical facilities. Identify any costs and efficiencies associated with the EAP. DHS reported that it expended significant internal resources to comply with the statutory requirement to develop an EAP, but DHS did not quantify the cost associated with the EAP. According to DHS, the resources expended included costs to develop EAP processes and procedures, and develop the associated guidance and outreach materials. ISCD officials told us that most of DHS's initial costs were for salary and benefits for federal employees working on the EAP, including policy, compliance, and legal staff who developed the EAP guidance, and information technology staff who updated the Chemical Security Assessment Tool. However, ISCD officials also told us that they were unable to quantify these costs because headquarters employees are only required to track overall hours worked each day versus time spent on individual tasks. ISCD officials stated that they have expended, and expect to continue to expend, minor funding amounts to keep the EAP operational. DHS also reported that it was unable to discern how much time and resources members of the regulated community or other stakeholders expended on activities, such as reviewing EAP proposals or considering whether to use the EAP. However, DHS stated that it expects that EAP costs to the regulated community were very low. Recommend the frequency of compliance inspections that may be required for EAP facilities. DHS discussed factors that can influence the frequency of compliance inspections, but did not quantify a recommended frequency for facilities in the EAP because, currently, there is no mandated frequency for any facility regardless of the type of security plan submitted. According to DHS, a variety of factors can influence the frequency of compliance inspections regardless of the type of site security plan the facility submits, including the facility's risk-based tier and previous compliance history, the corporate owner's compliance history, and the number and type of planned measures in the facility's approved security plan. The report also stated that DHS would consider if a facility elected to submit an expedited security plan when determining the timing of the facility's initial compliance inspection and frequency of subsequent inspections. Although DHS did not quantify a recommended frequency of compliance inspections, it noted that the election to use an expedited security plan would have the most impact on scheduling the initial compliance inspection because that would be the first inspection DHS would conduct at the facility. In addition, DHS would prioritize conducting an initial compliance inspection at an expedited facility over inspection of a similar facility that received approval of a traditional (i.e., standard) security plan or Alternative Security Program. According to DHS, as of April 2017, 2 of the 2,496 eligible facilities had used the EAP since ISCD implemented it; however, one of the two facilities was no longer in the EAP because ISCD no longer considers the facility to be high risk. ISCD had approved both facilities' expedited security plans--one before DHS issued the aforementioned report to Congress and one after the report. ISCD officials stated that they have not assessed why only two facilities have used the EAP and do not intend to do so because they did not have a preconceived number of facilities that they expected to use it. They also said that the EAP is one of three options--the expedited security plan, the standard security plan, and the Alternative Security Program--that tier 3 and tier 4 facilities can use. ISCD does not encourage facilities to use the EAP or discourage facilities from using it because facility officials are in the best position to decide which approach is the best option for their facility. Officials representing the two EAP chemical facilities told us that their companies involve small operations that store a single chemical of interest on site and do not have staff with extensive experience or expertise in chemical security. Officials from both facilities said they used the EAP instead of a standard site security plan or Alternative Security Program because the EAP would reduce the time and cost to prepare and submit their security plans. Officials from both facilities also stated that the EAP's prescriptive nature helped them to quickly determine the security measures required to be in their site security plans. For example, the contractor who prepared the site security plan for one of the two EAP facilities said that the facility probably saved $2,500 to $3,500 in consulting fees by using the EAP instead of a standard security plan. According to ISCD, the first compliance inspection at the one remaining EAP facility is scheduled to start later in calendar year 2017. ISCD and industry stakeholders we interviewed identified several factors that may explain why the EAP has not been more widely used, as discussed below. Timing of the EAP's Implementation. ISCD officials stated that the timing of the EAP's implementation may be the primary reason that only two facilities have used it. The officials explained that, by the time ISCD had implemented the EAP, the majority of eligible facilities had already submitted standard site security plans or Alternative Security Programs to ISCD, so it was not worthwhile for the facilities to start over again to use the EAP. For example, ISCD officials told us that they had already approved standard security plans and Alternative Security Programs from about 61 percent (1,463 of approximately 2,400) of facilities that had been assigned to tier 3 or tier 4 prior to the EAP's implementation. Also, officials from 5 of the 11 industry organizations we interviewed stated that the timing of the EAP's implementation resulted in limited interest in using the EAP. Prescriptive Nature of the EAP. As previously discussed, the CFATS Act of 2014 required DHS to develop specific security measures for the EAP that are sufficient to meet Risk-Based Performance Standards. ISCD officials and officials from 6 of the 11 industry organizations we interviewed stated that the prescriptive security measures required in the expedited security plan likely deterred some facilities from using the EAP. According to ISCD officials, some industry officials think that certain EAP- required security measures are too strict for tier 3 and tier 4 facilities. Officials we interviewed from 5 of the 11 industry organizations said that some, if not most, EAP-required security measures are more robust or strict than they should be for tier 3 and tier 4 facilities; however, officials from a Sector Coordinating Council and a member organization said that the EAP's required security measures are fair or appropriate for tier 3 and tier 4 facilities. ISCD officials agreed that some EAP required security measures are strict because the CFATS Act of 2014 requires that DHS develop specific security measures and approve expedited security plans that are determined to not be facially deficient based only on a review of the plan. For example, an industry official told us that a security measure pertaining to screening and inspection of vehicles is too strict. Specifically, the EAP guidance states that a facility must screen and inspect all vehicles for firearms, explosives, or certain materials prior to allowing vehicles access to the facility's perimeter by visually inspecting the vehicle, using a trained explosive detection dog team, under/over vehicle inspection systems, or cargo inspection systems. ISCD officials told us that this security measure is required because ISCD would not be able to evaluate the capability of a facility's random or percentage-based screening and inspection program by doing a review of the facility's expedited security plan; therefore, ISCD requires that EAP facilities apply this requirement to all vehicles prior to accessing a facility's perimeter. However, ISCD officials and officials from 4 of 11 industry organizations also stated that the EAP's prescriptive measures actually could encourage some facilities to use the EAP. For example, officials from an industry organization stated that smaller facilities often lack staff with the expertise needed to prepare a standard site security plan or Alternative Security Program and may prefer the EAP because it clearly states what a facility is required to do to meet security measures. This was consistent with the views of the officials representing the two facilities that submitted EAPs, as discussed earlier. Lack of an Authorization Inspection under the EAP. As previously discussed, ISCD conducts an authorization inspection at facilities using the standard process, but does not conduct this inspection at facilities using the EAP. ISCD officials stated that the lack of an authorization inspection under the EAP may discourage some facilities from using it because some facility officials have told ISCD that this inspection provides useful information about their facility's security. However, ISCD officials also said that some facilities may prefer the lack of an authorization inspection under the EAP because this expedites the approval process for a site security plan compared to the process for a standard security plan or Alternative Security Program. Certification Form Required for the EAP. An ISCD official and an industry official we interviewed told us that the certification form that a facility official must sign under penalty of perjury and submit to ISCD with the expedited security plan, may deter some facilities from using the EAP. For example, the DHS official stated that the form contains strict requirements and could result in the signing official being legally liable and subject to penalties in certain circumstances. However, officials for the two facilities that submitted expedited security plans and certification forms to ISCD told us that they were not concerned about signing the form. Two other factors that could influence facilities' participation in the EAP are the introduction of revised processes for (1) facilities to provide information to ISCD and (2) ISCD to determine the risk tier for each facility. ISCD officials stated that, in fall 2016, they implemented a revised Chemical Security Assessment Tool for facilities to provide information to ISCD in response to industry concerns, such as asking facilities to answer duplicate questions. In the same time frame, ISCD implemented a revised risk-tiering methodology in response to our prior reports and stakeholder concerns about not addressing all elements of risk (threat, vulnerability, and consequence). ISCD officials said they revised the risk-tiering methodology to enhance its ability to consider the elements of risk associated with a terrorist attack. The revised Chemical Security Assessment Tool, called the Chemical Security Assessment Tool 2.0, includes a revised Top-Screen and a streamlined version of the standard site security plan. ISCD officials said that a primary reason they revised the assessment tool was to eliminate duplication and confusion associated with the original standard security plan. The streamlined security plan, in ISCD officials' view, flows more logically, is more user-friendly, requires facility officials to write less narrative, does not have ambiguous questions, and pre-populates data from one part to another, so users do not have to re-type the same information multiple times. According to ISCD officials, industry feedback about Chemical Security Assessment Tool 2.0 has been very positive. Officials in 9 of the 11 industry organizations we interviewed told us that they have positive views about the revised assessment tool and that it is better than the original assessment tool. For example, officials from 5 of the 11 industry organizations stated that ISCD had improved the assessment tool by streamlining or eliminating duplicative questions. If the updated tool proves easier to use, it could affect future interest in using the expedited program. Regarding the revised tiering methodology, ISCD initiated a phased approach to re-tier about 27,000 facilities. ISCD officials said these facilities must re-submit Top-Screens using Chemical Security Assessment Tool 2.0 and the revised tiering methodology will be used to determine if each facility is high risk and, if so, assign the appropriate risk tier to the facility. According to a senior ISCD official, the re-tiering efforts are resulting in shifts in the risk assessments for some facilities due to the revised tiering methodology and because many facilities have not submitted new information in 7 or 8 years; however, dramatic shifts in the risk tiers of a large number of facilities are not expected. Nevertheless, ISCD is uncertain about the effect that Chemical Security Assessment Tool 2.0 and the revised tiering methodology will have on the future use of the EAP because ISCD cannot predict the extent to which facilities may be re-assigned from tier 1 or tier 2 to tier 3 or tier 4, or vice versa; assigned to tier 3 or tier 4 and submit an expedited security plan instead of a streamlined standard plan or Alternative Security Program, or vice versa; new to CFATS and assigned to tier 3 or tier 4; or no longer considered to be high risk. Given that only one facility is currently covered by the EAP, and about 27,000 facilities are to ultimately re-submit Top-Screens using Chemical Security Assessment Tool 2.0 and be tiered using the revised tiering methodology, it is too early to tell what impact, if any, the revised CFATS process will have on the future use of the EAP. We provided a draft of this report to DHS for review and comment. DHS did not provide formal comments, but did provide a technical comment, which we incorporated, as appropriate. We are sending copies of this report to interested congressional committees and the Secretary of Homeland Security. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have 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. Key contributors to this report are listed in appendix II. The following security measures are from Section D of the site security plan example for the Expedited Approval Program. For facilities that prepare an expedited security plan and submit it to the Department of Homeland Security (DHS), facility officials are to put a checkmark next to each applicable security measure that the facility has in place. For each applicable security measure that the facility does not have in place, facility officials are to explain the security measure planned to be implemented in the next 12 months. If the facility has a material deviation from a security measure, facility officials are to explain compensatory measures that provide comparable security. Section D: Response Measures (Risk-Based Performance Standards 9, 11, 13, and 14) D.1.1 ___ The facility has a defined emergency and security response organization in order to respond to site emergencies and security incidents. D.1.2 ___ The facility has a crisis management plan which includes emergency response procedures, security response plans, and post- incident security plans (post-terrorist attack, security incident, natural disaster, etc.). For Release facilities only: D.1.2.1 ___ The facility has additional portions to their crisis management plan, which include emergency shutdown plans, evacuation plans, re-entry/recovery plans, and community notification plans to account for response to Release chemicals of interest. ___ The facility is not regulated for Release chemicals of interest. D.1.3 ___ The facility has designated individual(s) responsible for executing each portion of the crisis management plan and individual(s) have been trained to execute all duties. D.1.4 ___ The facility has the appropriate resources (staff, emergency/response equipment, building space, communications equipment, process controls/safeguards, etc.) to execute all response plans. Emergency equipment includes at least one of the following: A radio system that is redundant and interoperable with law enforcement and emergency response agencies. At least one backup communications system, such as cell phones/desk phones. An emergency notification system (e.g., a siren or other facility-wide alarm system). Automated control systems or other process safeguards for all process units to rapidly place critical asset(s) in a safe and stable condition and procedures for their use in an emergency. Emergency safe-shutdown procedures for all process units. D.1.5 ___ All facility personnel have been trained on all response plans and response plans are exercised on a regular basis and at a minimum of biennially. D.1.6 ___ The facility has an active outreach program with local first responders (Police Department and Fire Department) which includes providing response documentation to agencies, providing facility layout information to agencies, inviting agencies to facility orientation tours, notifying agencies of the facility's chemicals of interest (regulated chemicals of interest and other chemical holdings identified on Appendix A) and security concern, and maintaining regular communication with agencies. D.2.1 ___ The facility has a documented process for increasing security measures commensurate to the designated threat level during periods of elevated threats tied to the National Terrorism Advisory System and when notified by DHS of a specific threat. D.2.2 ___ The facility will begin to execute security measures for elevated and specific threats within 8 hours of notification. D.2.3 ___ The facility will execute the following measures as a result of an elevated or specific threat: Coordinate with Federal, state, and local law enforcement agencies. Increase detection efforts through either dedicated monitoring of security systems (Intrusion Detection System (IDS) or Closed Circuit Television (CCTV)), increased patrols of the perimeter and/or asset area(s), or stationing of personnel at access points and/or asset area(s). For Theft/Diversion and Sabotage facilities only, increase frequency of outbound screening and inspections. For Sabotage facilities only, increase monitoring of outbound shipments. For Release facilities only, increase frequency of inbound screening and inspections. In addition to the contact named above, John Mortin, Assistant Director, and Joseph E. Dewechter, Analyst-in-Charge, managed this audit engagement. Chuck Bausell, Michele Fejfar, Tracey King, Michael Lenington, and Claire Peachey made significant contributions to this report.

Facilities that produce, use, or store hazardous chemicals could be of interest to terrorists intent on using them to inflict mass casualties in the United States. DHS established the CFATS program to, among other things, identify and assess the security risk posed by chemical facilities. DHS places high-risk facilities into one of four risk-based tiers and inspects them to ensure compliance with DHS standards. The CFATS Act of 2014 created the Expedited Approval Program as an option for the two lower-risk tier facilities (tiers 3 and 4) to reduce the burden and expedite the processing of security plans. The act further required that DHS report on its evaluation of the expedited program to Congress. The CFATS Act of 2014 also included a provision for GAO to assess the expedited program. This report discusses (1) DHS's implementation of the expedited program and its report to Congress and (2) the number of facilities that have used the program and factors affecting participation in it. GAO reviewed laws and DHS guidance, analyzed DHS's report to Congress, and interviewed DHS officials. GAO also received input from officials with three industry groups that represented the most likely candidates to use the program, and officials representing eight of their member organizations. The results of this input are not generalizable, but provide insights about the expedited program. GAO is not making recommendations in this report. For more information, contact Chris Currie at (404) 679-1875 or [email protected] . [ This page was updated to delete a typo .] The Department of Homeland Security (DHS) fully implemented the Chemical Facility Anti-Terrorism Standards (CFATS) Expedited Approval Program in June 2015 and reported to Congress on the program in August 2016, as required by the Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 (CFATS Act of 2014). DHS's expedited program guidance identifies specific security measures that eligible (i.e., tiers 3 and 4) high-risk facilities can use to develop expedited security plans, rather than developing standard (non-expedited) security plans. Standard plans provide more flexibility in securing a facility, but are also more time-consuming to process. DHS's report to Congress on the expedited program discussed all required elements. For example, DHS was required to assess the impact of the expedited program on facility security. DHS reported that it was difficult to assess the impact of the program on security because only one facility had used it at the time of the report. DHS officials stated that they would further evaluate the impact of the program on security if enough additional facilities use it in the future. As of April 2017, only 2 of the 2,496 eligible facilities opted to use the Expedited Approval Program; various factors affected participation. Officials from the two facilities told GAO they used the program because its prescriptive nature helped them quickly determine what they needed to do to implement required security measures and reduced the time and cost to prepare and submit their security plans to DHS. According to DHS and industry officials GAO interviewed, low participation to date could be due to several factors: DHS implemented the expedited program after most eligible facilities already submitted standard (non-expedited) security plans to DHS; the expedited program's security measures may be too strict and prescriptive, not providing facilities the flexibility of the standard process; and DHS conducts in-person authorization inspections to confirm that security plans address risks under the standard process, but does not conduct them under the expedited program. DHS officials noted that some facilities may prefer having this inspection because it provides them useful information. Recent changes in the CFATS program could also affect future use of the expedited program. In fall 2016, DHS updated its online tool for gathering data from facilities. Officials at DHS and 5 of the 11 industry organizations GAO contacted stated that the revised tool is more user-friendly and less burdensome than the previous one; however, it is unclear how the new tool might affect future use of the expedited program. Also, in fall 2016, DHS revised its methodology for determining the level of facility risk, and one of the two facilities that participated in the expedited program is no longer

The FEHBP is the largest employer-sponsored health insurance program in the country, providing health insurance coverage for about 8 million federal employees, retirees, and their dependents through contracts with private insurance plans. All currently employed and retired federal employees and their dependents are eligible to enroll in FEHBP plans, and about 85 percent of eligible workers and retirees are enrolled in the program. For 2007, FEHBP offered 284 plans, with 14 fee-for-service (FFS) plans, 209 health maintenance organization (HMO) plans, and 61 consumer-directed health plans (CDHP). About 75 percent of total FEHBP enrollment was concentrated in FFS plans, about 25 percent in HMO plans, and less than 1 percent in CDHPs. Total FEHBP health insurance premiums paid by the government and enrollees were about $31 billion in fiscal year 2005. As set by statute, the government pays 72 percent of the average premium across all FEHBP plans but no more than 75 percent of any particular plan's premium. The premiums are intended to cover enrollees' health care costs, plans' administrative expenses, reserve accounts specified by law, and OPM's administrative costs. Unlike some other large purchasers, FEHBP offers the same plan choices to currently employed enrollees and retirees, including Medicare-eligible retirees who opt to receive coverage through FEHBP plans rather than through the Medicare program. The plans include benefits for medical services and prescription drugs. By statute, OPM can negotiate contracts with health plans without regard to competitive bidding requirements. Plans meeting the minimum requirements specified in the statute and regulations may participate in the program, and plan contracts may be renewed automatically each year. OPM may terminate contracts if the minimum standards are not met. OPM administers a reserve account within the U.S. Treasury for each FEHBP plan, pursuant to federal regulations. Reserves are funded by a surcharge of up to 3 percent of a plan's premium. Funds in the reserves above certain minimum balances may be used, under OPM's guidance, to defray future premium increases, enhance plan benefits, reduce government and enrollee premium contributions, or cover unexpected shortfalls from higher-than-anticipated claims. On January 1, 2006, Medicare began offering prescription drug coverage (also known as Part D) to Medicare-eligible beneficiaries. Employers offering prescription drug coverage to Medicare-eligible retirees enrolled in their plans could, among other options, offer their retirees drug coverage that was actuarially equivalent to standard coverage under Part D and receive a tax-exempt government subsidy to encourage them to retain and enhance their prescription drug coverage. The subsidy provides payments equal to 28 percent of each qualified beneficiary's prescription drug costs that fall within a certain threshold and is estimated to average about $670 per beneficiary per year. OPM opted not to apply for the retiree drug subsidy. The average annual growth in FEHBP premiums has slowed since 2002-- declining each year from 2003 through 2007--and was generally lower than the growth for other purchasers since 2003. After a period of decreases in 1995 and 1996, FEHBP premiums began to increase for 1997, to a peak increase of 12.9 percent for 2002. The growth in average FEHBP premiums began slowing in 2003 and reached a low of 1.8 percent for 2007. The average annual growth in FEHBP premiums was faster than that of CalPERS and surveyed employers from 1997 through 2002--8.5 percent compared with 6.5 percent and 7.1 percent, respectively. However, beginning in 2003, the average annual growth rate in FEHBP premiums was slower than that of CalPERS and surveyed employers--7.3 percent compared with 14.2 percent and 10.5 percent, respectively. (See fig. 1). The premium growth rates for the 10 largest FEHBP plans by enrollment-- accounting for about three-quarters of total FEHBP enrollment--ranged from 0 percent to 15.5 percent for 2007. Premium growth rates across the smaller FEHBP plans varied more widely. Regarding enrollee premiums--the share of total premiums paid by enrollees--the growth in average enrollee premiums generally paralleled total premium growth from 1994 through 2007. In 2006, average monthly FEHBP premiums were $415 for individual plans and $942 for family plans in total. The enrollee premium contributions were $123 for individual plans and $278 for family plans. Projected increases in the cost and utilization of services and in the cost of prescription drugs accounted for most of the average annual premium growth across FEHBP plans for the period from 2000 through 2007, although projected withdrawals from reserves offset much of this growth for 2006 and 2007. Absent projected changes associated with other factors, projected increases in the cost and utilization of services and the cost of prescription drugs would have accounted for a 9 percent increase in average premiums for 2007. Projected increases in the cost of and utilization of services alone would have accounted for about a 6 percent increase premiums for 2007, down from a peak of about 10 percent for 2002. Projected increases in the cost of prescription drugs alone would have accounted for about a 3 percent increase in premiums for 2007, down from a peak of about 5 percent for 2002. Enrollee demographics-- particularly the aging of the enrollee population--were projected to have less of an effect on premium growth. Projected decreases in the costs associated with certain other factors, including benefit changes that resulted in less generous coverage and enrollee choice of plans--typically the migration to lower-cost plans--generally helped offset average premium growth for 2000 through 2007 to a small extent. Projected withdrawals from reserves offset average premium growth for 2006 and 2007. Officials we interviewed from most of the plans stated that OPM monitored their plans' reserve levels and worked closely with them to build up or draw down reserve funds gradually to avoid wide fluctuations in premium growth from year to year. Projected additions to reserves nominally contributed to average premium growth--by less than 1 percentage point--for 2000 through 2005. However, projected withdrawals from reserves offset average premium growth by about 2 percentage points for 2006 and 5 percentage points for 2007. (See fig. 2.) We also reviewed detailed data available for five large FEHBP plans on claims actually incurred from 2003 through 2005. These data showed that most of the increase in total expenditures per enrollee was explained by expenditures on prescription drugs (34 percent) and on hospital outpatient services (26 percent). Officials we interviewed from several FEHBP plans stated that the retiree drug subsidy would have had a small effect on premium growth had OPM applied for the subsidy and used it to offset premiums. First, drug costs for Medicare beneficiaries enrolled in these plans accounted for a small proportion of total expenses for all enrollees, and the subsidy would have helped offset less than one-third of these expenses. Second, because the same plans offered to currently employed enrollees were offered to retirees, the effect of the subsidy would have been diluted when spread across all enrollees. However, officials we interviewed from two large plans with high shares of elderly enrollees stated that the subsidy would have lowered premium growth for their plans. Officials from one of these plans estimated that 2006 premium growth could have been 3.5 to 4 percentage points lower. Our analysis of the potential effect of the retiree drug subsidy on all plans in FEHBP showed that had OPM applied for the subsidy and used it to offset premium growth, the subsidy would have lowered the 2006 premium growth by 2.6 percentage points from 6.4 percent to about 4 percent. The reduction in premium growth would have been a onetime reduction for 2006. Absent the drug subsidy, FEHBP premiums in the future would likely be more sensitive to drug cost increases than would be premiums of other large plans that received the retiree drug subsidy for Medicare beneficiaries. OPM officials explained that there was no need to apply for the subsidy because the intent of the subsidy was to encourage employers to continue offering prescription drug coverage to Medicare-eligible enrollees, and FEHBP plans were already doing so. The potential effect of the subsidy on premium growth would also have been uncertain because the statute did not require employers to use the subsidy to mitigate premium growth. Officials we interviewed from most of the FEHBP plans with higher-than- average premium growth in 2006 cited increases in the actual cost and utilization of services and high shares of elderly enrollees and early retirees as key drivers of premium growth. Our analysis of financial data provided by six of these plans showed that the average increase in total expenditures per enrollee from 2003 through 2005 was about 40 percent-- compared with the average of 25 percent for five large FEHBP plans that represented about two-thirds of total FEHBP enrollment. From 2001 through 2005, the average age of enrollees across all eight plans with higher-than-average premium growth increased by 2.7 years--compared with an average increase of 0.5 years across all FEHBP plans. Officials we interviewed from most of the FEHBP plans with lower-than- average premium growth in 2006 cited adjustments for previously overestimated projections of cost growth and benefit changes that resulted in less generous coverage for prescription drugs as factors that limited premium growth. Our analysis of financial data provided by two plans showed that per-enrollee expenditures for prescription drugs increased by 3 percent for one plan and 13 percent for the other from 2003 through 2005--compared with 30 percent for the average of the five large FEHBP plans. Also, from 2001 through 2005, the average age of enrollees across all six of these plans decreased by 0.5 years--compared with an average increase of 0.5 years across all FEHBP plans. Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or other Members of the subcommittee may have. For future contacts regarding this testimony, please contact John E. Dicken at (202) 512-7119 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Randy Dirosa, Assistant Director; Iola D'Souza; and Timothy Walker made key contributions to this testimony. 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Average health insurance premiums for plans participating in the Federal Employees Health Benefits Program (FEHBP) have risen each year since 1997. These growing premiums result in higher costs to the federal government and plan enrollees. The Office of Personnel Management (OPM) oversees FEHBP, negotiating benefits and premiums and administering reserve accounts that may be used to cover plans' unanticipated spending increases. GAO was asked to discuss its December 22, 2006 report, entitled Federal Employees Health Benefits Program: Premium Growth Has Recently Slowed, and Varies Among Participating Plans (GAO-07-141). In this report, GAO reviewed (1) FEHBP premium trends compared with those of other purchasers, (2) factors contributing to average premium growth across all FEHBP plans, and (3) factors contributing to differing trends among selected FEHBP plans. GAO reviewed data provided by OPM relating to FEHBP premiums and factors contributing to premium growth. For comparison purposes, GAO examined premium data from the California Public Employees' Retirement System (CalPERS) and surveys of other public and private employers. GAO also interviewed officials from OPM and eight FEHBP plans with premium growth that was higher than average and six FEHBP plans with premium growth that was lower than average. Growth in FEHBP premiums recently slowed, from a peak of 12.9 percent for 2002 to 1.8 percent for 2007. Starting in 2003, FEHBP premium growth was generally slower than for other purchasers. Premium growth rates for the 10 largest FEHBP plans by enrollment--accounting for about three-quarters of total enrollment--ranged from 0 percent to 15.5 percent for 2007. Projected increases in the cost and utilization of health care services and in the cost of prescription drugs accounted for most of the average annual FEHBP premium growth for 2000 through 2007. Absent other factors, these increases would have raised 2007 average premiums by 9 percent. Other projected factors, including benefit changes resulting in less generous coverage and enrollee migration to lower-cost plans, slightly offset average premium growth. In 2006 and 2007, projected withdrawals from reserves helped offset average premium growth--by 2 percentage points for 2006 and 5 percentage points for 2007. To explain the factors associated with premium growth, officials GAO interviewed from most of the FEHBP plans with higher-than-average premium growth cited increases in the cost and utilization of services as well as a high share of elderly enrollees and early retirees. Officials GAO interviewed from most plans with lower-than-average premium growth cited adjustments made for previously overestimated projections of cost growth, and some officials cited benefit changes that resulted in less generous coverage for prescription drugs. The plans with lower-than-average premium growth also experienced a decline of 0.5 years in the average age of their enrollees compared with an increase of 0.5 years in the average age of all FEHBP enrollees.

