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The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) significantly changed federal welfare policy for low- income families with children, from a program that entitled eligible families to monthly cash payments to a capped block grant that emphasizes employment and work supports for most adult recipients. As part of PRWORA, Congress created the TANF program, through which HHS provides states about $16.5 billion each year in block grant funds to implement the program. To receive the TANF block grant, each state must also spend at least a specified level of its own funds, which is referred to as state maintenance of effort (MOE).block grant, PRWORA defines four goals for the program: 1. provide assistance so that children could be cared for in their own homes or in the homes of relatives; 2. end families' dependence on government benefits by promoting job preparation, work, and marriage; 3. prevent and reduce the incidence of out-of-wedlock pregnancies; and 4. encourage the formation and maintenance of two-parent families. TANF is a flexible funding stream that states can use to provide cash assistance and a wide range of services that are "reasonably calculated" to further the program's four goals. In federal fiscal year 2011, states used about 29 percent of their TANF funds on basic assistance that included cash assistance for needy families, and the remaining funds were spent on other purposes, such as child care, employment programs, and child welfare services. Due to the flexibility given to states, TANF programs differ substantially by state. States are required to develop plans that outline their intended use of funds and report data on families receiving assistance. While the federal TANF statute does not define "assistance," HHS defines assistance in regulation as cash payments, vouchers, and other forms of benefits designed to meet a family's "ongoing basic needs," such as food, clothing, shelter, utilities, household goods, personal-care items, and general incidental expenses. Traditionally, states disbursed cash assistance benefit payments by means of paper check. The EBT program was devised in the 1980s originally to meet the needs of the Department of Agriculture's (USDA) Food Stamp Program, in which federal benefits were electronically disbursed to eligible recipients. These cards are not tied to a consumer asset account, and generally the account structures and processing requirements differ from other payment cards. EBT cards can be used to deliver benefits to banked and unbanked recipients and can be used to deliver multiple benefits using a single card. The cost savings in the Food Stamp Program (now known as the Supplemental Nutrition Assistance Program or SNAP) from using electronic payments to distribute benefits prompted states to use EBT cards to also distribute TANF benefits electronically, leveraging the existent EBT system designed for SNAP. Electronic benefit distribution methods also include Electronic Payment Cards (EPC). Some EPC cards are prepaid or debit cards that are branded with a MasterCard, American Express, Discover, or Visa logo, which allows cardholders to conduct signature-based transactions anywhere that those brands are accepted as well as at ATM and point-of- sale (POS) machines. Electronic benefit cards--both EBT and EPC--generally can be used like traditional debit or credit cards, in that recipients can use them at ATMs to withdraw cash, or at retailers' POS terminals for purchases or to receive cash by selecting a cash-back option. However, there are some key differences between the electronic benefit card and commercial credit cards. The main difference is that electronic benefit cards do not carry a credit line, and the purchases or withdrawals made with these cards cannot exceed the amount of recipients' TANF benefits. With commercial credit cards, cardholders borrow to make a purchase and then pay the money back later. Electronic benefit cards are more like debit or stored- value cards and provide an alternative to cash--each time that a cardholder uses his or her electronic benefit card, the money spent or withdrawn is deducted from the cardholder's TANF benefits account. States consider various factors when implementing EBT or EPC programs, including potential financial burden to recipients, such as transaction fees at ATMs that charge a surcharge for each transaction; recipient characteristics, such as disabilities; implementation costs; and fraud and security risks. States also take into account how readily recipients can access cash assistance. For example, in some rural areas or low-income neighborhoods the only access point for cash assistance benefits may be a location such as a grocery store, single depository institution, or even a liquor store. Some of the benefits to recipients from states choosing EBT or EPC programs include quicker disbursement of benefits, the elimination of lost or undelivered paper checks, access to benefits without an established bank account, and no need to locate check-cashing venues in order to access benefits. Prior to 2012, states were not required under federal law to take steps aimed at preventing specific TANF transactions at certain locations. However, the Welfare Integrity and Data Improvement Act, part of the Middle Class Tax Relief and Job Creation Act of 2012, signed into law on February 22, 2012, introduced several changes to TANF that can affect recipients' ability to access cash assistance at certain locations. Specifically, the Act requires that each state receiving a TANF block grant maintain policies and practices as necessary to prevent TANF assistance from being used in any "electronic benefit transfer transaction" in any liquor store; any casino, gambling casino, or gaming establishment; or any retail establishment that provides adult-oriented entertainment in which performers disrobe or perform in an unclothed state for entertainment. The Act calls for HHS to determine whether states have implemented and maintained