Since FPS was created in 1971, as part of GSA, it has been responsible for providing law enforcement and related security services to all federal facilities held or leased by GSA. Specifically, FPS is responsible for, among other things, (1) hiring security guard contractors and overseeing contract guards deployed at federal facilities, (2) controlling access to federal facilities, (3) responding to incidents, (4) enforcing property rules and regulations, and (5) conducting criminal investigations and facility security assessments (FSA). To accomplish this facility protection mission and other responsibilities, as of October 2014, FPS has about 1,200 full-time employees located in its headquarters and 11 regional offices around the country. FPS also has about 13,500 contract security guards deployed at approximately 5,650 of the almost 9,000 federal facilities it protects. To fund its operations, FPS charges fees for its security services to federal tenant agencies in GSA-controlled facilities. For fiscal year 2014, FPS expected to receive $1.3 billion in fees. In the 1980s, some federal departments and agencies raised concerns that GSA was not providing quality building services, including the physical security provided by FPS, in a timely manner. In response, GSA's Administrator decided to establish a delegation of authority program that would primarily decentralize building services such as security and lease management. A 1985 Executive Order also directed GSA to delegate its building operations authority to tenant agencies when it was feasible and economical. To make this determination, GSA required agencies to maintain program and financial data, which GSA reviewed to determine whether to grant a delegation. When FPS transferred from GSA to DHS in 2002, this delegation of authority program also transferred. Under the program, FPS is responsible for reviewing delegations for law enforcement and security services and determining -based on cost and capabilities analysis- if it is in the best interest of the government to authorize another department or agency to protect a federal facility instead of FPS. FPS also is responsible for ensuring that these delegated facilities are protected in a manner consistent with the Interagency Security Committee's (ISC) standards. A law enforcement delegation of authority authorizes an agency to enforce federal laws and regulations aimed at protecting the agency's federal facilities identified in the delegation and the employees and public who work in and visit those facilities; conduct investigations related to offenses against the property and persons on the property, and arrest and detain persons suspected of federal crimes. A delegation of authority for security services typically authorizes an agency to manage its own contract guard program at the specified federal facilities, including awarding and administering contracts, and ensuring that guards are properly trained and certified to protect those facilities. An agency may also receive a delegation of authority for both law enforcement and contract guard services. Delegations of authority are generally granted for about 2 to 5 years, but the expiration dates for some existing delegations are not specified or the delegation indicates that it will continue until terminated by FPS, according to FPS officials. In response to congressional direction, in November 2012, FPS issued its Interim Plan, which outlines its current process for reviewing delegations of authority. This process, which is managed primarily by FPS headquarters staff (one full-time employee and three part-time employees) in coordination with its 11 regional offices, includes four phases. During this phase, which began in 2010 and is still ongoing, FPS has focused on identifying delegations of authority that were primarily granted when FPS was part of GSA because FPS at that time did not have a centralized recordkeeping system. As part of this identification process, FPS contacted its 11 regions and GSA to determine if they had copies of delegations. In addition, in some instances, FPS obtained information about an existing delegation from agencies that were granted such authority. FPS uploaded the information it collected from these delegations into an electronic database. During this phase, the Interim Plan calls for FPS to conduct cost and capabilities analyses to determine whether to renew or rescind an existing delegation or grant a new one. To perform the cost analysis, FPS developed a cost estimation model, which establishes a standardized process for assessing the financial impact of each delegation of authority. As part of this cost analysis, FPS compares its and the delegated agency's costs of providing law enforcement or security services. For example, to estimate the current resources expended by the delegated agency and to determine the cost that FPS would be expected to incur if the delegation were rescinded, FPS reviews data on the amount it would spend and the amount the agency currently spends on various cost elements, such as salaries and benefits; guards' training and certification; law enforcement equipment (e.g., computers, uniforms, and mobile radios); and mega-center (dispatch center) services. In addition, information about the FSA; countermeasures (i.e., contract security guards, K-9 officers); training, services; and equipment (i.e., ammunition, cell phones, and office supplies) are also required to be entered into the cost estimation model. To conduct a capability analysis, FPS determines if services--such as acquisition of guard services, training, criminal investigations, guard oversight, and a mega center--are in place at the delegated facility; how those services are provided and resourced; and whether FPS can provide those services on a reimbursable basis and, if so, how much it would cost. According to the Interim Plan, after completing the cost and capabilities analyses, FPS recommends to DHS's Under Secretary for the National Protection and Programs Directorate (NPPD) whether a delegation should be granted, renewed, or rescinded. The Under Secretary then makes the final decision and notifies the agency requesting a delegation of authority. For delegations that are rescinded, FPS's Interim Plan requires an orderly transition of law enforcement or guard services so that there is no lapse in protection of the facility. For delegations that are granted or renewed, FPS has responsibility for overseeing the delegations and will conduct periodic inspections to ensure that the delegated facilities are protected in a manner consistent with its contract requirements and federal physical security standards. In September 2014, FPS drafted a directive that establishes its policy and procedures and assigns responsibilities for law enforcement and contract security guard delegations of authority. Among other things, the draft directive provides further detail on the roles and responsibilities of FPS headquarters and regional staff in reviewing delegations of authority and how FPS plans to verify that existing delegations are active, have not expired, or the facility is vacant. The draft directive also requires any agency requesting a delegation to complete a self-assessment of its security services and provide FPS with a copy of the most recent facility security assessment. As of January 2015, FPS had not set a timeframe for finalizing and implementing the draft directive. FPS's delegations of authority program does not fully meet applicable federal standards we identified for effective program management. FPS lacks reliable data, as called for by federal Standards for Internal Control in the Federal Government, for accurately identifying the total delegations it is responsible for managing. In addition, FPS's model for estimating the costs associated with a delegation does not fully align with the relevant leading practices outlined in GAO's Cost Guide. Without fully meeting these standards and leading practices, FPS cannot ensure that its decisions to grant, renew, or rescind delegations of authority are based on sound data and that security resources are efficiently allocated and in a manner that leads to effective protection of federal facilities. FPS lacks reliable data for identifying the total number of delegations of authority it has granted. Specifically, FPS has not established a reliable baseline for the number of delegations of authority that have been granted since the 1980s and remain active and thus, does not know how many it needs to review and oversee to ensure that law enforcement and security services are provided at these federal facilities. The federal Standards for Internal Control state that federal agencies should have relevant, reliable, and timely information for decision-making and external-reporting purposes. As previously discussed, in its Interim Plan, FPS reported that it granted over 300 delegations to approximately 30 federal departments and agencies. During the course of our engagement, FPS began verifying these data in accordance with criteria it outlined in its September 2014 draft directive. According to the draft directive, FPS should exclude from the list of 300 delegations of authority identified in the Interim Plan, those delegations that had expired or where the delegated agency no longer occupies the facility. FPS officials also told us that rescinded delegations of authority should also be excluded. Based on its verification process, FPS officials stated that only 62 of the 300 delegations of authority identified in the Interim Plan were active delegations, as of October 2014. However, we reviewed the 62 delegations of authority FPS verified and- based on FPS's criteria for excluding delegations- found that 12 were improperly included. Although FPS's verification process was to exclude expired delegations, we found that 11 of the 62 delegations of authority it identified as active had expired, including 3 that had expired almost 20 years ago when the delegated agency was still responsible for protecting its own facilities. These 11 delegations of authority were granted to 6 departments and agencies (Departments of Commerce, Health and Human Services, Defense, State, and Treasury, and the Social Security Administration) to protect 81 facilities. Although rescinded delegations are to be excluded, we found that FPS's validated data included a delegation that was granted to NRC but was rescinded in October 2013. That delegation also should have been excluded from FPS's validated data because it related to four facilities that NRC officials explained they had not occupied in about 20 years. Our analysis demonstrates that while FPS continues to gather information on all existing delegations of authority, it has not established effective internal controls, such as procedures to ensure that the data on its delegations are reliable. FPS officials stated that FPS lacks reliable data on its delegations of authority, in part, due to poor recordkeeping with existing delegations. FPS officials also said that they have worked with GSA and FPS regional offices to identify documentation of existing delegations of authority, but acknowledged that this approach may not have resulted in an accurate accounting of existing delegations of authority. Without reliable data on existing delegations of authority, FPS will face challenges effectively managing its delegations of authority program. In addition, the lack of reliable delegation data makes it difficult for FPS to ensure that delegated facilities are protected in a manner consistent with federal physical security standards and to provide its stakeholders with accurate and timely information for decision-making and external-reporting purposes. FPS's cost estimation model that it is using to analyze the costs of providing law enforcement or security services does not fully align with leading practice identified in GAO's Cost Guide. These leading practices are the basis for developing high-quality reliable cost estimates and help ensure that the cost estimates are comprehensive, well-documented, accurate, and credible. For example, following these practices should result in cost estimates that can, among other things, be replicated and updated. According to the Cost Guide, these leading practices can guide government managers as they assess the credibility of a cost estimate for decision-making purposes for a range of programs. We have previously reported that while the Cost Guide focuses on developing cost estimates for government acquisition programs, the leading practices are generally applicable to cost estimation in a variety of circumstances, including assessing an agency's cost estimating model. Accordingly, we applied the Cost Guide's leading practices to FPS's cost estimation model. Given that FPS's Interim Plan discusses the cost estimates developed with its cost model as one of the major criteria FPS uses to determine whether a delegation of authority should be granted, renewed or rescinded, and the importance of that decision for providing efficient and effective law enforcement and security services at federal facilities, we believe that ensuring the reliability of the cost model's estimate is paramount. We found that FPS's cost estimation model partially aligned with practices for producing comprehensive estimates and minimally aligned with those for producing well- documented and accurate estimates. Furthermore, the model does not align with practices for producing credible cost estimates. Table 1 shows our overall assessment of FPS's cost estimation model compared to the four characteristics. Appendix II provides greater detail on our comparison of FPS's model with the leading practices identified in GAO's Cost Guide. A model for developing cost estimates is considered comprehensive if, among other things, it accounts for all possible costs over an appropriate period of time and is based on documentation that defines the program and is technically reasonable, as shown in table 1. FPS's model partially aligns with these leading practices for developing comprehensive cost estimates. For example, FPS's model examined the costs associated with a delegation of authority over a 5-year period, which we found to be sufficient for the purposes of FPS making a decision on a delegation. In addition, an FPS official told us that the technical inputs for estimating security costs in the model are based on an FSA. However, FPS's Interim Plan does not require that an FSA be conducted prior to or as part of the delegation review process. We found that FPS also did not conduct or require the agency to obtain an FSA for the six requests for new or renewed delegations we analyzed involving the Departments of Commerce, the Interior, and State; the FTC; and NRC before determining whether those departments and agencies should be authorized to protect their facilities. During the course of this engagement, FPS included such a requirement in its draft directive, but FPS officials did not know when the draft directive would be completed and finalized. As a result, FPS's cost estimation model may not have a solid technical basis for estimating security costs, a limitation that can compromise the quality of the cost estimate and affect FPS's ability to make sound decisions on whether to grant, renew, or rescind a delegation. Appendix II provides greater detail on our comparison of FPS's model with the leading practices of a comprehensive cost estimate identified in GAO's Cost Guide. A model produces a well-documented cost estimate when, among other things, it includes (1) documentation on the source data, (2) clearly details the model's calculations and results so the results can be replicated, and (3) provides explanations for choosing a particular methodology, as shown in table 1. FPS's model minimally aligns with these leading practices for producing well-documented cost estimates. For example, FPS provided documentation on some of the sources of data that are programmed into the model, such as the sources for cost data on K-9 services and vehicles. The model also provides some steps that allow an estimate to be replicated, such as including mathematically logical formulas for its calculations. However, FPS's model did not include documentation on the sources of other cost data, such as those related to training programs or career development, how it assessed data reliability, or how the data were normalized.documentation did not describe the methodology it uses to develop a cost estimate, including a description of the methods or the costs used in its summary of the estimate. Without providing clear documentation of the data and methodology used by a model, it is difficult for a cost analyst to replicate the results and ensure that FPS's model and process are producing reliable cost estimates based on quality data and methods. Appendix II provides greater detail on our comparison of FPS's model with the leading practices of a well-documented cost estimate identified in GAO's Cost Guide. A cost estimation model should, among other things, include an uncertainty analysis (a way to assess variability in an estimate to reflect unknown information that could affect cost), be updated regularly to reflect changes to the current status, and be based on a historical record of costs and actual cost data, as shown in table 1. FPS's model minimally aligns with these leading practices for producing accurate cost estimates. For example, the model's calculations were based on a formula--that allowed any changes--such as those related to the security requirements or the security costs of the agency requesting the delegation--to be quickly updated. However, FPS's model and process do not include an uncertainty analysis to determine where a cost estimate falls within the range of possible costs. A model that does not assess the level of confidence associated with an estimate may not have adequate contingency funding available if the actual costs exceed the estimate. In addition, the model does not document any historical use of costs. Historical data can provide insight into actual costs, such as security costs associated with protecting similar facilities. Without including these elements of the leading practices for accuracy, the model may produce cost estimates with biased results, impeding management's ability to make sound decisions when reviewing a delegation. Appendix II provides greater detail on our comparison of FPS's model with the leading practices of an accurate cost estimate identified in GAO's Cost Guide. A credible model, among other things, provides a process for cross- checking its results with independent cost estimates, quantifies the levels of risk and uncertainty, and includes a sensitivity analysis--that is, it examines the effect of changing one assumption related to each project activity while holding all other variables constant in order to identify which variable most affects the cost estimate, as shown in table 1. FPS's model does not align with these leading practices for producing credible cost estimates. For example, the model does not include an analysis to quantify the potential risks and identify the uncertainty around key assumptions, which can undermine the credibility of an estimate. In addition, the model did not include a sensitivity analysis that identifies a range of possible costs based on varying major assumptions. FPS officials stated that the model identifies key cost drivers and examines the effect of changes to these key costs, but this analysis was not included in the model, and FPS did not provide any supporting documentation of the analysis being part of the process. Without conducting analyses on the sensitivity, risk, and uncertainty associated with an estimate and validating the methods for producing the cost estimate, FPS may not have an understanding of the limitations associated with the cost estimate, and could make a delegation of authority recommendation without understanding the credibility of the cost estimate. Appendix II provides greater detail on our comparison of FPS's model with the leading practices of a credible cost estimate identified in GAO's Cost Guide. An FPS official told us that the cost estimation model was not necessarily in line with GAO's cost estimation leading practices because the agency did not think a more rigorous model was warranted given the size and scope of the delegation program. However, Office of Management and Budget officials told us that FPS faced difficulties when comparing its security costs to that of an agency requesting a delegation and in discussions with FPS officials pointed out that FPS needs to establish a transparent process, when working with an agency to estimate these costs. As such, a reliable cost model is instrumental to establishing sound cost information for making decisions on delegations of authority. As previously discussed, the leading practices in the Cost Guide are applicable to a range of programs, such as FPS's assessment of delegations of authority, but the extent to which the leading practices apply may vary, depending on the scope and complexity of an individual delegation. For example, conducting a sensitivity analysis may involve varying the key security requirements, such as the recommended countermeasures like the number of contract guards protecting a facility, to determine how the changes affect the overall cost estimate. We recognize that the application of all of these cost estimating leading practices to FPS's cost estimating model would take time and financial resources. However, applying these leading practices would enable FPS to better identify and address issues with developing cost estimates, and provide its management and that of the agency requesting a delegation with reliable cost information on the financial impact of granting, renewing, or rescinding a delegation of authority. We analyzed the six requests for new or renewed delegations of authority FPS reviewed from June 2012 through May 2014, and found that FPS did not fully follow its Interim Plan when it reviewed five of the requests. According to FPS's Interim Plan, FPS should conduct cost and capabilities analyses before making a decision to grant, renew, or rescind a delegation of authority. However, as shown in table 2, FPS conducted these required analyses for only the delegation involving SSA and did not conduct them for the other five delegations involving NRC, Commerce's NIST, Interior, State, and FTC. Without conducting these analyses, FPS does not have a sound basis to determine whether cost or security considerations support its delegation of authority recommendations. In addition, FPS faces limitations ensuring that its contract requirements and ISC's physical security standards are being met at delegated facilities. FPS conducted cost and capabilities analyses in reviewing the SSA's request to renew a delegation of authority for contract guard services at a level II and a level IV facility in Durham, North Carolina. According to FPS's cost analysis, in fiscal year 2013, it would have cost SSA about $3.6 million and FPS about $4.7 million to provide the contract guard services at these facilities. According to FPS officials, FPS would need an additional $1.1 million to train its contract guards to operate SSA's technically complex security systems. FPS also completed a capabilities analysis, which showed that FPS could provide more of the required security services than SSA. According to SSA officials, the agency did not agree with FPS's capabilities assessment because SSA did not believe that FPS had sufficient resources to meet SSA's security needs. In January 2014, the Acting Under Secretary for NPPD renewed this delegation for 3 years based on FPS's analyses and recommendation. FPS did not fully follow its Interim Plan when it reviewed NRC's 2012 request to have the delegation renewed. Specifically, FPS conducted the required cost analysis but did not conduct the required capabilities analysis. FPS's cost analysis showed that in fiscal year 2013 it would have cost NRC $6.5 million and FPS about $8 million to provide the contract guard services at those facilities. According to FPS officials, it would need an additional $1.5 million more to hire, train, and certify contract guards. Conducting the required capabilities analysis could have provided information on FPS's capabilities versus NRC's in overseeing a security guard contract, according to FPS's Interim Plan. Such an analysis is to include ensuring that guards have the required training and certifications, and conducting inspections of guards' duty stations. During the review process, NRC officials raised questions about FPS's ability to oversee its contract guards, in part, because of our previous reports on challenges FPS faces with overseeing contract security guards at other federal facilities. Nonetheless, in 2013, based on FPS's recommendation the Secretary of DHS rescinded this delegation, stating it was in the best interest of the government, but provided no additional justification. Since then, among other things, FPS has been responsible for awarding the guard contract and overseeing the guards deployed at NRC facilities in Rockville and Bethesda, Maryland. In addition, FPS did not ensure that there was not a lapse in the protection of NRC's facilities as required by its Interim Plan. FPS and NRC officials told us that, since the contract was awarded in 2013, the guard contractor has not fully been meeting the terms of the contract. For example, 41 of the approximately 100 guards (41 percent) deployed to NRC facilities do not have the required L (equivalent to secret) or Q (equivalent to top secret) security clearances, as of February 13, 2015, according to NRC officials. In addition, according to FPS and NRC officials, the guard contractor had over 3,000 hours of open (unfilled) posts in NRC's facilities, in part, due to challenges the contractor faced with hiring and retaining guards. Based on these open posts, an NRC official estimated that the agency was due a refund of about $100,000. To address the open post issue, the guard contractor deployed guard supervisors to these posts. According to FPS officials, this type of deployment prevents the supervisors from completing their other responsibilities including conducting post inspections to ensure that guards are at their respective posts. Moreover, FPS officials told us that although the contractor deducted the costs associated with the open posts, NRC is not getting the level of security services for which it is paying and this has negatively affected NRC. For example, if there were a potential threat at any of the open posts, there would not have been a guard to counteract the threat. In January 2015, after completing the contractor's performance assessment report, FPS's Contracting Officer decided that although the contractor's overall performance has been less than satisfactory, the problem with open posts has not yet risen to the level of allowing the contract to expire or terminating the contract. However, FPS's Contracting Officer is not recommending the contractor for similar contract guard services in the future. The Acquisition Division Director of FPS concurred with this recommendation. Regarding the other 4 requests for new or renewed delegations of authority we reviewed, based on FPS's recommendations, the Secretary of DHS and the Under Secretary of NPPD renewed the delegations of authority for the Department of Commerce's NIST facilities for 5 years, the Department of the Interior's Hoover Dam for 2 years, and the State Department's Enterprise Service Operations Center facility for 2 years, and granted FTC a new contract guard delegation for 3 years; but FPS did not conduct cost or capabilities analyses prior to making these recommendations as required by the Interim Plan. FPS officials explained that FPS did not conduct these analyses, in part, because it was not able to obtain comparable cost data or limited staff prevented it from conducting the analyses before the delegations expired. FPS officials also told us that the program is evolving and that it has yet to establish management controls to ensure that the analyses are conducted. Officials from Commerce, the Interior, State, and FTC expressed some concerns to us about the quality of FPS's security services, the amount of time it takes FPS to review a delegation of authority, and the lack of transparency associated with FPS's review process. Nonetheless, they told us that they agreed with FPS's decision to renew or grant their delegations because they believed FPS faces resource and capability challenges. However, FPS remains responsible for ensuring that these facilities are protected in a manner that is consistent with ISC's physical security standards. FPS's Interim Plan identifies its 11 regional offices as stakeholders in its delegation review process. However, in some instances, the FPS regional offices where the delegated facility is located were not involved in the agency's delegation review process. For example, officials from three of the four regions we interviewed were not aware of FPS's Interim Plan or its decisions to renew delegations to Interior and State; grant FTC a delegation, and to rescind NRC's delegation. FPS officials stated that the delegations program was being managed from FPS headquarters. Moreover, officials in one FPS region said that omitting the regions from the delegations review process could result in the region's not meeting the requirements specified in a delegation, for example, overseeing the delegation to ensure that the delegated agency is meeting ISC standards. FPS headquarters officials explained that this program is evolving and that ongoing efforts such as its draft delegation directive (which was developed subsequent to the six delegations we analyzed) clarifies FPS regions' roles and responsibilities related to the delegation review process and oversight of delegations. However, as of January 2015, FPS officials did not provide a timeframe for finalizing the draft directive. Given that federal facilities remain targets of potential terrorist attacks or other acts of violence, it is important that FPS manages its delegations of authority program effectively. However, FPS has not effectively managed its delegations of authority program. For example, FPS does not have reliable data to identify the number of delegations of authority it is responsible for reviewing and overseeing. Developing and implementing procedures to improve the accuracy of its delegation of authority data would enable FPS to ensure that delegated facilities are protected in a manner consistent with federal physical security standards and would provide its stakeholders with accurate and timely information for decision- making. FPS has developed a process for reviewing delegations that includes a cost and capabilities analyses. However, FPS could enhance its ability to produce reliable cost estimates by aligning its cost estimation model with leading practices to ensure its estimates are comprehensive, well documented, accurate, and credible. Such an approach, would give FPS a solid technical basis for making its delegation of authority recommendations to DHS management. Cost and capability analyses play a major role in helping FPS determine whether to grant another agency the authority to protect federal facilities, but for five of the six delegations we examined, FPS did not consistently conduct these analyses before making a recommendation to DHS's management. It is important that FPS ensure that these analyses are consistently done. Without these analyses, FPS and DHS management faces limitations in making informed decisions about how best to protect delegated federal facilities from potential terrorist attacks or other acts of violence, protection that is FPS's responsibility. Finally, given that FPS is still in the process of finalizing its draft directive, it has an opportunity to ensure that its delegations of authority program fully aligns with federal standards for effective program management. To improve the management of FPS's delegations of authority program, we recommend that the Secretary of Homeland Security direct the Director of FPS take the following three actions: develop and implement procedures to improve the accuracy of its delegation of authority data; update FPS's cost estimation model to align with leading practices to ensure it produces comprehensive, well-documented, accurate, and credible cost estimates; and establish management controls to ensure that FPS's headquarters and regional office staff conduct required cost and capability analyses before FPS grants, renews, or rescinds a delegation of authority to a federal agency. We provided a copy of a draft of this report to DHS for review and comment. DHS provided written comments, reprinted in appendix III, agreeing with the report's recommendations. DHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Homeland Security, the Director of the Federal Protective Service, the Administrator the General Services Administration, the Director of the Office of Management and Budget, and other interested parties. The report will also be available on the GAO website at no charge at http://www.gao.gov If you or your staff have any questions about this report, please contact Mark Goldstein at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our report examines (1) the extent to which FPS's delegations of authority program meets select federal standards and leading practices for effective program management and (2) whether FPS has followed its 2012 Interim Plan in reviewing select delegations of authority. To determine the extent to which FPS's delegations of authority program meets select federal standards for effective program management, we analyzed FPS's 2012 Interim Plan and 2014 draft delegations of authority directive--which outline the processes FPS is currently using to identify delegations of authority granted when FPS was part of GSA and how FPS is supposed to review delegations of authority to determine if they should be granted, renewed or rescinded--against leading practices identified in applicable federal standards. We analyzed FPS's efforts to ensure the reliability of its delegations of authority data against internal controls specified in federal Standards for Internal Control in the Federal Government that provide reasonable assurance that an agency is operating efficiently and effectively. We also reviewed FPS's delegations of authority data as of October 30, 2014 to determine the federal departments and agencies with delegated authority, the type of delegation received (e.g., law enforcement or contract guard), the number of facilities specified in the delegation, and the status of FPS's review. We assessed the reliability of FPS's data by comparing it to source documents provided by FPS and interviewing FPS officials about the controls in place to ensure its reliability of FPS's delegation data, and, found the data to not be reliable as discussed in this report. GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009). documented, accurate, and credible. The extent to which the characteristics are met is determined by the extent to which the underlying leading practices for each characteristic are incorporated. The Cost Guide identifies 20 leading practices for developing a cost estimate that include underlying tasks associated with each of the four characteristics of reliable cost estimates. GAO developed the Cost Guide to assist government agencies as they develop, manage, and evaluate the costs of capital projects. Although FPS does not directly implement or oversee implementation of capital projects at federal facilities, the agency develops cost estimates as part of its delegation of authority review process (through its cost estimation model) and needs reliable cost estimates to inform DHS's decisions about whether to grant, renew, or rescind a delegation. As a result, most of the leading practices are applicable to the assessment of FPS's cost estimation model. However, we found that three leading practices and one of the underlying tasks associated with the leading practices were not applicable, in part, because we were assessing a cost model rather than a cost estimate for an acquisition. Specifically, since we did not evaluate a cost estimate, we did not assess (1) the consistency of the technical baseline with the data cost estimate, (2) any mistakes in the costs estimate, or (3) if the estimating technique was used appropriately in the cost estimate. In addition, we did not assess earned-value- management reporting as it was not applicable to FPS's delegation assessment process. For one leading practice, including all lifecycle costs, we adjusted the time period to reflect a shorter period that was sufficient for FPS's decision-making needs for a delegation of authority. We also interviewed officials from FPS and the Office of Management and Budget about FPS's process for reviewing delegations of authority. To determine whether FPS followed its Interim Plan in reviewing select delegations, we conducted case studies of the six requests for new or renewed delegations FPS reviewed from June 2012 through May 2014. These delegations involved the Department of the Interior's Hoover Dam, the Department of State's Enterprise Service Operations Center, the Department of Commerce's National Institute of Standards and Technology, the Federal Trade Commission, the Nuclear Regulatory Commission, and the Social Security Administration. For each of our six case studies, to the extent available, we reviewed the delegation of authority, cost and capabilities analyses, and interviewed officials from FPS's headquarters and 4 of its 11 regions. We selected these regions because the delegated facilities are located in these regions. We also interviewed officials from the delegated departments and agencies to obtain information on FPS's review of their delegations and how FPS's recommendations may have affected the protection of their facilities. Our case studies are not generalizable but provide insights into FPS's ability to follow its 2012 Interim Plan in delegations of authority. We conducted this performance audit from January 2014 to March 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We assessed FPS's Cost Estimation Model using the GAO Cost Guide's framework of the four characteristics--comprehensive, well-documented, accurate, and credible--associated with high-quality, reliable cost estimates. Specifically, we assessed FPS's cost model based on most of Table 3 the leading practices associated with these four characteristics.provides greater detail on our comparison of the model with the leading practices that are aligned with the four cost estimating characteristics. In addition to the contact named above, Tammy Conquest, Assistant Director; Karen Richey, Assistant Director; Jennifer DuBord; Sharon Dyer; Geoff Hamilton; Delwen Jones; Abishek Krupanand; Steve Martinez; and Kelly Rubin made key contributions to this report.

FPS's primary mission is to protect the almost 9,000 federal facilities that are held or leased by the General Services Administration. FPS also manages the Department of Homeland Security's (DHS) delegations of authority (delegations) program, which involves, among other things, reviewing requests by agencies to protect their own facilities instead of FPS and making recommendations to DHS about whether to grant, renew, or rescind such delegations. In response to direction in the conference report accompanying the Consolidated Appropriations Act, 2012, FPS prepared its Interim Plan that outlines FPS's process for reviewing existing and newly requested delegations. GAO was asked to review FPS's management of this program. This report covers (1) the extent to which FPS's delegations program meets select federal standards and (2) whether FPS has followed its Interim Plan in reviewing delegations. GAO reviewed FPS's 2012 Interim Plan and data on delegations; compared FPS's Interim Plan to federal standards; and analyzed the six requests for new or renewed delegations FPS reviewed from June 2012 through March 2014. The Federal Protective Service's (FPS) delegations of authority program does not fully meet applicable federal standards GAO identified for effective program management. FPS lacks reliable data, as called for by federal Standards for Internal Control, to accurately identify all the delegations FPS is responsible for managing and overseeing to ensure the protection of federal facilities. Specifically, of the 62 delegations of authority that FPS officials said were verified as active, GAO found that 12 had either expired or been rescinded. Standards for Internal Control state that federal agencies should have relevant, reliable, and timely information for decision-making and external- reporting purposes. FPS officials stated that poor recordkeeping contributed to the data's unreliability, but FPS has not established procedures to ensure data reliability. Without reliable data on delegations of authority, FPS will face challenges effectively managing this program. FPS's model for estimating the costs associated with a delegation--set forth in its 2012 Interim Plan --does not fully align with the relevant leading practices outlined in GAO's Cost Estimating and Assessment Guide . These leading practices help ensure reliable cost estimates that are comprehensive, well documented, accurate, and credible. GAO found that FPS's cost estimation model partially aligned with practices for producing comprehensive estimates and minimally aligned with those for producing well-documented and accurate estimates. Furthermore, the model does not align with practices for producing credible cost estimates because, among other things, it does not include a sensitivity analysis, which identifies a range of possible costs based on varying assumptions. Without fully aligning the cost model with leading practices, FPS faces limitations developing reliable cost estimates that support its delegations of authority recommendations. For five of the six agency requests for new or renewed delegations of authority that GAO analyzed, FPS did not conduct the required cost and security- capabilities analyses before making its recommendation to grant, renew, or rescind the delegation. The Interim Plan calls for these analyses to form the basis of FPS's recommendations. Specifically, FPS conducted the required analyses for only the delegation involving the Social Security Administration and did not conduct these analyses for the other five delegations involving facilities of the Departments of Commerce, Interior, and State; the Nuclear Regulatory Commission; and the Federal Trade Commission. According to FPS officials, they were not always able to obtain, from the agency requesting a delegation, comparable cost data to complete the cost model. FPS officials also acknowledged that FPS has yet to establish management controls to ensure that required analyses are conducted. Without these analyses, FPS does not have a sound basis to determine whether cost or security considerations support its delegations of authority recommendations. GAO recommends that the Secretary of DHS direct FPS (1) to improve the accuracy of its delegation data, (2) update its cost estimation model to align with leading practices, and (3) establish management controls to ensure that its staff conducts the required cost and capability analyses. DHS concurred with the recommendations.

Oversight of federally insured state-chartered banks is provided by state bank regulators and either the Federal Reserve System--for banks that are members of the Federal Reserve--or the Federal Deposit Insurance Corporation (FDIC)--for other state-chartered banks. National bank oversight is provided by the Office of the Comptroller of the Currency (OCC). As the deposit insurer, FDIC has back-up oversight authority for all FDIC-insured banks. This authority allows FDIC to examine potentially troubled institutions and take enforcement actions, even when it is not the institution's primary regulator. In addition to its authority over state-chartered member banks, the Federal Reserve oversees all BHCs. In accordance with a variety of federal laws and regulations, banks routinely provide federal bank regulators with reports containing information about their deposit and lending activities. These reports include the following: a quarterly financial report (call report), which is submitted to the primary an annual independent audit report (for banks with $500 million or more in assets), which is submitted to FDIC and relevant federal and state bank regulators; an annual summary of deposits report for each branch, which is submitted a statement of amounts required to be held as reserves, which is submitted to the Federal Reserve; and an annual report on home mortgage lending (for banks that originate, purchase, or receive applications for home purchase and home improvement loans and that have assets greater than $28 million in 1997), which is submitted to the bank's primary federal regulator. In addition, as of January 1997, revisions to the Community Reinvestment Act (CRA) interagency regulations require banks that have assets of $250 million or more, or banks that are affiliates of a BHC with assets of $1 billion or more, to report to their regulators some new data. These banks are required to annually report, by geographic location, the aggregate number and aggregate amount of small business and small farm lending loans originated or purchased, and the aggregate number and aggregate amount of community development loans originated or purchased. BHCs are also required to submit to the Federal Reserve quarterly financial reports (Y-9 reports) on the consolidated activities of their bank and nonbank subsidiaries. Federal bank regulators, along with other agencies, typically use the lending and deposit information gathered in these reports and special purpose reviews to carry out their oversight responsibilities. Congress gets information through a variety of means, including directly from bank regulators and also from the legislative support agencies including us, the Congressional Research Service (CRS), and the Congressional Budget Office (CBO). These support agencies, in turn, use the information gathered in these banking reports, along with other sources, to do various analyses for Congress. Parties other than federal regulators, such as industry analysts and community organizations, may also use call reports and Y-9 reports (both of which are publicly available) to produce state, regional, and national summaries of the types and overall dollar amounts of loans and deposits held by banks and BHCs. These parties also frequently use home mortgage-related lending reports to assess the availability of credit to various groups within a geographical area, such as a state. Because a state was the largest area within which a bank could expand, information collected at the bank level has been used by such parties to approximate bank loan and deposit activity within a state. To determine what information regulators collect from banks, we reviewed the laws and regulations pertaining to the requirements for banks and BHCs to report data on bank activities (focusing on loans and deposits). These laws and regulations consisted primarily of those authorizing federal bank regulators to conduct examinations, collect financial statement data, collect bank deposit information, and encourage banks to provide credit to the communities in which they operate. In addition, we obtained regulators' and others' views about whether interstate branching would pose new or different needs for information. We concentrated our review on information that is currently collected from banks and BHCs. We did not conduct an independent analysis to identify all of the information that regulators and Congress may need to execute their regulatory and oversight responsibilities. To obtain views on the effect that Riegle-Neal is likely to have on the usefulness of reported loan and deposit data, we held discussions with staff members at the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Dallas, and headquarters and field offices of FDIC and OCC. We also spoke with staff members at CBO and CRS in their roles as users of data for congressional oversight. In addition, we interviewed representatives of several community organizations (the National Community Reinvestment Coalition, the Center for Community Change, and the Association of Community Organizations for Reform Now). We did not attempt to identify all users of reported loan and deposit data. To determine whether there would likely be a material loss of information important to regulatory and congressional oversight of banks, we reviewed call, Y-9, Summary of Deposit, Home Mortgage Disclosure Act (HMDA) loan application register, and required reserve reports collected by the regulators pursuant to laws and regulations. We also reviewed the loan and deposit data the regulators make available to us as the investigative arm of Congress. We then reviewed in greater detail the loan and deposit information that regulators summarized by state, region, and nationwide. We conducted our work between March 1994 and November 1996 in Dallas and Washington, D.C. We provided a draft of this report to the heads of the Federal Reserve, FDIC, and OCC for their review and comment. We also provided the community organizations and other parties we contacted with the opportunity to comment on portions of the draft report that we attributed to them. The comments we received are discussed and evaluated on pages 12 to 14, and the written comments are reprinted in appendixes I and II. Our work was done in accordance with generally accepted government auditing standards. Regulators collect a variety of information about bank loan and deposit activities through reports filed by banks and BHCs. These reporting requirements were not affected by Riegle-Neal. In table 1, we briefly describe the loan reports and the information collected from them. Call reports and Y-9 reports are the primary sources of data that banks and BHCs provide to regulators. Both reports contain a summary of the entity's loan portfolio categorized by type of loan (e.g., real estate or consumer). The HMDA loan application register and the new CRA report on small business and small farm lending are to collect data, by geographic location, on specific categories of bank loans to assist the regulators in enforcing the federal fair lending laws. Unlike data from call reports and Y-9 reports, data from these reports are collected to assess a bank's compliance with federal fair lending laws and to assess the bank's performance in meeting the credit needs of its local community. In addition, the HMDA data are submitted only by banks engaged in originating home mortgage loans; banks that merely purchase loans are not required to submit HMDA data. In table 2, we describe the reports that banks and BHCs use to provide regulators with information about their deposits. Call reports again provide the greatest detail about a bank's total deposits because they provide a summary of a bank's total deposits by type (e.g., demand deposits). The Summary of Deposits report provides the most comprehensive information on bank deposits by location, but only provides information on the total bank deposits based on the branch in which the account is located. Additionally, these data are only collected yearly. The Required Reserve report provides more limited information on bank deposits. Although regulators and other interested parties have used call report data to produce state, regional, and national summaries of the types and overall dollar amounts of loans and deposits held by banks, the data reported have always had limitations in their ability to provide information about the geographical location of banking activity. In measuring loan activity, limitations have existed because the data used to compile call reports do not explicitly identify the geographic location of the borrower or the project being funded. As a result, questions exist as to how appropriate it has ever been to assume that the loans held by a bank were made (1) by a banking entity located in the same state in which the bank reporting the loan was chartered or (2) to a party living or doing business in the state where the bank reporting the loan was chartered. These limitations could become more apparent and more widespread once Riegle-Neal is implemented, since the activities reported by banks with interstate operations will clearly include activities in a number of states. According to regulatory officials, loan data reported in the call reports and Y-9 reports do not represent total bank lending in a particular state or region for the following reasons: A significant percentage of a bank's mortgage loans are sold in secondary markets through such entities as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Banks sometime transfer all, or a portion, of a loan to an affiliated bank or sell loans to unaffiliated banks. Banks make such transfers to diversify portfolios and to ensure compliance with legal lending limits. In addition, some BHCs have their bank subsidiaries transfer all loans of a certain type to one bank to better serve customers and reduce operating expenses. Banks that serve a multistate market (e.g., the metropolitan area of Washington, D.C.) may directly lend to out-of-state customers. Therefore, if a study were trying to determine the amount of loans made by banks to borrowers in a state or region, call report data alone, at least as currently collected and reported, could not answer the question. Researchers interested in studying the geographic distribution of loans noted such limitations before Riegle-Neal was considered. For such studies, data from the HMDA loan application register, and presumably the data to be collected on small business and small farm loans, may be more useful since they provide specific geographic information on borrowers. However, similar geographic information on a bank's entire loan portfolio is not available from these sources. Call report data on deposits do not identify the location of a bank's depositors, much as the loan data does not identify the location of a bank's borrowers. The Required Reserve report serves a specific bank oversight function, as previously described, and is not suited to providing detailed information about the types of deposits or the location of depositors. The most detailed information on the location of depositors is provided by the Summary of Deposits report. This report is the only one that identifies a bank's deposits by branch. However, regulators pointed out that even the Summary of Deposits report contains inherent limitations regarding the origin of a bank's deposits. For example, banks may purchase deposits in the national market; in this case, the reporting branch need not reflect either the depositor's home or business location. Therefore, while a state-by-state analysis of a bank's Summary of Deposits report identifies where deposits exist, it does not necessarily identify the location of the depositor and, thus, the location from which the funds come. In addition, unlike call report data, which are collected quarterly, the data in the Summary of Deposits report are collected yearly. To the extent that interstate branching becomes prevalent, the usefulness of information reported to bank regulators, which is currently used to compile banking data on a state-by-state basis, would become even more problematic. If BHCs consolidate their operations by merging multistate banking operations or if banks expand across state lines by opening or acquiring branches, call report information would increasingly encompass the loans and deposits of more than one state. Therefore, although the data collected will not change, the geographical information content of the data is likely to become less useful because the data are collected at the bank level rather than the branch level. While the usefulness of data collected at the bank level to provide information for state-by-state measures of banking activity--including monitoring the industry's geographic concentrations--may be affected by Riegle-Neal, it is unlikely to have a material effect on federal regulation or oversight for three reasons. First, as previously mentioned, the data reported on call reports have always had limitations from the standpoint of imparting geographic information about bank loans. Second, deposit data should continue to be provided at the branch level and, with the limitations noted, should provide some measure of state-by-state banking activity. Third, the most useful and detailed information about bank activities is attained through examinations. Regulators with primary supervisory responsibility still have this tool available, although those who rely solely on off-site information will not. Regulators use the information described in the previously mentioned reports to perform various off-site analyses of banks and BHCs, including (1) financial statements and financial trends, (2) fair lending practices, and (3) market concentrations of deposits. Additionally, bank regulators use call reports and Y-9 reports to assist them in planning, scoping, and conducting safety and soundness examinations or inspections, respectively. Data from these reports provide regulators with financial information about the institutions' activities and reported financial conditions. Analyses of the data provide insights about the institutions over time and compared with other institutions. To a lesser degree, regulators use the annual independent audit reports in planning safety and soundness examinations for those institutions required to have annual independent audits. Bank regulators are responsible for assessing compliance with various fair lending and consumer protection laws, including the CRA, and they rely, in part, on annual home mortgage-related lending reports to plan, scope, and conduct their compliance and CRA examinations. Likewise, the new small business and small farm loan report is likely to be used in those examinations. The other deposit and reserve reports are not routinely used by regulators in discharging their examination responsibilities, although the related information may be made available to them upon request. These reports are used primarily by FDIC and the Federal Reserve in monitoring institutions' deposit and reserve activities to assess insurance premiums and to determine that banks are maintaining the proper amount of reserves, respectively. When considering banks' applications for mergers and acquisitions, bank regulators and the Department of Justice also use the various reports--particularly the Summary of Deposits report and the home mortgage loan report--to assess any antitrust or fair lending implications. With respect to their antitrust review, bank regulators and Justice officials typically look to see if the new banking entity could create an undue concentration of loan or deposit activities in a particular market, which could impede fair and open competition among institutions. Regulatory staff told us that, although the data collected in the various reports are essential to effective off-site monitoring, regulatory actions are rarely, if ever, premised solely upon this information. Off-site information is to be supplemented by on-site examinations or visitations. For example, call reports, which are the most comprehensive and frequently used sources of publicly available information, typically provide regulators with indicators about an institution's activities and condition. However, the call reports must be supplemented with more detailed and explicit information about the institution's deposits, lending, and other investment activities. Similarly, the annual home mortgage loan report is used by the bank regulators as an initial indicator of a bank's performance under the fair lending and CRA laws and regulations, but assessments of the bank's lending practices involve detailed analyses and generally are supplemented by on-site examinations. Regulators recognize that call reports, as well as the other reports, can only provide indicators of an institution's activities and must be supplemented through examinations. While bank supervisors use call report data primarily for planning their on-site examinations, FDIC staff members told us that they use these data in their back-up oversight authority. In the past, FDIC staff members have analyzed call report data to identify patterns or trends in industry activity or within geographic areas, particularly those that may indicate a problem that could affect industry stability. Their research is important in identifying historical patterns or trends that can be used to project or anticipate potential bank losses, failures, or crises. FDIC staff members expressed concern that call report data are increasingly becoming less useful for these purposes as consolidation occurs, and they are concerned about further deterioration in the data's usefulness after Riegle-Neal is implemented. FDIC staff members are considering recommendations to change the call reports to require banks to report their loan and deposit activity by state. Representatives from financial institutions and industry trade groups told us that, on the basis of their past experience, they did not believe that interstate branching would materially affect the usefulness, for regulation or oversight purposes, of lending and deposit information currently collected by federal regulators. Specifically, none of these representatives thought that interstate branching would necessitate that federal bank regulators collect additional data to conduct CRA examinations. They pointed out that Riegle-Neal expands the CRA examination process to require separate state-by-state written evaluations, including a rating, for banks with interstate branches. The act also requires that separate written evaluations, including a rating, be prepared for branches located in multistate metropolitan areas. Finally, officials at the federal bank regulatory agencies stated that section 109 of Riegle-Neal requires their agencies to promulgate uniform regulations by June 1997 that prohibit banks with interstate branch networks from using their out-of-state branches simply to operate as deposit production offices (i.e., as offices that take deposits but do not make loans in their communities). On March 12, 1997, the agencies released for comment a proposal setting forth such regulations. Moreover, at least 1 year after a bank establishes or acquires an interstate branch(es), the appropriate federal banking agency should determine whether the bank is operating the branch(es) as a deposit production office. Representatives from consumer and community organizations did not necessarily believe that a material loss of information would result from interstate banking. However, they stated that to ensure there is no material loss of information necessary to oversee bank activities in an interstate branching environment, banks should be required to submit information on the origin of their loans and deposits. Some representatives suggested that this requirement should take the form of having banks submit call report data for each state in which they operate. In general, the representatives believed that regulators and Congress would better be able to carry out their regulatory and oversight functions if banks were required to submit information on loans by branch as they are required to do for deposits. They also pointed out that such data, by branch, would make it easier for their groups to monitor bank lending activities. As previously noted, many of these organizations had expressed similar concerns about the usefulness of call report data before Riegle-Neal was even considered because information regarding the geographical distribution of loans is one of the groups' particular concerns. Therefore, the implementation of Riegle-Neal did not give rise to their concern, but does heighten it. We provided a draft of this report to the Chairman of the Board of Governors, Federal Reserve System; the Chairman of the Federal Deposit Insurance Corporation; and the Comptroller of the Currency for their review and comment. We also provided the community organizations we contacted the opportunity to review and comment on a draft of this report. The Federal Reserve and the community organizations did not offer any comments on the draft report. However, the Comptroller of the Currency provided comments in a letter dated February 6, 1997, and the FDIC Chairman commented in a January 27, 1997, letter. The comment letters are reprinted in appendixes I and II. OCC generally agreed with our conclusions, especially given the call report limitations we described. OCC stated that it understood the potential value of more precise geographic information for researching and monitoring regional trends and the relationship between regional economic conditions and bank performance. However, OCC also recognized that reporting is not without its burdens and that proposals to increase reporting requirements must be considered carefully. FDIC expressed some concern with the draft report's conclusion, but did not disagree that the implementation of Riegle-Neal in and of itself will not cause a material loss of information. FDIC pointed out that for the last decade banks have expanded their lending beyond traditional geographic boundaries and that, to the extent this trend continues, the usefulness of institution-level data will continue to erode. FDIC's primary concern with our conclusion was that FDIC believes it does not place sufficient emphasis on the effects that interstate branching will have in accelerating this trend and eventually leading to what FDIC considers a material loss of information it uses for statistical and economic studies that assist FDIC in fulfilling its responsibilities. FDIC believes that its need for the geographic data being lost is greatest for large institutions that FDIC insures but does not supervise because these institutions are more likely to have lending exposures outside of their home states. Given FDIC's unique role and responsibility as deposit insurer, it believes the ongoing loss of geographic data is material to FDIC. In addition, FDIC believes that call report data are the best source of aggregate data, while on-site examinations are less useful for this purpose. However, FDIC acknowledges that, from a cost-benefit perspective, there is a question about what kinds and how much additional data could be justifiably collected--either in call reports or other regulatory reports--that would permit more effective off-site monitoring. FDIC also suggested that our conclusion was in conflict with our report on the bank oversight structure because in that report, we encouraged the use of off-site monitoring to better target and plan on-site examinations. FDIC believes our position in this current report (i.e., the best institution-level information is available through on-site investigation) contradicts our previous position. We understand why FDIC places more emphasis than other regulators on the effect Riegle-Neal may have in eroding the geographic content of call report data, given FDIC's responsibility to monitor institutions that it does not directly supervise. As deposit insurer, FDIC may have unique research-based information needs that other federal bank regulators do not have. However, while FDIC may need this type of information, we agree with both FDIC and OCC that this need must be balanced against the burdens additional reporting requirements could impose on the industry. Collectively, the bank regulators are in the best position to make such cost-benefit determinations. We do not believe our position in this report contradicts our earlier position on the value of off-site monitoring. Off-site monitoring provides regulators with useful indicators about a bank's activities and performance that are generally further analyzed through on-site examinations involving the review of more specific information. Regulators are not precluded from requesting information from banks, beyond the information that is reflected in call reports, to enhance their off-site monitoring as well as decisions about on-site examinations. We are sending copies of this report to the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Comptroller of the Currency, other members of the banking committees, other interested congressional committees, and other interested parties. We will also make copies available to others upon request. This report was prepared under the direction of Mark Gillen, Assistant Director, Financial Institutions and Markets Issues. Major contributors to this report are listed in appendix III. If there are any questions about this report, please contact me at (202) 512-8678. The following is GAO's comment on the Federal Deposit Insurance Corporation's letter dated January 27, 1997. Text was added to eliminate confusion about when FDIC must produce regulations and make determinations about deposit production offices. Jeanne Barger, Issue Area Manager John V. Kelly, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 legislative requirement, GAO reviewed how the interstate branching provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 are likely to affect the usefulness of the deposit and loan data collected and reported to federal regulators by the banking industry under statutory and regulatory requirements, focusing on whether modifications to such data requirements would help to ensure that the implementation of the act's interstate branching provisions does not result in material loss of information important to regulatory and congressional oversight of banks. GAO noted that: (1) to the extent that interstate branching becomes prevalent, call report data, as currently collected and reported, will become less useful for approximating bank loan and deposit activity within a state; (2) as bank holding companies (BHC) consolidate by merging multistate banking operations and as banks expand across state lines by opening or acquiring branches, call report information reported at the bank level will increasingly encompass the loans and deposits from more than one state; (3) however, accurately measuring loan and deposit activity by state was subject to limitations even before Riegle-Neal; (4) BHCs had already begun establishing interstate operations and creating regional booking centers for some of their activities and national markets have developed for certain bank products; (5) compared with the information that existed before it was enacted, the implementation of Riegle-Neal is unlikely to result in a material loss of information necessary to perform regulatory and congressional oversight for three reasons; (6) first, as previously mentioned, the usefulness of call report data to approximate bank loan or deposit activities within a state was already somewhat limited and has become increasingly so, but only in part due to Riegle-Neal; (7) second, sources of information collected at the branch level or by geographic location should not be affected by interstate branching; (8) for example, summary of deposits data should still be available to measure deposit activities that are booked in a particular state, although these data will not provide information on the geographic source of those deposits; (9) also, home mortgage loan data should be available as an indicator of mortgage loan activity in a geographic area; (10) finally, the most useful and detailed information about bank activities is attained through examinations; (11) regulators with primary supervisory responsibility still have this tool available, although those who rely solely on off-site information will not; and (12) for these reasons, at this time, there does not appear to be sufficient need to modify regulatory or statutory reporting requirements.

GAO is a key source of professional and objective information and analysis and, as such, plays a crucial role in supporting congressional decision making. For example, in fiscal year 2003, as in other years, the challenges that most urgently engaged the attention of the Congress helped define our priorities. Our work on issues such as the nation's ongoing battle against terrorism, Social Security and Medicare reform, the implementation of major education legislation, human capital transformations at selected federal agencies, and the security of key government information systems all helped congressional members and their staffs to develop new federal policies and programs and oversee ongoing ones. Moreover, the Congress and the executive agencies took a wide range of actions in fiscal year 2003 to improve government operations, reduce costs, or better target budget authority based on GAO's analyses and recommendations. In fiscal year 2003, GAO served the Congress and the American people by helping to identify steps to reduce improper payments and credit card fraud in government programs; restructure government and improve its processes and systems to maximize homeland security; prepare the financial markets to continue operations if terrorism update and strengthen government auditing standards; improve the administration of Medicare as it undergoes reform; encourage and help guide federal agency transformations; contribute to congressional oversight of the federal income tax system; identify human capital reforms needed at the Department of Defense, the Department of Homeland Security, and other federal agencies; raise the visibility of long-term financial commitments and imbalances in the federal budget; reduce security risks to information systems supporting the nation's critical infrastructures; oversee programs to protect the health and safety of today's workers; ensure the accountability of federal agencies through audits and serve as a model for other federal agencies by modernizing our approaches to managing and compensating our people. To ensure that we are well positioned to meet the Congress's future needs, we update our 6-year strategic plan every 2 years, consulting extensively during the update with our clients in the Congress and with other experts (see app. I for our strategic plan framework). The following table summarizes selected performance measures and targets for fiscal years 1999 through 2005. Highlights of our fiscal year 2003 accomplishments and their impact on the American public are shown in the following sections. Many of the benefits produced by our work can be quantified as dollar savings for the federal government (financial benefits), while others cannot (other benefits). Both types of benefits resulted from our efforts to provide information to the Congress that helped (1) improve services to the public, (2) provide information that resulted in statutory or regulatory changes, and (3) improve core business processes and advance governmentwide management reforms. In fiscal year 2003, our work generated $35.4 billion in financial benefits-- a $78 return on every dollar appropriated to GAO. The funds made available in response to our work may be used to reduce government expenditures or reallocated by the Congress to other priority areas. Nine accomplishments accounted for nearly $27.4 billion, or 77 percent, of our total financial benefits for fiscal year 2003. Six of these accomplishments totaled $25.1 billion. Table 2 lists selected major financial benefits in fiscal year 2003 and describes the work contributing to financial benefits over $500 million. Many of the benefits that flow to the American people from our work cannot be measured in dollar terms. During fiscal year 2003, we recorded a total of 1,043 other benefits--up from 607 in fiscal year 1999. As shown in appendix II, we documented instances where information we provided to the Congress resulted in statutory or regulatory changes, where federal agencies improved services to the public and where agencies improved core business processes or governmentwide reforms were advanced. These actions spanned the full spectrum of national issues, from securing information technology systems to improving the performance of state child welfare agencies. We helped improve services to the public by Strengthening the U.S. visa process as an antiterrorism tool. Our analysis of the U.S. visa-issuing process showed that the Department of State's visa operations were more focused on preventing illegal immigrants from obtaining nonimmigrant visas than on detecting potential terrorists. We recommended that State reassess its policies, consular staffing procedures, and training program. State has taken steps to adjust its policies and regulations concerning the screening of visa applicants and its staffing and training for consular officers. Enhancing quality of care in nursing homes. In a series of reports and testimonies since 1998, we found that, too often, residents of nursing homes were being harmed and that programs to oversee nursing home quality of care at the Centers for Medicare and Medicaid Services were not fully effective in identifying and reducing such problems. In 2003, we found a decline in the proportion of nursing homes that harmed residents but made additional recommendations to further improve care. Making key contributions to homeland security. Drawing on an extensive body of completed and ongoing work, we identified specific vulnerabilities and areas for improvement to protect aviation and surface transportation, chemical facilities, sea and land ports, financial markets, and radioactive sealed sources. In response to our recommendations, the Congress and cognizant agencies have undertaken specific steps to improve infrastructure security and improve the assessment of vulnerabilities. Improving compliance with seafood safety regulations. We reported that when Food and Drug Administration (FDA) inspectors identified serious violations at seafood processing firms, it took FDA 73 days on average, well above its 15-day target. Based on our recommendations, FDA now issues warning letters in about 20 days. We helped to change laws in the following ways: We highlighted the National Smallpox Vaccination program volunteers' concerns about losing income if they sustained injuries from an inoculation. As a result, the Smallpox Emergency Personnel Protection Act of 2003 (Pub. L. No. 108-20) provides benefits and other compensation to covered individuals injured in this way. We performed analyses that culminated in the enactment of the Postal Civil Service Retirement System Funding Reform Act of 2003 (Pub. L. No. 108-18), which reduced USPS's pension costs by an average of $3 billion per year over the next 5 years. The Congress directed that the first 3 years of savings be used to reduce USPS's debt and hold postage rates steady until fiscal 2006. We also helped to promote sound agency and governmentwide management by Encouraging and helping guide agency transformations. We highlighted federal entities whose missions and ways of doing business require modernized approaches, including the Postal Service and the Coast Guard. Among congressional actions taken to deal with modernization issues, the House Committee on Government Reform established a special panel on postal reform and oversight to work with the President's Commission on the Postal Service on recommendations for comprehensive postal reform. Our recommendations to the Coast Guard led to better reporting by the Coast Guard and laid the foundation for key revisions the agency intended to make to its strategic plan. Helping to advance major information technology modernizations. Our work has helped to strengthen the management of the complex multibillion-dollar information technology modernization program at the Internal Revenue Service (IRS) to improve operations, promote better service, and reduce costs. For example, IRS implemented several of our recommendations to improve software acquisition, enterprise architecture definition and implementation, and risk management and to better balance the pace and scope of the program with IRS's capacity to effectively manage it. Supporting controls over DOD's credit cards. In a series of reports and testimonies beginning in 2001, we highlighted pervasive weaknesses in DOD's overall credit card control environment, including the proliferation of credit cards and the lack of specific controls over its multibillion-dollar purchase and travel card programs. DOD has taken many actions to reduce its vulnerabilities in this area. While our primary focus is on improving government operations at the federal level, sometimes our work has an impact at the state and local levels. To the extent feasible, in conducting our audits and evaluations, we cooperate with state and local officials. At times, our work results will have local applications, and local officials will take advantage of our efforts. We are conducting a pilot to determine the feasibility of measuring the impact of our work on state and local governments. The following are examples we have collected during our pilot where our work is relevant for state and local government operations: Identity theft. Effective October 30, 1998, the Congress enacted the "Identity Theft and Assumption Deterrence Act of 1998" prohibiting the unlawful use of personal identifying information, such as names, Social Security numbers, and credit card numbers. GAO report GGD-98-100BR is mentioned prominently in the act's legislative history. Subsequently, a majority of states have enacted identity theft laws. Sponsors of some of these state enactments--Alaska, Florida, Illinois, Michigan, Pennsylvania, and Texas--mentioned the federal law and/or our report. For example, in 1999, Texas enacted SB 46, which is modeled after the federal law. Justice officials said that enactment of state identity theft laws has multijurisdictional benefits to all levels of law enforcement-- federal, state, and local. Pipeline safety. Our report GAO-RCED-00-128, Pipeline Safety: The Office of Pipeline Safety Is Changing How It Oversees the Pipeline Industry, found that the Department of Transportation's Office of Pipeline Safety was reducing its reliance on states to help oversee the safety of interstate pipelines. The report stated that allowing states to participate in this oversight could improve pipeline safety. As a result, the Office of Pipeline Safety modified its Interstate Pipeline Oversight Program for 2001-2002 to allow greater opportunities for state participation. Temporary Assistance for Needy Families Grant Program. We reported on key national and state labor market statistics and changes in the levels of cash assistance and employment activities in five selected states. We also highlighted the fact that the five states had faced severe fiscal challenges and had used reserve funds to augment their spending above the amount of their annual Temporary Assistance for Needy Families block grant from the federal government. Issued to coincide with the start of each new Congress, our high-risk update lists government programs and functions in need of special attention or transformation to ensure that the federal government functions in the most economical, efficient, and effective manner possible. This is especially important in light of the nation's large and growing long- term fiscal imbalance. Our latest report, released in January 2003, spotlights more than 20 troubled areas across government. Many of these areas involve essential government services, such as Medicare, housing programs, and postal service operations that directly affect the lives and well-being of the American people. Our high-risk program, which we began in 1990, includes five high-risk areas added in 2003: implementing and transforming the new Department of Homeland Security, modernizing federal disability programs, Pension Benefit Guaranty Corporation's (PBGC) single-employer pension insurance program. In fiscal year 2003, we also removed the high-risk designation from two programs: the Social Security Administration's Supplemental Security Income program, and Asset Forfeiture programs administered by the U.S. Departments of Justice and the Treasury. In fiscal 2003, we issued 208 reports and delivered 112 testimonies related to high-risk areas, and our related work resulted in financial benefits totaling almost $21 billion. Our sustained focus on high-risk problems also has helped the Congress enact a series of governmentwide reforms to strengthen financial management, improve information technology, and create a more results-oriented and accountable federal government. The President's Management Agenda for reforming the federal government mirrors many of the management challenges and program risks that we have reported on in our performance and accountability series and high- risk updates, including a governmentwide initiative to focus on strategic management of human capital. Following GAO's designation of federal real property as a high-risk issue, the Office of Management and Budget (OMB) has indicated its plans to add federal real property as a new program initiative under the President's Management Agenda. OMB recently issued an executive order on federal real property that addresses many of GAO's concerns, including the need to better emphasize the importance of government property to effective management. We have an ongoing dialog with OMB regarding the high-risk areas, and OMB is working with agency officials to address many of our high-risk areas. Some of these high-risk areas may require additional authorizing legislation as one element of addressing the problems. Our fiscal year 2003 high-risk list is shown in table 3. During fiscal year 2003 GAO executives testified at 189 congressional hearings--sometimes with very short notice--covering a wide range of complex issues. Testimony is one of our most important forms of communication with the Congress; the number of hearings at which we testify reflects, in part, the importance and value of our expertise and experience in various program areas and our assistance with congressional decision making. The following figure highlights, by GAO's three external strategic goals for serving the Congress, examples of issues on which we testified during fiscal year 2003. While the vast majority of our products--97 percent--were completed on time for our congressional clients and customers in fiscal year 2003, we slightly missed our target of providing 98 percent of them on the promised day. We track the percentage of our products that are delivered on the day we agreed to with our clients because it is critical that our work be done on time for it to be used by policymakers. Though our 97 percent timeliness rate was a percentage point improvement over our fiscal year 2002 result, it was still a percentage point below our goal. As a result, we are taking steps to improve our performance in the future by encouraging matrix management practices among the teams supporting various strategic goals and identifying early those teams that need additional resources to ensure the timely delivery of their products to our clients. The results of our work were possible, in part, because of the changes we have made to maximize the value of GAO. With the Congress's support, we have demonstrated that becoming world class does not require substantial staffing increases, but rather maximizing the efficient and effective use of the resources available to us. Since I came to GAO, we have developed a strategic plan, realigned our organizational structure and resources, and increased our outreach and service to our congressional clients. We have developed and revised a set of congressional protocols, developed agency and international protocols, and better refined our strategic and annual planning and reporting processes. We have worked with you to make changes in areas where we were facing longer-term challenges when I came to GAO, such as in the critical human capital, information technology, and physical security areas. We are grateful to the Congress for supporting our efforts through pending legislation that, if passed, would give us additional human capital flexibilities that will allow us, among other things, to move to an even more performance-based compensation system and help to better position GAO for the future. As part of our ongoing effort to ensure the quality of our work, this year a team of international auditors will perform a peer review of GAO's performance audit work issued in calendar year 2004. We continued our policy of proactive outreach to our congressional clients, the press, and the public to enhance the visibility of our products. On a daily basis we compile and publish a list of our current reports. This feature has more than 18,000 subscribers, up 3,000 from last year. We also produced an update of our video on GAO, "Impact 2003." Our external Web site continues to grow in popularity, having increased the number of hits in fiscal year 2003 to an average of 3.4 million per month, 1 million more per month than in fiscal year 2002. In addition, visitors to the site are downloading an average of 1.1 million files per month. As a result, demand for printed copies of our reports has dramatically declined, allowing us to phase out our internal printing capability. For the 17th consecutive year, GAO's financial statements have received an unqualified opinion from our independent auditors. We prepared our financial statements for fiscal year 2003 and the audit was completed a month earlier than last year and a year ahead of the accelerated schedule mandated by OMB. For a second year in a row, the Association of Government Accountants awarded us a certificate of excellence; this year the award was for the fiscal year 2002 annual performance and accountability report. Given our role as a key provider of information and analyses to the Congress, maintaining the right mix of technical knowledge and expertise as well as general analytical skills is vital to achieving our mission. Because we spend about 80 percent of our resources on our people, we need excellent human capital management to meet the expectations of the Congress and the nation. Accordingly, in the past few years, we have expanded our college recruiting and hiring program and focused our overall hiring efforts on selected skill needs identified during our workforce planning effort and to meet succession planning needs. For example, we identified and reached prospective graduates with the required skill sets and focused our intern program on attracting those students with the skill sets needed for our analyst positions. Our efforts in this area were recognized by Washingtonian magazine, which listed GAO as one of the "Great Places to Work" in its November 2003 issue. Continuing our efforts to promote the retention of staff with critical skills, we offered qualifying employees in their early years at GAO student loan repayments in exchange for their signed agreements to continue working at GAO for 3 years. We also have begun to better link compensation, performance, and results. In fiscal year 2002 and 2003, we implemented a new performance appraisal system for our analyst, attorney, and specialist staff that links performance to established competencies and results. We evaluated this system in fiscal year 2003 and identified and implemented several improvements, including conducting mandatory training for staff and managers on how to better understand and apply the performance standards, and determining appropriate compensation. We will implement a new competency based appraisal system, pay banding and a pay for performance system for our administrative professional and support services staff this fiscal year. To train our staff to meet the new competencies, we developed an outline for a new competency-based and role- and task-driven learning and development curriculum that identified needed core and elective courses and other learning resources. We also completed several key steps to improve the structure of our learning organization, including hiring a Chief Learning Officer and establishing a GAO Learning Board to guide our learning policy, to set specific learning priorities, and to oversee the implementation of a new training and development curriculum. We also drafted our first formal and comprehensive strategic plan for human capital to communicate both internally and externally our strategy for enhancing our standing as a model professional services organization, including how we plan to attract, retain, motivate, and reward a high- performing and top-quality workforce. We expect to publish the final plan this fiscal year. Our Employee Advisory Council is now a fully democratically elected body that advises GAO's senior executives on matters of interest to our staff. We also established a Human Capital Partnership Board to gather opinions of a cross section of our employees about upcoming initiatives and ongoing programs. The 15-member board will assist our Human Capital Office in hearing and understanding the perspectives of its customers--our staff. In addition, we will continue efforts to be ready to implement the new human capital authorities included in legislation currently pending before the Senate. This legislation, if passed, would give us more flexibility to deal with mandatory pay and related costs during tight budgetary times. Our resourceful management of information technology was recognized when we were named one of the "CIO (Chief Information Officer) 100" by CIO Magazine, recognizing excellence in managing our information technology (IT) resources through "creativity combined with a commitment to wring the most value from every IT dollar." We were one of three federal agencies named, selected from over 400 applicants, largely representing private sector firms. In particular, we were cited for excellence in asset management, staffing and sourcing, and building partnerships, and for implementing a "best practice"--staffing new projects through internal "help wanted" ads. We have expanded and enhanced the IT Enterprise Architecture program we began in fiscal year 2002. We formally established an Enterprise Architecture oversight group and steering committee to prioritize our IT business needs, provide strategic direction, and ensure linkage between our IT Enterprise Architecture and our capital investment process. We implemented a number of user friendly Web-based systems to improve our ability to obtain feedback from our congressional clients, facilitate access to our information for the external customer, and enhance productivity for the internal customer. Among the new and enhanced Web-based systems were an application to track and access General Counsel work by goal, team, a Web site on emerging trends and issues to provide information for our teams and offices as they consult with the Congress; and an automated tracking application for our staff to monitor the status of products to be published. In addition, we developed and released a system to automate an existing data collection and analysis process, greatly expanding our annual capacity to review DOD weapons systems programs. As a result, we were able to increase staff productivity and efficiency and enhance the information and services provided to the Congress. In the past, we were able to complete a review annually of eight DOD weapons systems programs. In fiscal year 2003 we reviewed 30 programs and reported on 26. Within the next year, that number will grow to 80 per year. We recognize the ongoing, ever present threat to our shared IT systems and information assets and continue to promote awareness of this threat, maintain vigilance, and develop practices that protect information assets, systems, and services. As part of our continuing emergency preparedness plan, we upgraded the level of telecommunications services between our disaster recovery site and headquarters, expanded our remote connectivity capability, and improved our response time and transmission speed. To further protect our data and resources, we drafted an update to our information systems security policy, issued network user policy statements, hardened our internal network security, expanded our intrusion detection capability, and addressed concerns raised during the most recent network vulnerability assessment. We plan to continue initiatives to ensure a secure environment, detect intruders in our systems, and recover in the event of a disaster. We are also continuing to make the investments necessary to enhance the safety and security of our staff, facilities, and other assets for the mutual benefit of GAO and the Congress. In addition, we plan to continue initiatives designed to further increase employees' productivity, facilitate knowledge sharing, and maximize the use of technology through tools available at the desktop and by reengineering the systems that support our business processes. On the basis of recommendations resulting from our physical security evaluation and threat assessment, we continue to implement initiatives to improve the security and safety of our building and personnel. In terms of the physical plant improvements, we upgraded the headquarters fire alarm system and installed a parallel emergency notification system. We completed a study of personal protective equipment, and based on the resulting decision paper, we have distributed escape hoods to GAO staff. We have also made a concerted effort to secure the perimeter and access to our building. Several security enhancements will be installed in fiscal year 2004, such as vehicle restraints at the garage ramps; ballistic-rated security guard booths; vehicle surveillance equipment at the garage entrances; and state-of-the-art electronic security comprising intrusion detection, access control, and closed-circuit surveillance systems. A team of international auditors, led by the Office of the Auditor General of Canada, will conduct a peer review for calendar year 2004 of our performance audit work. This entails reviewing our policies and internal controls to assess the compliance of GAO's work with government audit standards. The review team will provide GAO with management suggestions to improve our quality control systems and procedures. Peer reviews will be conducted every 3 years. GAO is requesting budget authority of $486 million for fiscal year 2005. The requested funding level will allow us to maintain our base authorized level of 3,269 full-time equivalent (FTE) staff to serve the Congress, maintain operational support at fiscal year 2004 levels, and continue efforts to enhance our business processes and systems. This fiscal year 2005 budget request represents a modest increase of 4.9 percent over our fiscal year 2004 projected operating level, primarily to fund mandatory pay and related costs and estimated inflationary increases. The requested increase reflects an offset of almost $5 million from nonrecurring fiscal year 2004 initiatives, including closure of our internal print plant, and $1 million in anticipated reimbursements from a planned audit of the Securities and Exchange Commission's (SEC) financial statements. Our requested fiscal year 2005 budget authority includes about $480 million in direct appropriations and authority to use $6 million in estimated revenue from reimbursable audit work and rental income. To achieve our strategic goals and objectives for serving the Congress, we must ensure that we have the appropriate human capital, fiscal, and other resources to carry out our responsibilities. Our fiscal year 2005 request would enable us to sustain needed investments to maximize the productivity of our workforce and to continue addressing key management challenges: human capital, and information and physical security. We will continue to take steps to "lead by example" within the federal government in these and other critical management areas. If the Congress wishes for GAO to conduct technology assessments, we are also requesting $545,000 to obtain four additional FTEs and contract assistance and expertise to establish a baseline technology assessment capability. This funding level would allow us to conduct one assessment annually and avoid an adverse impact on other high priority congressional work. We are grateful to the Congress for providing support and resources that have helped us in our quest to be a world class professional services organization. The funding we received in fiscal year 2004 is allowing us to conduct work that addressed many difficult issues confronting the nation. By providing professional, objective, and nonpartisan information and analyses, we help inform the Congress and executive branch agencies on key issues, and covered programs that continue to involve billions of dollars and touch millions of lives. I am proud of the outstanding contributions made by GAO employees as they work to serve the Congress and the American people. In keeping with my strong belief that the federal government needs to exercise fiscal discipline, our budget request for fiscal year 2005 is modest, but would maintain our ability to provide first class, effective, and efficient support to the Congress and the nation to meet 21st century challenges in these critical times. This concludes my statement. I would be pleased to answer any questions the Members of the Subcommittee may have. GAO Efforts That Helped to Change Laws and/or Regulations Consolidated Appropriations Resolution, 2003, Public Law 108-7. The law includes GAO's recommended language that the administration's competitive sourcing targets be based on considered research and sound analysis. Smallpox Emergency Personnel Protection Act of 2003, Public Law 108-20. GAO's report on the National Smallpox Vaccination program highlighted volunteers' concerns about losing income if they sustained injuries from an inoculation. This statute provides benefits and other compensation to covered individuals injured in this way. Postal Civil Service Retirement System Funding Reform Act of 2003, Public Law 108-18. Analyses performed by GAO and OPM culminated in the enactment of this law that reduces USPS's pension costs by an average of $3 billion per year over the next 5 years. The Congress directed that the first 3 years of savings be used to reduce USPS's debt and hold postage rates steady until fiscal 2006. Accountability of Tax Dollars Act of 2002, Public Law 107-289. A GAO survey of selected non-CFO Act agencies demonstrated the significance of audited financial statements in that community. GAO provided legislative language that requires 70 additional executive branch agencies to prepare and submit audited annual financial statements. Emergency Wartime Supplemental Appropriations Act, 2003, Public Law 108-11. GAO assisted congressional staff with drafting a provision that made available up to $64 million to the Corporation for National and Community Service to liquidate previously incurred obligations, provided that the Corporation reports overobligations in accordance with the requirements of the Antideficiency Act. Intelligence Authorization Act for Fiscal Year 2003, Public Law 107-306. GAO recommended that the Director of Central Intelligence report annually on foreign entities that may be using U. S. capital markets to finance the proliferation of weapons, including weapons of mass destruction, and this statute instituted a requirement to produce the report. GAO Efforts That Helped to Improve Services to the Public Strengthening the U.S. Visa Process as an Antiterrorism Tool. Our analysis of the U.S. visa-issuing process showed that the Department of State's visa operations were more focused on preventing illegal immigrants from obtaining nonimmigrant visas than on detecting potential terrorists. We recommended that State reassess its policies, consular staffing procedures, and training program. State has taken steps to adjust its policies and regulations concerning the screening of visa applicants and its staffing and training for consular officers. Enhancing Quality of Care in Nursing Homes. In a series of reports and testimonies since 1998, we found that, too often, residents of nursing homes were being harmed and that programs to oversee nursing home quality of care at the Centers for Medicare and Medicaid Services were not fully effective in identifying and reducing such problems. In 2003, we found a decline in the proportion of nursing homes that harmed residents but made additional recommendations to further improve care. Making Key Contributions to Homeland Security. Drawing upon an extensive body of completed and ongoing work, we identified specific vulnerabilities and areas for improvement to protect aviation and surface transportation, chemical facilities, sea and land ports, financial markets, and radioactive sealed sources. In response to our recommendations, the Congress and cognizant agencies have undertaken specific steps to improve infrastructure security and improve the assessment of vulnerabilities. Improving Compliance with Seafood Safety Regulations. We reported that when Food and Drug Administration (FDA) inspectors identified serious violations at seafood processing firms, it took FDA 73 days on average, well above its 15-day target. Based on our recommendations, FDA now issues warning letters in about 20 days. Strengthening Labor's Management of the Special Minimum Wage Program. Our review of this program resulted in more accurate measurement of program participation and noncompliance by employees and prevented inappropriate payment of wages below the minimum wage to workers with disabilities. Reducing National Security Risks Related to Sales of Excess DOD Property. We reported that DOD did not have systems and procedures in place to maintain visibility and control over 1.2 million chemical and biological protective suits and certain equipment that could be used to produce crude forms of anthrax. Unused suits (some of which were defective) and equipment were declared excess and sold over the Internet. DOD has taken steps to notify state and local responders who may have purchased defective suits. Also, DOD has taken action to restrict chemical-biological suits to DOD use only--an action that should eliminate the national security risk associated with sales of these sensitive military items. Lastly, DOD has suspended sales of the equipment in question pending the results of a risk assessment. GAO Efforts That Helped to Change Laws and/or Regulations Protecting the Retirement Security of Workers. We alerted the Congress to potential dangers threatening the pensions of millions of American workers and retirees. The pension insurance program's ability to protect workers' benefits is increasingly being threatened by long-term, structural weaknesses in the private-defined, pension benefit system. A comprehensive approach is needed to mitigate or eliminate the risks. Improving Mutual Fund Disclosures. To improve investor awareness of mutual fund fees and to increase price competition among funds, we identified alternatives for regulators to increase the usefulness of fee information disclosed to investors. Early in fiscal year 2003, the Securities and Exchange Commission issued proposed rules to enhance mutual fund fee disclosures using one of our recommended alternatives. GAO Efforts That Helped to Promote Sound Agency and Governmentwide Management Encouraging and Helping Guide Agency Transformations. We highlighted federal entities whose missions and ways of doing business require modernized approaches, including the Postal Service, and the Coast Guard. Among congressional actions taken to deal with modernization issues, the House Committee on Government Reform established a special panel on postal reform and oversight to work with the President's Commission on the Postal Service on recommendations for comprehensive postal reform. We also reported this year on the Coast Guard's ability to effectively carry out critical elements of its mission, including its homeland security responsibilities. We recommended that the Coast Guard develop a blueprint for targeting its resources to its various mission responsibilities and a better reporting mechanism for informing the Congress on its effectiveness. Our recommendations led to better reporting by the Coast Guard and laid the foundation for key revisions the agency intended to make to its strategic plan. Helping DOD Recognize and Address Business Modernization Challenges. Several times we have reported and testified on the challenges DOD faces in trying to successfully modernize about 2,300 business systems, and we made a series of recommendations aimed at establishing the modernization management capabilities needed to be successful in transforming the department. DOD has implemented some key architecture management capabilities, such as assigning a chief architect and creating a program office, as well as issuing the first version of its business enterprise architecture in May 2003. In addition, DOD has revised its system acquisition guidance. By implementing our recommendations, DOD is increasing the likelihood that its systems investments will support effective and efficient business operations and provide for timely and reliable information for decision making. Helping to Advance Major Information Technology Modernizations. Our work has helped to strengthen the management of the complex, multibillion-dollar information technology modernization program at the Internal Revenue Service (IRS) to improve operations, promote better service, and reduce costs. For example, IRS implemented several of our recommendations to improve software acquisition, enterprise architecture definition and implementation, and risk management and to better balance the pace and scope of the program with its capacity to effectively manage it. Improving Internal Controls and Accountability over Agency Purchases. Our work examining purchasing and property management practices at FAA identified several weaknesses in the specific controls and overall control environment that allowed millions of dollars of improper and wasteful purchases to occur. Such weaknesses also contributed to many instances of property items not being recorded in FAA's property management system, which allowed hundreds of lost or missing property items to go undetected. Acting on our findings, FAA established key positions to improve management oversight of certain purchasing and monitoring functions, revised its guidance to strengthen areas of weakness and to limit the allowability of certain expenditures, and recorded assets into its property management system that we identified as unrecorded. Strengthening Government Auditing Standards. Our publication of the Government Auditing Standards in June 2003 provides a framework for audits of federal programs and monies. This comes at a time of urgent need for integrity in the auditing profession and for transparency and accountability in the management of scarce resources in the government sector. The new revision of the standards strengthens audit requirements for identifying fraud, illegal acts, and noncompliance, and gives clear guidance to auditors as they contribute to a government that is efficient, effective, and accountable to the people. Supporting Controls over DOD's Credit Cards. In a series of reports and testimonies beginning in 2001, we highlighted pervasive weaknesses in DOD's overall credit card control environment, including the proliferation of credit cards and the lack of specific controls over its multibillion dollar purchase and travel card programs. We identified numerous cases of fraud, waste, and abuse and made 174 recommendations to improve DOD's credit card operations. DOD has taken many actions to reduce its vulnerabilities in this area. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. In the years ahead, its support to the Congress will likely prove even more critical because of the pressures created by the nation's large and growing long-term fiscal imbalance, which is driven primarily by known demographic and rising health care trends. These pressures will require the Congress to make tough choices regarding what the government does, how it does business, and who will do the government's business in the future. GAO's work covers virtually every area in which the federal government is or may become involved, anywhere in the world. Perhaps just as importantly, GAO's work sometimes leads it to sound the alarm over problems looming just beyond the horizon--such as the nation's enormous long-term fiscal challenges--and help policymakers address these challenges in a timely and informed manner. The Comptroller General presented testimony that focused on GAO's progress during his first five years in office. He highlighted GAO's (1) fiscal year 2003 performance and results; (2) efforts to maximize its effectiveness, responsiveness, and value; and (3) budget request for fiscal year 2005 to support the Congress and serve the American people. The funding GAO received in fiscal year 2003 allowed it to conduct work that addressed many of the difficult issues confronting the nation, including diverse and diffuse security threats, selected government transformation challenges, and the nation's long-term fiscal imbalance. Its work was also driven by changing demographic trends, which led it to focus on such areas as the quality of care in the nation's nursing homes and the risks to the government's single-employer pension insurance program. Importantly, in fiscal year 2003, GAO generated a $78 return for each $1 appropriated to the agency. With the Congress's support, GAO demonstrated that becoming world class does not require a substantial increase in the number of staff authorized, but rather maximizing the efficient and effective use of the resources available to it. During tight budget times, human capital flexibilities would allow GAO, among other things, more options to deal with mandatory pay and related costs. In keeping with the Comptroller's belief that the federal government needs to exercise a greater degree of fiscal discipline, GAO has kept its request to $486 million, an increase of only 4.9 percent over fiscal year 2004. In keeping with the Congress's intent, GAO is continuing its efforts to revamp its budget presentation to make the linkages between funding and program areas more clear. Hopefully in the future the Congress will be able to use such performance information to make tough choices on funding, thereby enabling it to avoid across-the-board reductions that penalize agencies that exercise fiscal discipline and generate high returns on investment and real results.

In 2009, the Federal Reserve centralized coin management across the 12 Reserve Banks and established national inventory targets. Previously, each Reserve Bank office set and managed its own inventory levels, resulting in varying levels of inventory held relative to demand. Under the centralized approach, the Federal Reserve's Cash Product Office (CPO) manages distribution of the coin inventory, orders new coins, and acts on behalf of the Reserve Banks in working with stakeholders, such as depository institutions. From 2008 through 2012, the combined inventory for pennies, nickels, dimes, and quarters decreased 43 percent, due, in part, to the centralized program. (See fig. 1.) In 2009, CPO also established national upper and lower inventory targets for pennies, nickels, dimes, and quarters to track and measure the coin inventory. CPO officials noted that these targets help meet their primary goal in managing the nation's coin inventory: ensuring a sufficient supply of all coin denominations to meet the public's demand. The upper national- inventory target serves as a signal for CPO to reduce future coin orders from the U.S. Mint to avoid the risk of approaching coin-storage capacity limits and the lower national-inventory target serves as a signal to CPO that there is a need to increase future coin orders to avoid shortages. We analyzed national inventory targets from 2009 to 2012 and found that in most cases these targets were met. In managing the coin inventory, CPO determines if coins should be transferred from an area with more coins than needed to fulfill demand or if additional coins should be ordered from the U.S. Mint. If there is an insufficient supply of coins to meet demand and transferring coins from another location would not be cost-effective, CPO orders new coins from the U.S. Mint based on its 2-month rolling forecast of expected demand. After submitting orders to the U.S. Mint, CPO may increase an order or defer shipments to later months based on updated information. In part to respond to these changes, each month the U.S. Mint produces a safety stock of coins. Our analysis found that in 2012, Reserve Bank costs related to coin management were approximately $62 million. To monitor costs related to currency management, including coins as well as notes, CPO officials said they review these costs at the national level because individual Reserve Banks may vary in their accounting for operational costs related to coins and notes. In October 2013, we found that from 2008 through 2012 total annual Reserve Bank currency-management costs increased by 23 percent at the national level. While cost information for coins and notes is available separately, CPO does not separately monitor the Reserve Bank's coin management costs. Looking specifically at coin management costs, which include direct and support costs, our analysis found that they increased by 69 percent from 2008 through 2012. More specifically, Reserve Bank direct costs for coin management increased by 45 percent during this period, about $5 million across the 28 offices, and support costs increased by 80 percent, about $19.6 million across these offices. Direct costs include personnel and equipment. CPO officials attributed the increase in coin management costs mainly to support costs. Support costs include utilities, facilities, and information technology as well as other local and national support services such as CPO's services. Although Reserve Bank coin management costs have risen since 2008, we found in October 2013 that CPO had not taken steps to systematically assess factors influencing direct and support costs related to coin management and assess whether opportunities exist to identify elements of its coin inventory management that could lead to cost savings or greater efficiencies across the Reserve Banks. We also found that the rates of increasing coin management costs differ across Reserve Banks. Specifically, using data provided by CPO on individual Reserve Banks' costs, from 2008 through 2012, coin management costs increased for all Reserve Banks, with the increases ranging from a low of 36 percent to a high of 116 percent. The Federal Reserve's 2012-2015 strategic plan includes an objective to use financial resources efficiently and effectively. In addition, according to a leading professional association that provides guidance on internal controls, as part of the internal control process, management should ensure that operations, such as managing an inventory, are efficient and cost effective, and this process includes monitoring costs and using this information to make operational adjustments. Without taking steps to identify and share cost-effective coin management practices across Reserve Banks, the Federal Reserve may be missing opportunities to support more efficient and effective use of Reserve Bank resources. To address this issue, in our October 2013 report we recommended that the Federal Reserve develop a process to assess the factors that have influenced increasing coin-operations costs and the large differences in costs across Reserve Banks and to use this information to identify practices that could lead to costs savings. We concluded that taking these actions may help the Federal Reserve identify ways to improve the cost-effectiveness of its coin management, potentially increasing the revenues that are available for the Federal Reserve System to transfer to the General Fund. The Federal Reserve generally agreed with the recommendations in our report, including the above recommendation as well as recommendations discussed below, and has developed a plan for addressing them. In response to the recommendations, the Federal Reserve also noted that it would define a new metric that measures the productivity of Reserve Bank coin operations and that will enable it to monitor coin costs and identify cost variations across Reserve Banks. We will continue to monitor the Federal Reserve's progress in addressing our recommendations. In October 2013, we found that the Federal Reserve, in managing the circulating-coin inventory, follows two of five key inventory management practices we identified and partially follows three. Establishing, documenting, and following these key practices contributes to a more effective inventory-management system. Specifically, the Federal Reserve follows key practices for collaboration and risk management and partially follows key practices for performance metrics, forecasting demand, and system optimization. For example, it follows the key practice of collaboration because it has established multiple mechanisms for sharing information related to coin inventory management with partner entities such as depository institutions. In addition, the Federal Reserve follows the risk management key practice because it has identified sources of potential disruptions, assessed the potential impact of risk, and developed plans to mitigate risk at multiple levels of its operations. In the key practice area of performance metrics, we found that the Federal Reserve has developed some metrics in the form of upper and lower national coin-inventory targets. However, it has not developed other goals or metrics to measure other aspects of its coin supply-chain management--such as costs. Characteristics of this key practice include agencies' identifying goals, establishing performance metrics, and measuring progress toward those goals. We concluded that establishing goals and metrics, such as those related to coin management costs, could aid the Federal Reserve in using information and resources to identify additional efficiencies. To address this issue, we recommended that CPO establish, document, and annually report to the Board performance goals and metrics for managing the circulating coin inventory and measure performance toward those goals and metrics. In its response, as noted previously, the Federal Reserve said that it planned to define a new metric that measures the productivity of the Reserve Bank's coin operations and use this metric to monitor coin costs. In the key practice area of forecasting demand, we found that the Federal Reserve forecasts future coin demand and uses this information to make decisions, but does not systematically track the accuracy of its monthly forecasts compared to the final coin orders. Our analysis of initial monthly CPO coin orders and final orders (actual U.S. Mint coin shipments) from 2009 through 2012 indicated that initial orders were consistently less than the final orders. A leading operations management industry association that offers professional certifications recommends that forecasting results must be continuously monitored and a mechanism should be in place to revise forecasting models as needed, and that if the forecast consistently exhibits a bias, the forecast should be adjusted to match the actual demand. We concluded that taking additional steps to assess forecast accuracy could help CPO identify the factors influencing forecast accuracy and then adjust forecasts to improve accuracy. To address this issue, we recommended that CPO establish and implement a process to assess the accuracy of forecasts for new coin orders and revise the forecasts as needed. In its response, the Federal Reserve reported that in addition to implementing a more formal program for assessing new coin order forecasts, CPO has begun working to refine the accuracy of its coin forecasts. In the key practice area of system optimization, we found that CPO does not fully use available information and resources to optimize system efficiencies within the supply chain. Specifically, it does not use the range of information available to establish and track performance metrics to measure progress. Better information related to forecast accuracy and costs--such as the types of information we recommended that the Federal Reserve develop--could aid CPO in using its information and resources to identify inefficiencies and further support the interrelated key practice of system optimization. For example, the U.S. Mint's monthly production of new coins could be more efficient with improvements to the accuracy of initial new-coin orders. In part to improve this linkage, we concluded that optimizing U.S. Mint's and individual Reserve Bank's operations could potentially contribute to reducing U.S. Mint or Federal Reserve costs related to circulating coins. To collect data and information on potential changes in the demand for currency, the Federal Reserve has conducted studies and outreach with groups such as depository institutions and merchants, and found a general consensus that the use of currency may decline slightly in the near term. According to the Federal Reserve, this expectation is due, in part, to an increase in alternative payment options (e.g., additional forms of electronic payments), but interrelated factors--such as technological change and economic conditions--make it difficult to predict long-term (i.e., 5 to 10 years) currency demand. According to many agency officials, stakeholders, and foreign government officials we spoke to, while there may be changes in the use of various types of payments in the coming years, the effect on currency demand is likely a gradual decline. Federal Reserve officials expect that their current procedures and approach to managing the coin and note inventory--including their forecasting and monitoring of the coin inventory targets discussed previously--will allow the agency to accommodate gradual shifts in demand. For example, to respond to increasing or decreasing demand for coins, CPO can decrease or increase coin orders from the U.S. Mint. According to the officials we met with, CPO is continually working to identify ways to streamline its processes to be more flexible and adaptable to changes, and CPO and the Reserve Banks have established plans and procedures, such as risk management plans, to address the effects associated with short-term, unexpected changes in coin and note demand. Experts we interviewed agree that well-managed currency systems are capable of handling major trend-based changes. According to inventory management experts we consulted, dependable forecasts-- that take both trends and cyclical demand changes into account--are key to effectively managing a supply chain. Therefore, we concluded in our October 2013 report that combining forecasts with continual tracking of demand and inventory levels should allow the Federal Reserve to be able to adapt to any major trend-based changes in coin and note demand. As discussed earlier, this makes accurate forecasting by the Federal Reserve even more important. While Federal Reserve officials we met with indicated their current processes should enable them to adapt to gradual changes in coin and note demand, a significant and unexpected change could affect the management of the coin and note inventories. CPO officials said that if a large decline in coin usage occurs, they would adapt their management of the inventory in response. For example, if demand for coins were to decrease suddenly, leaving too many coins in circulation, the Federal Reserve would first stop ordering new coins from the U.S. Mint and would then focus on storing the excess coin inventory. Coin attrition would reduce this inventory over time, and CPO officials anticipate that they would have sufficient storage capacity available to accommodate the excess coins. CPO officials told us that inventory levels would need to be well in excess of the existing targets before they would have an effect on storage capacity and related costs. While coin terminal operators did not expect a decrease in coin demand significant enough to exceed their storage capacity, additional storage could be needed to accommodate and store the coins returned by depository institutions to the Reserve Banks if there is a substantial decrease in public demand for coins. In 2010, CPO began to develop a long-term strategic framework to consider potential changes to currency demand over the next 5 to 10 years and how this change could affect CPO's operations. According to Federal Reserve officials, this framework is an internally focused effort to help share information, refine internal operations, and monitor trends. One component of this effort includes examining internal operations for distributing coins and processing notes as well as seeking to increase efficiency in these areas to better position the agency to adapt to future changes in demand. Conducting research is another component of this framework. For example, as part of a broader effort to look at trends in various payment types, one Reserve Bank is examining the detailed spending habits of a selection of consumers, who were asked to document their transactions and payment decisions over a period of time in a shopping "diary." Because determining how much of the currency in circulation is being used for transactions is difficult, this type of study may help officials better understand currency use in the United States. Australian, Austrian, and Canadian officials we interviewed for our 2013 report were also exploring the potential impact of alternative payment technologies and collecting new data to inform research efforts. For example, Austrian and Canadian officials have also conducted diary studies to better understand individuals' use of various payment options. Collecting detailed consumer-payment information through these types of studies may help officials better understand consumers' payment and currency management habits. In conclusion, the Federal Reserve has taken steps to standardize its management of the circulating-coin inventory from a national perspective, steps that have led to improvements such as reductions in national coin inventories. The actions that it has planned to address our recommendations could potentially contribute to reducing federal costs related to circulating coins, a reduction that could increase the amount of money returned to the General Fund. While the Federal Reserve has a framework that it believes can adapt to expected gradual changes in coin demand, a significant and unexpected decrease in demand could lead to increased storage needs. Chairman Campbell, Ranking Member Clay, and members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions at this time. For further information on this testimony, please contact Lorelei St. James, 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 the work this testimony is based on include Teresa Spisak and John Shumann (Assistant Directors); Maria Wallace; Amy Abramowitz; Lawrance Evans, Jr.; David Hooper; Delwen Jones; Sara Ann Moessbauer; Colleen Moffatt Kimer; and Josh Ormond. 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.

Efficiently managing the nation's inventory of circulating coins helps to ensure that the coin supply meets the public's demand while avoiding unnecessary production and storage costs. This testimony is based on GAO's October 2013 report on the Federal Reserve's management of the circulating-coin inventory. It addresses (1) how the Federal Reserve manages the circulating coin inventory and the related costs, (2) the extent to which the Federal Reserve follows key practices in managing the circulating-coin inventory, and (3) actions taken to respond to potential changes in demand for currency (coins and notes). In 2009, the Federal Reserve centralized coin management across the 12 Reserve Banks and established national inventory targets to track and measure the coin inventory. However, based on GAO's analysis of Federal Reserve data, from 2008 to 2012, total annual Reserve Bank coin-management costs increased by 69 percent, and more specifically, costs at individual Reserve Banks increased at rates ranging from 36 percent to 116 percent. GAO found in October 2013 that the Federal Reserve did not monitor coin management costs by each Reserve Bank--instead focusing on combined national coin and note costs--thus missing potential opportunities to improve the cost-effectiveness of coin-related operations. Furthermore, the agency had not taken steps to systematically assess factors influencing coin management costs and identify practices that could lead to cost savings. In managing the circulating-coin inventory, the Federal Reserve followed two of five key inventory management practices GAO identified and partially followed three. For example, the agency followed the key practice of collaboration because it has established multiple mechanisms for sharing information related to coin inventory management with partner entities such as depository institutions. The Federal Reserve partially followed the key practice of performance metrics, which involves identifying goals, establishing performance metrics, and measuring progress toward goals. While the Federal Reserve had developed some performance metrics of upper and lower national coin-inventory targets, it had not developed goals or metrics to measure other aspects of its coin supply-chain management, such as costs. Establishing goals and metrics, such as those related to coin management costs, could aid the Federal Reserve in using information and resources to identify additional efficiencies. To collect data and information on potential changes in the demand for currency (coins and notes), the Federal Reserve has conducted studies and outreach with groups such as depository institutions and merchants, and found a general consensus that the use of currency may decline slightly in the near term. This expectation is due, in part, to an increase in alternative payment options (e.g., additional forms of electronic payments), but interrelated factors--such as technological change and economic conditions--make it difficult to predict long-term currency demand. In 2010, the Federal Reserve began to develop a long-term strategic framework to consider potential changes to currency demand over the next 5 to 10 years and how this change could affect operations. This effort includes, among other things, examining internal operations for distributing coins and processing notes as well as conducting research into the use of payment types to understand currency use in the United States to better position the agency to adapt to future changes in demand. GAO's October 2013 report included several recommendations to the Federal Reserve to ensure the efficient management of the coin inventory and potentially to reduce costs. These included recommendations (1) to develop a process to assess factors influencing coin operations costs and identify practices that could lead to cost-savings and (2) to establish additional performance goals and metrics relevant to coin inventory management. The Federal Reserve generally agreed with the report's recommendations and, in response, has developed a plan for addressing them.

DOE has numerous contractor-operated facilities that carry out the programs and missions of the Department. Much of the work conducted at these facilities is unclassified and nonsensitive and can be, and is, openly discussed and shared with researchers and others throughout the world. However, DOE's facilities also conduct some of the nation's most sensitive activities, including designing, producing, and maintaining the nation's nuclear weapons; conducting efforts for other military or national security applications; and performing research and development in advanced technologies for potential defense and commercial applications. Security concerns and problems have existed since these facilities were created. The Los Alamos National Laboratory in New Mexico developed the first nuclear weapons during the Manhattan Project in the 1940s; however, it was also the target of espionage during that decade as the then Soviet Union obtained key nuclear weapons information from the laboratory. In the 1960s, significant amounts of highly enriched uranium--a key nuclear weapons material --was discovered to be missing from a private facility under the jurisdiction of the Atomic Energy Commission, a predecessor to DOE. It is widely believed that in the early 1980s, China obtained information on neutron bomb design from the Lawrence Livermore National Laboratory in California. Most recently, two incidents have occurred at Los Alamos in which laboratory employees are believed to have provided classified information to China. In one situation, a laboratory employee admitted to providing China classified information on a technology used to conduct nuclear weapons development and testing. In the other situation, which occurred earlier this year, DOE disclosed that it had evidence that indicated China obtained information on this nation's most advanced nuclear warhead and had used that information to develop its own smaller, more deliverable nuclear weapons. A laboratory employee has been fired as a result of recent investigations into how this information was obtained by China; however, no charges have yet been filed. While the recent incidents at Los Alamos have been receiving national attention, these are only the most recent examples of problems with DOE's security systems. For nearly 20 years, we have issued numerous reports on a wide range of DOE security programs designed to protect nuclear weapons-related and other sensitive information and material. These reports have included nearly 50 recommendations for improving programs for controlling foreign visitor access, protecting classified and sensitive information, maintaining physical security over facilities and property, ensuring the trustworthiness of employees, and accounting for nuclear materials. While DOE has often agreed to take corrective actions, we have found that the implementation has often not been successful and that problems recur over the years. I would like to highlight some of the security problems identified in these reports. Thousands of foreign nationals visit DOE facilities each year, including the three laboratories--Lawrence Livermore National Laboratory in California and the Los Alamos National Laboratory and the Sandia National Laboratories in New Mexico--that are responsible for designing and maintaining the nation's nuclear weapons. These visits occur to stimulate the exchange of ideas, promote cooperation, and enhance research efforts in unclassified areas and subjects. However, allowing foreign nationals into the weapons laboratories is not without risk, as this allows foreign nationals direct and possibly long-term access to employees with knowledge of nuclear weapons and other sensitive information. Consequently, DOE has had procedures to control these visits as well as other lines of defense--such as access controls and counterintelligence programs--to protect its information and technology from loss to foreign visitors. In 1988, we reported that significant weaknesses exist in DOE's controls over foreign visitors to these laboratories. First, required background checks were performed for fewer than 10 percent of the visitors from sensitive countries prior to their visit. As a result, visitors with questionable backgrounds--including connections with foreign intelligence services--obtained access to the laboratories without DOE's knowledge. Second, DOE and the laboratories were not always aware of visits that involved topics, such as isotope separation and inertial confinement fusion, that DOE considers sensitive because they have the potential to enhance nuclear weapons capability, lead to proliferation, or reveal other advanced technologies. Third, internal controls over the foreign visitor program were ineffective. Visits were occurring without authorized approvals, security plans detailing how the visits would be controlled were not prepared, and DOE was not notified of visits. Because DOE was not notified of the visits, it was unaware of the extent of foreign visitors to the laboratories. At that time, DOE acknowledged problems with its controls over foreign visitors and subsequently set out to resolve these problems. Among other things, DOE revised its foreign visitor controls, expanded background check requirements, established an Office of Counterintelligence at DOE headquarters, and created an integrated computer network for obtaining and disseminating data on foreign visitors. However, at the same time the number of foreign visitors continued to grow. Between the period of the late-1980s to the mid-1990s, the annual number of foreign visitors increased from about 3,800 to 6,400 per year--nearly 70 percent --and those from sensitive countries increased from about 500 to over 1,800 per year--more than 250 percent. We again examined the controls over foreign visitors and reported in 1997 that most of the problems with these controls persist. We found that revised procedures for obtaining background checks had not been effectively implemented and that at two facilities, background checks were being conducted on only 5 percent of visitors from all sensitive countries and on less than 2 percent of the visitors from China. We also found that visits were still occurring that may involve sensitive topics without DOE's knowledge. Moreover, other lines of defense were not working effectively. Security controls over foreign visitors did not preclude them from obtaining access to sensitive information. For example, Los Alamos allowed unescorted after-hours access to controlled areas to preserve what one official described as an open "campus atmosphere." Evaluations of the controls in areas most frequented by foreign visitors had not been conducted. Additionally, we found that the counterintelligence programs for mitigating the threat posed by foreign visitors needed improvements. These programs lacked comprehensive threat assessments, which are needed to identify the threats against DOE and the facilities most at risk, and lacked performance measures to gauge the effectiveness of these programs in neutralizing or deterring foreign espionage efforts. Without these tools, the counterintelligence programs lacked key data on threats to the facilities and on how well the facilities were protected against these threats. Information security involves protecting classified and/or sensitive information from inappropriate disclosure. We have found problems with information security at the nuclear weapons laboratories that could involve the loss of classified information and/or assist foreign nuclear weapons capability. For example, in February 1991, we reported that the Lawrence Livermore National Laboratory was unable to locate or determine the disposition of over 12,000 secret documents. These documents covered a wide range of topics, including nuclear weapons design. The laboratory conducted a search and located about 2,000 of these documents but did not conduct an assessment of the potential that the documents still missing compromised national security. We also found that DOE had not provided adequate oversight of the laboratory's classified document control program. Although the laboratory's classified document controls were evaluated annually, the evaluations were limited in scope and failed to identify that documents were missing. In 1987 and 1989, we reported that DOE had inadequate controls over unclassified but sensitive information that could assist foreign nuclear weapons programs. Specifically, we found that countries--such as China, India, Iraq, and Pakistan--that pose a proliferation or security risk routinely obtain reprocessing and nuclear weapon-related information from DOE. We also found that DOE had transferred to other countries information appearing to meet the definition of sensitive nuclear technology, which requires export controls. Further, we found that DOE placed no restrictions on foreign nationals' involvement in reprocessing research at colleges and universities. In the 1990s, we continued to raise concerns. In 1991, we reported that DOE and its weapons laboratories were not complying with regulations designed to control the risk of weapons technology or material being transferred to foreign countries having ownership, control, or influence over U.S. companies performing classified work for DOE. We estimated that about 98 percent of the classified contracts awarded at the weapons laboratories during a 30-month period that were subject to such regulations did not fully comply with those regulations. As recently as February of this year, we reported on information security problems in DOE's Initiatives for Proliferation Prevention with Russia.Under these initiatives, DOE may have provided defense-related information to Russian weapons scientists--an activity that could negatively affect U.S. national security. We reviewed 79 projects funded by DOE under this program and found nine to have dual-use implications--that is, both military and civilian applications--such as improving aircraft protective coating materials, enhancing communication capabilities among Russia's closed nuclear cities, and improving metals that could be used in military aircraft engines. We note that the Department of Commerce has also recently raised concerns about nuclear-related exports to Russia from at least one DOE facility. Commerce notified Los Alamos in January 1999 that equipment the laboratory sent to nuclear facilities in Russia required export licenses and that the laboratory may be facing civil charges for not obtaining the required licenses. Physical security controls involve the protection, primarily through security personnel and fences, of facilities and property. In 1991, we reported that security personnel were unable to demonstrate basic skills such as the apprehension and arrest of individuals who could represent a security threat. Prior to that report, in 1990, we reported that weaknesses were occurring with security personnel, as some security personnel could not appropriately handcuff, search, or arrest intruders or shoot accurately. For example, we found that at the Los Alamos National Laboratory, 78 percent of the security personnel failed a test of required skills. Of the 54-member guard force, 42 failed to demonstrate adequate skill in using weapons, using a baton, or apprehending a person threatening the facility's security. Some failed more than one skill test. We also found that many Los Alamos' training records for security personnel were missing, incomplete, undated, changed, or unsigned. Without accurate and complete training records, DOE could not demonstrate that security personnel are properly trained to protect the facility. Problems we have identified were not only with keeping threats out of the facilities, but also with keeping property in. For example, we reported in 1990 that the Lawrence Livermore National Laboratory could not locate about 16 percent of its inventory of government equipment, including video and photographic equipment as well as computers and computer-related equipment. When we returned in 1991 to revisit this problem, we found that only about 3 percent of the missing equipment had been found; moreover, the laboratory's accountability controls over the equipment were weaker than in the prior year. We also found that DOE's oversight of the situation was inadequate and that its property control policies were incomplete. We found similar problems at DOE's Rocky Flats Plant in 1994 where property worth millions of dollars was missing, such as forklifts and a semi-trailer. Eventually, property worth almost $21 million was written off. Other problems in controlling sensitive equipment have been identified, such as disposing of usable nuclear-related equipment, that could pose a proliferation risk. For example, in 1993, DOE sold 57 different components of nuclear fuel reprocessing equipment and associated design documents, including blueprints, to an Idaho salvage dealer. DOE subsequently determined that the equipment and documents could be useful to a group or country with nuclear material to process, and that the equipment could significantly shorten the time necessary to develop and implement a nuclear materials reprocessing operation. This incident resulted from a lack of vigilance at all levels for the potential impacts of releasing sensitive equipment and information to the public, and DOE conceded that system breakdowns of this type could have severe consequences in other similar situations where the equipment and documents may be extremely sensitive. DOE's personnel security clearance program is intended to provide assurance that personnel with access to classified material and information are trustworthy. We have found numerous problems in this area, dating back to the early 1980s. In 1987, and again in 1988, we found that DOE headquarters and some field offices were taking too long to conduct security investigations. We found that the delays in investigations lowered productivity, increased costs, and were a security concern. We also found that DOE's security clearance database was inaccurate. Clearance files at two field offices contained about 4,600 clearances that should have been terminated and over 600 employees at the Los Alamos laboratory had clearance badges, but did not have active clearances listed in the files. In other cases, the files contained inaccurate data, such as incorrect clearance levels and names. We followed DOE's efforts to remedy these problems, and by 1993, DOE had greatly reduced its backlog of investigations. However, some DOE contractors were not verifying information on prospective employees such as education, personal references, previous employment, and credit and law enforcement records. Material accountability relates to the protection of special nuclear material such as enriched uranium and plutonium. In 1991, we found that DOE facilities were not properly measuring, storing, and verifying quantities of nuclear materials. Without proper accounting for nuclear materials, missing quantities are more difficult to detect. We also found that DOE facilities were not complying with a rule requiring that two people always be present when nuclear material is being accessed or used. This rule is designed to preclude a single individual from having access to and diverting nuclear material without detection. In 1994 and 1995, we reported on DOE's efforts to develop a nuclear material tracking system for monitoring nuclear materials exported to foreign countries. A nuclear tracking system is important to protect nuclear materials from loss, theft, or diversion. In 1994, we reported that the existing system was not able to track all exported nuclear materials and equipment; moreover, DOE had not adequately planned the replacement system. We recommended activities that we believed were necessary to ensure that the new system would be successful. In 1995, we found that DOE had not implemented our recommendations and had no plans to do so. We also found that the system still had development risks. DOE was not adequately addressing these risks and had no plans to conduct acceptance testing, and as a result of these problems, it had no assurance that the system would ever perform as intended. Our concerns were justified, as 3 months after the new tracking system began operating, the technical committee overseeing this system concluded that it faced a high probability of failure and that the system should not be used. As you can see, Mr. Chairman, our work over the years has identified a wide variety of specific security problems at DOE facilities. While each individual security problem is a concern, when looked at collectively over an extended period of time, a more serious situation becomes apparent that stems from systemic causes. In our view, there are two overall systemic causes of the security problems. First, there has been a longstanding lack of attention and/or priority given to security matters by DOE managers and its contractors. Second, and probably most importantly, there is a serious lack of accountability among DOE and its contractors for their actions. These two causes are interrelated and not easily corrected. The lack of attention and priority given by DOE management and its contractors to security matters can be seen in many areas. One area is its long-term commitment to improving security. For example, in response to our 1988 report on foreign visitors, DOE required more background checks be obtained. However, 6 years later, it granted Los Alamos and Sandia exemptions to this requirement, and as a result, few background checks were conducted at those facilities. Also in response to our 1988 report, DOE brought in FBI personnel to assist its counterintelligence programs. However, the FBI eventually withdrew its personnel in the early 1990s because of resistance within DOE to implementing the measures the FBI staff believed necessary to improve security. We note with interest that in response to the current concerns with foreign visitors and other espionage threats against DOE facilities, the FBI is again being brought in to direct DOE's counterintelligence program. The lack of attention to security matters can be seen in other ways as well. In 1996, when foreign visitors were coming in increasing numbers to the laboratory, Los Alamos funded only 1.1 staff years for its counterintelligence program. Essentially, one person had to monitor not only thousands of visitors to the laboratory but also monitor over 1,000 visits made by laboratory scientists overseas. This problem was not isolated to Los Alamos; funding for counterintelligence activities at DOE facilities during the mid-1990s could only be considered minimal. Prior to fiscal year 1997, DOE provided no direct funding for counterintelligence programs at its facilities. Consequently, at eight high-risk facilities, counterintelligence program funding was obtained from overhead accounts and totaled only $1.4 million and 15 staff. Resources were inadequate in other areas. In 1992, we reported that safeguard and security plans and vulnerability assessments for many of DOE's sensitive facilities were almost 2 years overdue because, among other reasons, DOE had not provided sufficient staff to get the job done. These plans and assessments are important in identifying threats to the facilities as well as devising countermeasures to the threats. In our view, not providing sufficient resources to these important activities indicates that security is not a top priority. This problem is not new. We reported in 1980 and again in 1982 that funding for security has low priority and little visibility. Earlier I mentioned missing classified documents at Lawrence Livermore Laboratory. In response to that report, both DOE and laboratory officials showed little concern for the seriousness of the situation and told us that they believed the missing documents were the result of administrative error, such as inaccurate record keeping and not theft. Although DOE is required to conduct an assessment of the missing documents' potential for compromising national security, at the time of our report DOE did not plan to do this for over 1 year after we reported the documents missing. Similarly, security problems identified by DOE's own internal security oversight staff often go unresolved, even today. For example, issues related to the inadequate separation of classified and unclassified computer networks were identified at Los Alamos in 1988, 1992, and 1994. This problem was only partially corrected in 1997, as classified information was discovered on Los Alamos' unclassified computer network in 1998. We found in 1991 that deficiencies DOE identified as early as 1985 at six facilities had not been corrected by 1990 because DOE did not have a systematic method to track corrective actions taken on its own security inspections. The low priority given security matters is underscored by how DOE manages its contractors. DOE's contract with the University of California for managing its Los Alamos and Lawrence Livermore national laboratories contain specific measures for evaluating the university's performance. These measures are reviewed annually by DOE and should reflect the most important activities of the contractor. However, none of the 102 measures in the Los Alamos contract or the 86 measures in the Lawrence Livermore contract relate to counterintelligence. We reported in 1997 that DOE had not developed measures for evaluating the laboratories' counterintelligence activities, and DOE told us it was considering amending its contracts to address this problem. Performance measures for counterintelligence activities are still not in its contracts for these two laboratories. The contracts do contain a related measure, for safeguarding classified documents and materials from unauthorized persons, but this measure represents less than 1 percent of the contractor's total score. Safeguards and security performance measures in general account for only about 5 percent of the university's performance evaluations for the two laboratories. The low priority afforded security matters may account for the low rating DOE has just given nuclear weapons facilities in its latest Annual Report on Safeguards and Security. Two weapons laboratories--Los Alamos and Lawrence Livermore--received a rating of "marginal" for 1997 and 1998. In its annual evaluation of Los Alamos' overall performance, however, DOE rated the laboratory as "excellent" in safeguards and security, even though the laboratory reported 45 classified matter compromises and infractions for the year. The previous 3-year rolling average was 20. DOE explained that the overall excellent score was justified based on Los Alamos' performance in many different aspects of safeguards and security. For future contracts, a new DOE policy will enable the Department to withhold a laboratory's full fee for catastrophic events, such as a loss of control over classified material. We recommended as far back as 1990 that DOE should withhold a contractor's fee for failing to fix security problems on a timely basis. Both laboratories have been managed by the University of California since their inception without recompeting these contracts, making them among the longest-running contracts in the DOE complex. In the final analysis, security problems reflect a lack of accountability. The well-documented history of security lapses in the nuclear weapons complex show that DOE is not holding its contractors accountable for meeting all of its important responsibilities. Furthermore, DOE leadership is not holding its program managers accountable for making sure contractors do their jobs. Achieving accountability in DOE is made more difficult by its complex organizational structure. Past advisory groups and internal DOE studies have often reported on DOE's complex organizational structure and the problems in accountability that result from unclear chains of command among headquarters, field offices, and contractors. For example The FBI, which examined DOE's counterintelligence activities in 1997, noted that there is a gap between authority and responsibility, particularly when national interests compete with specialized interests of the academic or corporate management that operate the laboratories. Citing the laboratories' autonomy granted by DOE, the FBI found that this autonomy has made national guidance, oversight, and accountability of the laboratories' counterintelligence programs arduous and inefficient. A 1997 report by the Institute for Defense Analyses cited serious flaws in DOE's organizational structure. Noting long-standing concerns in DOE about how best to define the relationships between field offices and the headquarters program offices that sponsor work, the Institute concluded that "the overall picture that emerges is one of considerable confusion over vertical relationships and the roles of line and staff officials." As a consequence of DOE's complex structure, the Institute reported that unclear chains of command led to the weak integration of programs and functions across the Department, and confusion over the difference between line and staff roles. A 1997 DOE internal report stated that "lack of clarity, inconsistency, and variability in the relationship between headquarters management and field organizations has been a longstanding criticism of DOE operations . . . . This is particularly true in situations when several headquarters programs fund activities at laboratories. . . ." DOE's Laboratory Operations Board also reported in 1997 on DOE's organizational problems, noting that there were inefficiencies due to DOE's complicated management structure. The Board recommended that DOE undertake a major effort to rationalize and simplify its headquarters and field management structure to clarify roles and responsibilities. DOE's complex organization stems from the multiple levels of reporting that exist between contractors, field offices, and headquarters program offices. Further complicating reporting, DOE assigns each laboratory to a field operations office, whose director serves as the contract manager and also prepares the contractor's annual appraisal. The operations office, however, reports to a separate headquarters office under the Deputy Secretary, not to the program office that supplies the funding. Thus, while the Los Alamos National Laboratory is primarily funded by Defense Programs, it reports to a field manager who reports to another part of the agency. We believe these organizational weaknesses are a major reason why DOE has been unable to develop long-term solutions to the recurring problems reported by advisory groups. Recent events at the Brookhaven National Laboratory in New York, for example, illustrate the consequences of organizational confusion. Former Secretary Pena fired the contractor operating the laboratory when he learned that the contractor breached the community's trust by failing to ensure it could operate safely. DOE did not have a clear chain of command over environment, safety, and health matters and, as a result, laboratory performance suffered in the absence of DOE accountability. To address problems in DOE's oversight, the Secretary removed the Chicago Operations Office from the chain of command over Brookhaven, by having the on-site DOE staff report directly to the Secretary's office. We found, however, that even though the on-site staff was technically reporting directly to the Secretary's office, the Chicago Operations Office was still managing the contractor on a day-to-day basis, including retaining the responsibility for preparing the laboratory's annual appraisal. Chicago officials told us that there was considerable confusion regarding the roles of Chicago and on-site DOE staff. As a result, DOE did not fundamentally change how it manages the contractor through its field offices. This concludes my testimony, and I will be happy to answer any questions you may have. Nuclear Fuel Reprocessing And The Problems Of Safeguarding Against The Spread Of Nuclear Weapons (EMD-80-38, Mar. 18, 1980). Safeguards and Security At DOE's Weapons Facilities Are Still Not Adequate (C-GAO/EMD-82-1, Aug. 20, 1982). Security Concerns at DOE's Rocky Flats Nuclear Weapons Production Facility (GAO/RCED-85-83, Apr. 22, 1985). Nuclear Nonproliferation: DOE Has Insufficient Control Over Nuclear Technology Exports (GAO/RCED-86-144, May 1, 1986). Nuclear Security: DOE's Reinvestigation of Employees Has Not Been Timely (GAO/RCED-87-72, Mar. 10, 1987). Nuclear Nonproliferation: Department of Energy Needs Tighter Controls Over Reprocessing Information (GAO/RCED-87-150, Aug. 17, 1987). Nuclear Security: DOE Needs a More Accurate and Efficient Security Clearance Program (GAO/RCED-88-28, Dec. 29, 1987). Nuclear Nonproliferation: Major Weaknesses in Foreign Visitor Controls at Weapons Laboratories (GAO/RCED-89-31, Oct. 11, 1988). Nuclear Security: DOE Actions to Improve the Personnel Clearance Program (GAO/RCED-89-34, Nov. 9, 1988). Nuclear Nonproliferation: Better Controls Needed Over Weapons-Related Information and Technology (GAO/RCED-89-116, June 19, 1989). Nuclear Security: DOE Oversight of Livermore's Property Management System Is Inadequate (GAO/RCED-90-122, Apr. 18, 1990). Nuclear Safety: Potential Security Weaknesses at Los Alamos and Other DOE Facilities (GAO/RCED-91-12, Oct. 11, 1990). Nuclear Security: Accountability for Livermore's Secret Classified Documents Is Inadequate (GAO/RCED-91-65, Feb. 8, 1991). Nuclear Nonproliferation: DOE Needs Better Controls to Identify Contractors Having Foreign Interests (GAO/RCED-91-83, Mar. 25, 1991). Nuclear Security: Property Control Problems at DOE's Livermore Laboratory Continue (GAO/RCED-91-141, May 16, 1991). Nuclear Security: DOE Original Classification Authority Has Been Improperly Delegated (GAO/RCED-91-183, July 5, 1991). Nuclear Security: Safeguards and Security Weaknesses at DOE's Weapons Facilities (GAO/RCED-92-39, Dec. 13, 1991). Nuclear Security: Weak Internal Controls Hamper Oversight of DOE's Security Program (GAO/RCED-92-146, June 29, 1992). Nuclear Security: Improving Correction of Security Deficiencies at DOE's Weapons Facilities (GAO/RCED-93-10, Nov. 16, 1992). Nuclear Security: Safeguards and Security Planning at DOE Facilities Incomplete (GAO/RCED-93-14, Oct. 30, 1992). Personnel Security: Efforts by DOD and DOE to Eliminate Duplicative Background Investigations (GAO/RCED-93-23, May 10, 1993). Nuclear Security: DOE's Progress on Reducing Its Security Clearance Work Load (GAO/RCED-93-183, Aug. 12, 1993). Nuclear Nonproliferation: U.S. International Nuclear Materials Tracking Capabilities Are Limited (GAO/RCED/AIMD-95-5, Dec. 27, 1994). Department of Energy: Poor Management of Nuclear Materials Tracking System Makes Success Unlikely (GAO/AIMD-95-165, Aug. 3, 1995). Nuclear Nonproliferation: Concerns With the U.S. International Nuclear Materials Tracking System (GAO/T-RCED/AIMD-96-91, Feb. 28, 1996). DOE Security: Information on Foreign Visitors to the Weapons Laboratories (GAO/T-RCED-96-260, Sept. 26, 1996). Department of Energy: DOE Needs to Improve Controls Over Foreign Visitors to Weapons Laboratories (GAO/RCED-97-229, Sept. 25, 1997). Department of Energy: Information on the Distribution of Funds for Counterintelligence Programs and the Resulting Expansion of These Programs (GAO/RCED-97-128R, Apr. 25, 1997). Department of Energy: Problems in DOE's Foreign Visitor Program Persist (GAO/T-RCED-99-19, Oct. 6, 1998). Department of Energy: DOE Needs To Improve Controls Over Foreign Visitors To Its Weapons Laboratories (GAO/T-RCED-99-28, Oct. 14, 1998). Nuclear Nonproliferation: Concerns With DOE's Efforts to Reduce the Risks Posed by Russia's Unemployed Weapons Scientists (GAO/RCED-99-54, Feb. 19, 1999). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed its past work involving security at Department of Energy's (DOE) facilities. GAO noted that: (1) GAO's work has identified security-related problems with controlling foreign visitors, protecting classified and sensitive information, maintaining physical security over facilities and property, ensuring the trustworthiness of employees, and accounting for nuclear materials; (2) these problems include: (a) ineffective controls over foreign visitors to DOE's most sensitive facilities; (b) weaknesses in efforts to control and protect classified and sensitive information; (c) lax physical security controls, such as security personnel and fences, to protect facilities and property; (d) ineffective management of personnel security clearance programs; and (e) weaknesses in DOE's ability to track and control nuclear materials; (3) the recent revelations about espionage bring to light how ingrained security problems are at DOE; (4) although each individual security problem is a concern, when these problems are looked at collectively over time, a more serious situation becomes apparent; (5) while a number of investigations are under way to determine the status of these security problems, GAO has found that DOE has often agreed to take corrective action but the implementation has not been successful and the problems reoccur; (6) there are two overall systemic causes for this situation; (7) DOE managers and contractors have shown a lack of attention and priority to security matters; (8) there is a serious lack of accountability at DOE; (9) efforts to address security problems have languished for years without resolution or repercussions to those organizations responsible; (10) security in today's environment is even more challenging, given the greater openness that now exists at DOE's facilities and the international cooperation associated with some of DOE's research; (11) even when more stringent security measures were in place than there are today, problems have arisen and secrets can be, and were, lost; and (12) consequently, continual vigilance, as well as more sophisticated security strategies, will be needed to meet the threats that exist today.

technical excellence: furnishing the care in the correct way, for example, performing open-heart surgery skillfully; accessibility: patients being able to get care when needed, for example, getting an appointment with a heart specialist when symptoms first occur; and acceptability: patients' views of their care, such as being satisfied with the outcome of surgery or the speed with which they get a doctor's appointment. Accreditation and analysis of performance indicators are methods for gauging whether and to what degree quality health care is provided. Accreditation does not directly measure quality, however; instead, it seeks to ensure that organizational systems necessary to attain quality are in place. Accreditation, a formal designation granted by a third party, is usually based on standards that specify the resources and organizational arrangements needed to deliver good care. For example, standards might set forth staff qualifications or the requirement that an HMO have an effective quality assurance program. During an accreditation survey, a survey team reviews an organization's policies and procedures and visits the provider to make certain that the standards are being met. The survey team discusses the survey findings with appropriate provider officials and subsequently prepares a written report. If standards are not being met, the HMO usually is given time to take corrective action. If the HMO does not take action within a specified time period, it could lose its accreditation. Performance indicators more directly measure the attributes of quality than does accreditation. Performance indicators frequently measure appropriateness and technical excellence--providers' actions--and the outcomes of those actions. For example, these indicators provide information about the rate at which certain preventive health care actions are furnished, the mortality rate from certain procedures, or patient satisfaction survey results. Administrative databases, medical records, and patient surveys provide data for measuring these indicators. The results are then compared with preestablished benchmarks or with the performance of other HMOs. also requesting information on health plans to help them make their health care purchasing decisions. Some purchasers believe that the standards required to be met for accreditation might have no bearing on whether quality of care is actually furnished. Others view accreditation requirements as a way of ensuring that systems expected to result in quality care are in place. Because accreditation standards do not directly measure quality, however, many purchasers use a combination of accreditation and an analysis of performance indicators, including outcomes. may contend that poor outcomes are due to their caring for sicker patients. Performance indicators may not be comparable. Nationwide standards for defining and calculating indicator results have not been established. While relying to some extent on several standard indicators, many health plans continue to use their own criteria for collecting data and computing results. Consequently, purchasers cannot systematically compare health plans to determine which one meets their needs. Cost continues to be an overriding concern to virtually all corporate purchasers. However, many large corporate purchasers are using accreditation status and information about specific quality-of-care performance indicators to determine which HMO(s) to offer their employees. According to a recent survey of 384 U.S. employers conducted by Watson Wyatt, a benefits consulting organization, and WBGH, 60 percent of large corporations consider accreditation status by the National Committee for Quality Assurance (NCQA) when deciding to purchase health insurance from an HMO. Nineteen percent also consider accreditation from other organizations. Furthermore, some purchasers evaluate other organizational structures. For example, 55 percent said they evaluate whether a health plan has quality improvement initiatives, and 67 percent determine that the health plan ensures that its providers are qualified. help gauge the quality of care provided by health plans, and 68 percent evaluate the results of consumer satisfaction surveys. NCQA recognized the need for outcome indicators when it released its first HEDIS measures. In July 1996, it released for public comment a new draft version of 75 HEDIS measures based on the recommendations of purchasers, HCFA, and other stakeholders. This new version, which NCQA expects will be used by health plans in 1997, includes a revision of prior HEDIS indicators, a standardized patient satisfaction survey, and more indicators for high-prevalence diseases. The clinical care measures continue to focus on providers' actions, however, rather than outcomes. NCQA also released another 30 indicators, a few focusing on outcomes. NCQA defines these indicators as a "testing set" to be used by health plans only after evidence has been established that certain criteria are met, such as that the indicator is a valid measure of what it is intended to assess. While NCQA was developing new HEDIS measures, a large group of corporate purchasers and HCFA established the Foundation for Accountability (FAcct) to develop standardized outcome measures. In early fall 1996, the Foundation released eight indicators for treating diabetes, breast cancer, and major depression. Some of these measures focus on outcomes. The Foundation also endorsed an indicator addressing consumers' satisfaction with health plans. Xerox, a large corporate purchaser, provides an example of a purchaser's use of quality assessment methods. Xerox's stated objective is to increase the accountability of health plans contracting with it and to improve the health status of its employees. Xerox officials review health plan reports about the plan's accreditation status, results on HEDIS performance indicators, access to services, and membership satisfaction. Reports also include goals for each measure as benchmarks. Xerox's goal is to develop long-term relationships with health plans. To this end, Xerox encourages health plans' continuous improvement rather than immediately terminating a contract if a plan does not meet specific performance goals. of prior performance. In the past, quality assurance programs focused on the care provided to individual patients, directing improvement activities toward individual "outlier" providers rather than encouraging improvement by health care providers. These efforts were limited to a small number of providers and often resulted in adversarial relations between the reviewers and those being reviewed. Like other large corporate purchasers, HCFA uses an inspection process and analysis of performance indicators to evaluate the quality of care provided to Medicare beneficiaries in risk contract HMOs. HCFA's HMO Qualification Program is intended to ensure that HMOs with Medicare contracts meet minimum requirements for organizational structures and processes. HCFA's Medicare PRO Program is intended to measure an HMO's performance by evaluating indicators for selected diseases or procedures of concern to older Americans. Like accreditation, HCFA's HMO Qualification Program is an inspection method. HCFA's initial approval of an HMO to serve Medicare beneficiaries includes this inspection. Thereafter, HCFA personnel visit contracting HMOs at least once every 2 years to monitor their compliance with requirements. HCFA's inspection team spends several days at the HMO comparing the HMO's policies and procedures with Medicare requirements. The team informs the HMO of its preliminary findings at the end of the visit and later prepares a formal report. If the HMO has failed to meet one or more requirements, it must submit a corrective action plan, including a timetable for correcting the deficiency. HCFA personnel may revisit the site to monitor compliance at the end of the time period specified in the plan's timetable or may simply require regular progress reports. If the HMO fails to correct the deficiency in a timely manner, HCFA may terminate its contract or, under some circumstances, impose a civil monetary penalty or suspend Medicare enrollment. This happens rarely, however, and only after repeated HCFA efforts to get the HMO to correct the deficiencies. action. Furthermore, HCFA often found that the same problems existed when it made its next annual monitoring visit. In our August 1995 report, we found the same problems. We concluded that HCFA's HMO Qualification Program is inadequate to ensure that Medicare HMOs comply with standards for ensuring quality of care. Specifically, this program remains inadequate because HCFA does not determine if HMO quality assurance programs are operating effectively, systematically incorporate the results of PRO review of HMOs or use PRO staff expertise in its compliance monitoring, and routinely collect utilization data that could most directly indicate potential quality problems. We also found that the enforcement processes are still slow when HCFA does find quality problems or other deficiencies at HMOs that do not comply promptly with federal standards. For example, even though one HMO repeatedly did not meet standards during a 7-year period and HCFA received PRO reports indicating that the HMO was providing substandard care to a significant number of beneficiaries, HCFA allowed the HMO to operate as freely as a fully compliant HMO. Like large corporate purchasers' analysis of performance indicators, the Medicare PRO Program analyzes HMO performance treating certain diseases or performing selected procedures. The PRO Program, however, is substantially changing its approach. substandard providers were identified; HCFA officials found this model to be confrontational, unpopular with the physician community, and of limited effectiveness. Therefore, by the end of 1995, case reviews had been replaced by cooperative projects modeled on continuous quality improvement concepts implemented by mutual agreement between PROs and risk contract HMOs. Provider participation is voluntary. Typically, these cooperative projects involve establishing joint identification of a problem, appropriate performance indicators, and benchmarks. The PRO then measures current HMO performance on these indicators and disseminates these data to the HMOs. HMOs then may choose to participate in the project to improve care. After implementation of corrective action, the PROs again collect data to determine if improvements have been made. Although this process is voluntary, HCFA officials say that they believe most HMOs will welcome the opportunity to collaborate on projects that can improve the quality of care. They do not believe that provider noncooperation will be a significant problem. HCFA officials told us, however, that they still can take action if they have strong indications that an HMO has significant quality-of-care problems. If an HMO refuses to cooperate, HCFA can still apply a range of sanctions, including a letter terminating the HMO's participation. In one state, we talked with HMO and PRO officials about this new approach. The HMOs liked it, particularly the fact that the PRO provided them with comparative performance data that would be otherwise unavailable to them. PRO officials also felt that this program was more successful than case review because it addressed the care being provided to the majority of beneficiaries rather than the 1 or 2 percent who may be recipients of bad care. Although we think this new approach holds promise, it is too early to evaluate its impact. But an evaluation of this program as soon as feasible is essential because it is such a major departure from previous PRO practice. performance indicators. HCFA also plans to collect data on beneficiaries' satisfaction with risk contract HMOs. In June 1995, HCFA announced that it was joining FAcct. According to HCFA, it has played a major role in developing the Foundation's performance indicators for depression, breast cancer, and diabetes. Furthermore, HCFA worked with NCQA on its new HEDIS indicators. HCFA played a role in identifying and defining seven newly released indicators that measure functional status for enrollees over age 60, mammography rates, rate of influenza vaccinations, rate of retinal examinations for diabetics, outpatient follow-up after acute psychiatric hospitalization, utilization of certain appropriate medications in heart attack patients, and smoking cessation programs. HCFA also plans to conduct a survey of Medicare beneficiaries enrolled in managed care. It is developing a survey instrument in cooperation with the Agency for Health Care Policy and Research. Data collected in this survey will include information on member satisfaction, perceived quality of care, and access to care. HCFA officials told us that they plan to have an outside contractor perform annual surveys of a statistically valid sample of Medicare enrollees in every HMO with a Medicare contract. The contractor will use a standard survey and provide a consistent analysis of the information received from beneficiaries. Some large corporate purchasers are sharing performance assessment information with their employees. They believe that individual employees can better choose health plans if they have good information on which to base their enrollment decisions. According to the Watson Wyatt/WBGH survey, 31 percent of large corporate purchasers give their employees information about accreditation status, 25 percent give their employees information about overall health plan performance, 13 percent give their employees HEDIS information, and 47 percent distribute consumer satisfaction survey results. Additionally, 32 percent of the large purchasers surveyed offer financial incentives to their employees to choose plans that they have designated as being of "exceptional quality." years, that information generally featured premium and benefits coverage. CalPERS' May 1995 Health Plan Quality/Performance Report was its first effort to distribute comprehensive information that includes both specific performance indicators about quality and member satisfaction results. The quality performance data are based on HEDIS indicators measuring HMO success with providing childhood immunizations, cholesterol screening, prenatal care, cervical and breast cancer screening results, and diabetic eye exams. Employee survey results include employee satisfaction with physician care, hospital care, the overall plan, and the results of a question asking whether members would recommend the plan to a fellow employee or friend. CalPERS released a new report providing updated information in 1996. Although HCFA collects performance information that could be useful to beneficiaries, it does not routinely make such information available to them nor does it have immediate plans to do so. HCFA does not distribute the results of its HMO Qualification Program nor does it distribute information it collects about Medicare HMO enrollment and disenrollment rates, Medicare appeals, beneficiary complaints, plan financial condition, availability of and access to services, and marketing strategies. However, HCFA officials have told us they are considering ways to provide Medicare beneficiaries with information that will help them choose managed care plans. HCFA is working to make comparative information available on the Internet. Phase one of this project, to be implemented in 1997, will provide comparative data about HMO benefits, premiums, and cost-sharing requirements. Later phases will add information on the results of plan member satisfaction surveys and, eventually, outcome indicators. No timetable has been established, however, for disseminating the latter information. In conclusion, large corporate purchasers who rely on experts in the field are the leaders in health care quality assessment. Although HCFA's current quality assessment programs are catching up with those of large corporate purchasers, some areas need further improvement. Most notably, HCFA still lags behind the private sector in disseminating performance assessment information to its beneficiaries. Messrs. Chairmen and Madam Chairwoman, this concludes my formal remarks. I will be happy to answer any questions from you and other members of the Caucus. For more information on this testimony, please call Sandra K. Isaacson, Assistant Director, at (202) 512-7174. Other major contributors include Peter E. Schmidt. Health Care: Employers and Individual Consumers Want Additional Information on Quality (GAO/HEHS-95-201, Sept. 29, 1995). Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155, Aug. 3, 1995). Medicare: Enhancing Health Care Quality Assurance (GAO/T-HEHS-95-224, July 27, 1995). Community Health Centers: Challenges in Transitioning to Prepaid Managed Care (GAO/HEHS-95-138, May 4, 1995); testimony on the same topic (GAO/T-HEHS-95-143, May 4, 1995). Medicare: Opportunities Are Available to Apply Managed Care Strategies (GAO/T-HEHS-95-81, Feb. 10, 1995). Health Care Reform: "Report Cards" Are Useful but Significant Issues Need to Be Addressed (GAO/HEHS-94-219, Sept. 29, 1994). Home Health Care: HCFA Properly Evaluated JCAHO's Ability to Survey Home Health Agencies (GAO/HRD-93-33, Oct. 26, 1992). Home Health Care: HCFA Evaluation of Community Health Accreditation Program Inadequate (GAO/HRD-92-93, Apr. 20, 1992). Medicare: HCFA Needs to Take Stronger Actions Against HMOs Violating Federal Standards (GAO/HRD-92-11, Nov. 12, 1991). Health Care: Actions to Terminate Problem Hospitals From Medicare Are Inadequate (GAO/HRD-91-54, Sept. 5, 1991). Medicare: PRO Review Does Not Ensure Quality of Care Provided by Risk HMOs (GAO/HRD-91-48, Mar. 13, 1991). Medicare: Physician Incentive Payments by Prepaid Health Plans Could Lower Quality of Care (GAO/HRD-89-29, Dec. 12, 1988). Medicare: Experience Shows Ways to Improve Oversight of Health Maintenance Organizations (GAO/HRD-88-73, Aug. 17, 1988). Medicare: Issues Raised by Florida Health Maintenance Organization Demonstrations (GAO/HRD-86-97, July 16, 1986). 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 Health Care Financing Administration's (HCFA) efforts to provide health care quality information to Medicare beneficiaries joining health maintenance organizations (HMO). GAO noted that: (1) corporate purchasers use accreditation and performance measurement monitoring to ensure that HMO furnish quality health care; (2) HCFA is starting to use similar methods to ensure HMO quality; (3) while the use of performance measurement indicators has become popular, such indicators may not be reliable or comparable, and may not be valid measures of quality; (4) 60 percent of large corporations consider HMO accreditation status by the National Committee for Quality Assurance (NCQA), before contracting with HMO; (5) NCQA developed a set of standardized information on HMO focusing on provider actions, rather than patient care outcomes; (6) NCQA recently released in draft form a set of measures based on patient care outcomes; (7) HCFA has joined with a group of corporate purchasers to develop another set of standardized outcome measures; (8) HCFA uses a qualification review program similar to accreditation, along with peer review, to assess health care organizations' quality; and (9) HCFA does not routinely make quality assessment information available to Medicare beneficiaries.

According to the IFCAP database, in fiscal year 2007 nearly 132,000 miscellaneous obligations, with a total value of nearly $9.8 billion, were created (see table 1). While VA's Central Office had $2.9 billion in miscellaneous obligations during fiscal year 2007, our review focused on the $6.9 billion in miscellaneous obligations used by VHA's 129 stations, located in every Veterans Integrated Services Network (VISN) throughout the country, for a variety of mission-related activities. (See app. III for a listing of the use of miscellaneous obligations by VISN, and app. IV for a listing of the use of miscellaneous obligations by station.) According to available VHA data, VHA used record estimated obligations of over $6.9 billion for mission-related goods and services. As shown in figure 1, about $3.8 billion (55.1 percent) was for fee-based medical and dental services for veterans, and another $1.4 billion (20.4 percent) was for drugs, medicines, and hospital supplies. The remainder was for, among other things, state veterans homes, transportation of veterans to and from medical centers for treatment, and miscellaneous obligations to logistical support and facility maintenance for VHA medical centers nationwide. Other, such as dietetic proviion, operting supplie, clening ervice, nd d processing. Trporttion of peron/thing. Ste home nd homeless vetersupport. Rent, commniction, nd tilitie inclding gas, electricity, wter, ewer, nd phone. Supplie inclding dr, medicine, hopitsupplie, lood prodct, nd prothetic supplie. Service inclding fee base phyicin, ning, dentl, hopitliztion , rerch, nd prothetic repir. According to VHA contracting and fiscal service officials, using miscellaneous obligations tends to reduce administrative workload and facilitates the payment for contracted goods and services, such as drugs, medicines, and transportation, and for goods and services for which no pre-existing contracts exist, such as fee-basis medical and dental service and utilities. VHA officials stated that miscellaneous obligations facilitate the payment for contracted goods and services when the quantities and delivery dates are not known. A miscellaneous obligation can be created for an estimated amount and then modified as specific quantities are needed or specific delivery dates are set. When a purchase order is created, however, the obligated amount cannot be changed without a modification of the purchase order. According to VHA officials, the need to prepare num modifications to purchase orders could place an undue burden on the limited contracting personnel available at individual centers and could also require additional work on the part of fiscal services personnel. Our preliminary observations on VA policies and procedures indicate they were not designed to provide adequate controls over the use of miscellaneous obligations. According to GAO's Standards for Internal Control in the Federal Government, agency management is responsible for developing detailed policies and procedures for internal control suitable for their agency's operations and ensuring that they provide for adequate monitoring by management, segregation of duties, and supporting documentation for the need to acquire specific goods in the quantities purchased. We identified control design flaws in each of these oversight areas, and we confirmed that these weaknesses existed at the three locations where we conducted case studies. Collectively, these control design flaws increase the risk of fraud, waste, and abuse (including employees converting government assets to their own use without detection). New guidance for the use of miscellaneous obligations was released in January 2008 and finalized in May 2008. We reviewed the new guidance and found that while it offered some improvement, it did not fully address the specific control design flaws we identified. Furthermore, VA officials told us that this guidance was not subject to any legal review. Such an analysis is essential to help ensure that the design of policies and procedures comply with all applicable federal appropriations law and internal control standards. We reviewed 42 miscellaneous obligations at the three case study locations and developed illustrative, more detailed information on the extent and nature of these control design flaws. Table 2 summarizes the locations visited, the miscellaneous obligations reviewed at each location, and the extent and nature of control design deficiencies found. To help minimize the use of miscellaneous obligations, VA policy stated that miscellaneous obligations would not be used as obligation control documents unless the contracting authority for a station had determined that purchase orders or contracts would not be required. Furthermore, VA policy required review of miscellaneous obligations by contracting officials to help ensure proper use in accordance with federal acquisition regulations, but did not address the intended extent and nature of these reviews or how the reviews should be documented. Contracting officials were unable to electronically document their review of miscellaneous obligations and no manual documentation procedures had been developed. Our review of 42 miscellaneous obligations prepared at three VHA stations showed that contracting officers were at times familiar with specific miscellaneous obligations at their facilities, but that they had no documented approvals available for review. Furthermore, none of the three sites we visited had procedures in place to document review of the miscellaneous obligations by the appropriate contracting authorities. Effective oversight and review by trained, qualified officials is a key factor in identifying a potential risk for fraud, waste, or abuse. Without control procedures to help ensure that contracting personnel review and approve miscellaneous obligations prior to their creation, VHA is at risk that procurements will not have safeguards established through a contract approach. For example, in our case study at the VA Pittsburgh Medical Center, we found 12 miscellaneous obligations, totaling about $673,000, used to pay for laboratory services provided by the University of Pittsburgh Medical Center (UPMC). The Chief of Acquisition and Materiel Management for the VA Pittsburgh Medical Center stated that she was not aware of the UPMC's laboratory testing service procurements and would review these testing services to determine whether a contract should be established for these procurements. Subsequently, she stated that VISN 4, which includes the VA Pittsburgh Medical Center, was going to revise procedures to procure laboratory testing services through purchase orders backed by reviewed and competitively awarded contracts, instead of funding them through miscellaneous obligations. Another Pittsburgh miscellaneous obligation for about $141,000 was used to fund the procurement of livers for transplant patients. Local officials said that there was a national contract for the services, and that livers were provided at a standardized price of $21,800. However, officials could not provide us with a copy of the contract, nor documentation of the standardized pricing schedule. Therefore, we could not confirm that VHA was properly billed for these services or that the procurement was properly authorized. Furthermore, in the absence of review by contracting officials, controls were not designed to prevent miscellaneous obligations from being used for unauthorized purposes, or for assets that could be readily converted to personal use. Our analysis of the IFCAP database for fiscal year 2007 identified 145 miscellaneous obligations for over $30.2 million that appeared to be used in the procurement of such items as passenger vehicles; furniture and fixtures; office equipment; and medical, dental, and scientific equipment. Although the VA's miscellaneous obligation policy did not address this issue, VA officials stated that acquisition of such assets should be done by contracting officials and not through miscellaneous obligations. Without adequate controls to review and prevent miscellaneous obligations from being used for the acquisition of such assets, it is possible that the VHA may be exposing the agency to unnecessary risks by using miscellaneous obligations to fund the acquisitions of goods or services that should have been obtained under contract with conventional controls built in. In January 2008, VA issued interim guidance effective for all miscellaneous obligations created after January 30, 2008, concerning required procedures for using miscellaneous obligations. The guidance provides that prior to creating a miscellaneous obligation, fiscal service staff are required to check with the contracting activity to ensure that a valid contract is associated with the miscellaneous obligation, except in specific, itemized cases. Under this guidance, the using service is to have the contracting activity determine (1) if a valid procurement authority exists, (2) if a procurement needs to be initiated, and (3) the appropriate method of obligation. Also, this guidance requires that a copy of the head contracting official's approval be kept with a copy of the miscellaneous obligation for future audit purposes. In addition, the guidance provides that the fiscal service may not create a miscellaneous obligation without appropriate information recorded in the purpose, vendor, and contract number fields on the document. The guidance specifically cites a number of invalid uses for miscellaneous obligations, including contract ambulance, lab tests, blood products, and construction, but did not always specify a procurement process to be used for these items. In May 2008, VHA management finalized the interim guidance. This guidance represents a step in the right direction. It includes a manual process for documenting contracting approval of miscellaneous obligations and specifically states that a miscellaneous obligation cannot be created if the vendor, contract number, and purpose fields are incomplete. However, the new guidance does not address the segregation of duties issues we and others have identified and does not establish an oversight mechanism to ensure that control procedures outlined are properly implemented. In our view, VHA has missed an opportunity to obtain an important legal perspective on this matter. According to VA officials, these policies have not been subject to any legal review. Such a review is essential in ensuring that the policies and procedures comply with federal funds control laws and regulations and any other relevant VA policies or procedures dealing with budgetary or procurement matters. For example, such a review would help ensure that the guidance adequately addresses Federal Acquisition Regulations, requiring that no contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met. In addition, a review could help to ensure that this guidance (1) provides that all legal obligations of VA are supported by adequate documentation to meet the requirements of the recording statute 31 U.S.C. SS1501(a) and (2) prevents any individual from committing the government for purchases of supplies, equipment, or services without being delegated contracting authority as a contracting officer, purchase card holder, or as a designated representative of a contracting officer. The absence of a legal review to determine the propriety of VA's miscellaneous obligations policies and procedures places VA at risk of not complying with important laws and regulations. In conclusion, Mr. Chairman, without basic controls in place over billions of dollars in miscellaneous obligations, VA is at significant risk of fraud, waste, and abuse. Effectively designed internal controls serve as the first line of defense for preventing and detecting fraud, and they help ensure that an agency effectively and efficiently meets its missions, goals, and objectives; complies with laws and regulations; and is able to provide reliable financial and other information concerning its programs, operations, and activities. Although miscellaneous obligations can facilitate and streamline the procurement process, they require effectively designed mitigating controls to avoid impairing full accountability and transparency. In the absence of effectively designed key funds and acquisition controls, VA has limited assurance that its use of miscellaneous obligations is kept to a minimum, for bona fide needs, in the correct amount, and to the correct vendor. Improved controls in the form of detailed policies and procedures, along with a management oversight mechanism, will be critical to reducing the government's risks from VA's use of miscellaneous obligations. To that end, our draft report includes specific recommendations, including a number of preventive actions that, if effectively implemented, should reduce the risks associated with the use of miscellaneous obligations. We are making recommendations to VA to modify its policies and procedures, in conjunction with VA's Office of General Counsel, to better ensure adequate oversight of miscellaneous obligations by contracting officials, segregation of duties throughout the process, and sufficient supporting documentation for miscellaneous obligations. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For more information regarding this testimony, please contact Kay Daly, Acting Director, Financial Management and Assurance, at (202) 512-9095 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In order to determine how VHA used miscellaneous obligations during fiscal year 2007, we obtained and analyzed a copy of VHA's Integrated Funds Distribution, Control Point Activity, Accounting and Procurement (IFCAP) database of miscellaneous obligations for that year. IFCAP is used to create miscellaneous obligations (VA Form 4-1358) at VA, and serves as a feeder system for VA's Financial Management System (FMS)-- the department's financial reporting system of record. According to VA officials, FMS cannot be used to identify the universe of miscellaneous obligations at VHA in fiscal year 2007 because FMS does not identify the procurement method used for transactions (i.e., miscellaneous obligations, purchase card, purchase order). Furthermore, FMS does not capture the contract number, requester, approving official, and obligating official for obligations. However, according to senior agency officials, the IFCAP database is the most complete record of miscellaneous obligations available at VHA and can be used to provide an assessment of how miscellaneous obligations were used during fiscal year 2007. IFCAP's data included information on the appropriation codes, vendors, budget object codes (BOC), date and amount of obligations, obligation numbers, approving officials, and VISN and VHA station for VHA miscellaneous obligations. We converted the database to a spreadsheet format and sorted the data by VISN, station, and BOC to determine where and how miscellaneous obligations were used in fiscal year 2007 (see app. III and IV). To determine whether VHA's polices and procedures are designed to provide adequate controls over the use of miscellaneous obligations, we first reviewed VHA's policies and procedures governing the use of miscellaneous obligations at VA. Specifically, we reviewed the VA Controller Policy, MP-4, Part V, Chapter 3, Section A, Paragraph 3A.02 - Estimated Miscellaneous Obligation or Change in Obligation (VA Form 4-1358); the VA Office of Finance Bulletin 06GA1.05, Revision to MP-4, Part V, Chapter 3, Section A, Paragraph 3A.02 - Estimated Miscellaneous Obligation or Change in Obligation (VA Form 4-1358), dated September 29, 2006; VA Interim Guidance on Miscellaneous Obligations, VA Form 1358, dated January 30, 2008; VHA Revised Guidance for Processing of Miscellaneous Obligations, VA Form 1358, dated May 18, 2008; and other VA and VHA directives, policies, and procedures. We also used relevant sections of the Federal Acquisition Regulations (FAR); VA's Acquisition Regulations; appropriation law; and GAO's Standards for Internal Control in the Federal Government in assessing the design of VA's policies and procedures, and we met with VA and VHA officials in Washington, D.C., and coordinated with VHA's Office of Inspector General staff to identify any previous audit findings relevant to our audit work. We also interviewed representatives of VA's independent public accounting firm and reviewed copies of their reports. In order to better understand the extent and nature of VA policy and procedure design deficiencies related to miscellaneous obligations, we conducted case studies at three VHA stations in Cheyenne, Wyoming; Kansas City, Missouri; and Pittsburgh, Pennsylvania. The stations in Kansas City and Pittsburgh were selected because they had a high volume of miscellaneous obligation activity, and they were located in different regions of the country. We conducted field work at the Cheyenne, Wyoming, station during the design phase of our review to better understand the extent and nature of miscellaneous obligation control design deficiencies at a small medical center. Inclusion of the Cheyenne facility in our review increased the geographic diversity of our analysis and allowed us to compare the extent and nature of miscellaneous obligation design deficiencies at medical centers in the eastern, midwestern, and western portions of the United States. During the case studies, we met with senior medical center administrative, procurement, and financial management officials to discuss how VA policies and procedures were designed with regard to specific obligations, and assess the control environment design for using miscellaneous obligations at the local level. We discussed how miscellaneous obligations were used as part of the procurement process and the effect of new VHA guidance on medical center operations. We also reviewed the design of local policies and procedures for executing miscellaneous obligations and conducted walk-throughs of the processes. To provide more detailed information on the extent and nature of the control design deficiencies we found at our case study locations, we identified a nongeneralizable sample of obligations for further review at each site. Through data mining techniques, we identified a total of 42 miscellaneous obligations for more detailed examination at our case studies: 11 from Cheyenne, 17 from Kansas City, and 14 from Pittsburgh. We based our selection on the nature, dollar amount, date, and other identifying characteristics of the obligations. For each miscellaneous obligation selected, we accumulated information on the extent and nature of control design weaknesses concerning miscellaneous obligations: review and documentation by contracting officials; segregation of duties during the procurement process; and the purpose, timing, and documentation for obligations. Concerning the adequacy of control design with respect to contracting review, we reviewed miscellaneous obligations for evidence of review by contracting officials and, for selected miscellaneous obligations, followed up with contracting officials to discuss contracts in place for miscellaneous obligations, whether review by contracting officials was needed, and when and how this review could occur and be documented. Concerning the control design deficiencies with respect to segregation of duties, we reviewed miscellaneous obligation documents to determine which officials requested, approved, and obligated funds for the original miscellaneous obligations and then which officials certified delivery of goods and services and approved payment. We noted those instances where control design deficiencies permitted one official to perform multiple functions. With respect to control design deficiencies relating to the supporting documentation for the miscellaneous obligations, we reviewed the purpose, vendor, and contract number fields for each obligation. For the purpose field, we assessed whether the required description was adequate to determine the nature, timing, and extent of the goods and/or services being procured and whether controls provided for an adequate explanation for any estimated miscellaneous obligation amounts. For the vendor and contract number fields, we assessed whether controls were designed to ensure entered information was correct, and we identified those instances where control deficiencies permitted fields to be left blank. Because of time limitations, we did not review VHA's procurement or service authorization processes. In addition, in our case study approach, we were unable to analyze a sufficient number of obligations to allow us to generalize our conclusions to the sites visited, nor to the universe of VHA medical centers. The 42 obligations represented a total of approximately $36.0 million; however, the results cannot be projected to the overall population of miscellaneous obligations in fiscal year 2007. While we found no examples of fraudulent or otherwise improper purchases made by VHA, our work was not specifically designed to identify such cases or estimate its full extent. We assessed the reliability of the IFCAP data provided by (1) performing various testing of required data elements, (2) reviewing related policies and procedures, (3) performing walkthroughs of the system, (4) interviewing VA officials knowledgeable about the data, and (5) tracing selected transactions from source documents to the database. In addition, we verified that totals from the fiscal year 2007 IFCAP database agreed with a method of procurement compliance report provided to Subcommittee staff during a September 7, 2007 briefing. We did not reconcile the IFCAP miscellaneous obligations reported to us to FMS--the VA system of record--and published VA financial statements because FMS does not identify the procurement method used for transactions (i.e., miscellaneous obligations, purchase card, purchase order). We determined that the data were sufficiently reliable for the purposes of our report and that they can be used to provide an assessment of how miscellaneous obligations were used during fiscal year 2007. We briefed VA and VHA headquarter officials, including the Deputy Assistant Secretary for Logistics and Acquisition, as well as VHA officials at the three case study locations, on the details of our audit, including our findings and their implications. During the briefings officials generally agreed with our findings and said that they provided useful insights into problems with the miscellaneous obligation process and corrective actions that could be taken to address them. We conducted this audit from November 2007 through July 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We recently provided our draft report to the Secretary of Veterans Affairs for review and comment. Following this testimony, we plan to issue a report, which will incorporate VA's comments as appropriate and include recommendations for improving internal controls over miscellaneous obligations. The Department of Veterans Affairs (VA) is responsible for providing federal benefits to veterans. Headed by the Secretary of Veterans Affairs, VA operates nationwide programs for health care, financial assistance, and burial benefits. In fiscal year 2007, VA received appropriations of over $77 billion, including over $35 billion for health care and approximately $41.4 billion for other benefits. The Congress appropriated more than $87 billion for VA in fiscal year 2008. The Veterans Health Administration (VHA) is responsible for implementing the VA medical assistance programs. In fiscal year 2007, VHA operated more than 1,200 sites of care, including 155 medical centers, 135 nursing homes, 717 ambulatory care and community-based outpatient clinics, and 209 Readjustment Counseling Centers. VHA health care centers provide a broad range of primary care, specialized care, and related medical and social support services. The number of patients treated increased by 47.4 percent from 3.8 million in 2000 to nearly 5.6 million in 2007 due to an increased number of veterans eligible to receive care. As shown in figure 2, VHA has organized its health care centers under 21 Veterans Integrated Services Networks (VISN), which oversee the operations of the various medical centers and treatment facilities within their assigned geographic areas. During fiscal year 2007, these networks provided more medical services to a greater number of veterans than at any time during VA's long history. VA has used "Estimated Miscellaneous Obligation or Change in Obligation" (VA Form 4-1358) to record estimated obligations for goods and services for over 60 years. According to VA policy, miscellaneous obligations can be used to record obligations against appropriations for the procurement of a variety of goods and services, including fee-based medical, dental, and nursing services; non-VA hospitalization; nursing home care; beneficiary travel; rent; utilities; and other purposes. The policy states that miscellaneous obligations should be used as obligation control documents when a formal purchase order or authorization is not required, and when necessary to record estimated obligations to be incurred by the subsequent issue of purchase orders. The policy also states that the use of miscellaneous obligations should be kept to an absolute minimum, consistent with sound financial management policies regarding the control of funds, and should only be used in cases where there was a bona fide need for the goods and services being procured. In September 2006, VA policy for miscellaneous obligations was revised in an attempt to minimize the use of miscellaneous obligations as an obligation control document. The revision states that miscellaneous obligations should not be used as an obligation control document unless the head contracting official for the station has determined that a purchase order or contract will not be required. However, the policy provides that fiscal staff can use miscellaneous obligations as a tracking mechanism for obligations of variable quantity contracts, as well as for public utilities. In January 2008, VA issued interim guidance regarding the use of miscellaneous obligations; however, the guidance did not apply to the fiscal year 2007 miscellaneous obligations we reviewed. In recent years VHA has attempted to improve its oversight of miscellaneous obligations. For example, VHA's Clinical Logistics Group created the Integrated Funds Distribution, Control Point Activity, Accounting and Procurement (IFCAP) system database in April 2006 to analyze the use of miscellaneous obligations agencywide. The database is updated on a monthly basis and contains information on the miscellaneous obligations created monthly by the 21 VISN offices and their associated stations. VHA officials are using the IFCAP database to (1) analyze the number and dollar amounts of procurements being done using contracts and purchase cards, and recorded using miscellaneous obligations, and (2) identify the types of goods and services recorded as miscellaneous obligations. Prior to the creation of the IFCAP database, such information on the use of the miscellaneous obligations nationwide was not readily available to VHA upper level management. The creation and processing of miscellaneous obligations (VA Form 4- 1358) is documented in IFCAP--a component of VA's Veterans Health Information System and Technology Architecture (VISTA). The miscellaneous obligation request passes through several stages illustrated in figure 3. Pacific Islands HCS (Honolulu) James E. Van Zandt VA(Altoona) $6,908,827,084 This is a work of the U.S. government and is not subject to copyright protection in the United States. 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The Veterans Health Administration (VHA) has been using miscellaneous obligations for over 60 years to record estimates of obligations to be incurred at a later time. The large percentage of procurements recorded as miscellaneous obligations in fiscal year 2007 raised questions about whether proper controls were in place over the authorization and use of billions of dollars. GAO's testimony provides preliminary findings related to (1) how VHA used miscellaneous obligations during fiscal year 2007, and (2) whether the Department of Veterans' Affairs (VA) policies and procedures were designed to provide adequate controls over their authorization and use. GAO recently provided its related draft report to the Secretary of Veterans Affairs for review and comment and plans to issue its final report as a follow-up to this testimony. GAO obtained and analyzed available VHA data on miscellaneous obligations, reviewed VA policies and procedures, and reviewed a nongeneralizable sample of 42 miscellaneous obligations at three case study locations. GAO's related draft report includes four recommendations to strengthen internal controls governing the authorization and use of miscellaneous obligations, in compliance with applicable federal appropriations law and internal control standards. VHA recorded over $6.9 billion of miscellaneous obligations for the procurement of mission-related goods and services in fiscal year 2007. According to VHA officials, miscellaneous obligations were used to facilitate the payment for goods and services when the quantities and delivery dates are not known. According to VHA data, almost $3.8 billion (55.1 percent) of VHA's miscellaneous obligations was for fee-based medical services for veterans and another $1.4 billion (20.4 percent) was for drugs and medicines. The remainder funded, among other things, state homes for the care of disabled veterans, transportation of veterans to and from medical centers for treatment, and logistical support and facility maintenance for VHA medical centers nationwide. GAO's Standards for Internal Control in the Federal Government states that agency management is responsible for developing detailed policies and procedures for internal control suitable for their agency's operations. However, based on GAO's preliminary results, VA policies and procedures were not designed to provide adequate controls over the authorization and use of miscellaneous obligations with respect to oversight by contracting officials, segregation of duties, and supporting documentation for the obligation of funds. Collectively, these control design flaws increase the risk of fraud, waste, and abuse (including employees converting government assets to their own use without detection). These control design flaws were confirmed in the case studies at Pittsburgh, Cheyenne, and Kansas City. In May 2008, VA issued revised guidance concerning required procedures for authorizing and using miscellaneous obligations. GAO reviewed the revised guidance and found that while it offered some improvement, it did not fully address the specific control design flaws GAO identified. Furthermore, according to VA officials, VA's policies governing miscellaneous obligations have not been subject to legal review by VA's Office of General Counsel. Such a review is essential in ensuring that the policies and procedures comply with applicable federal appropriations law and internal control standards.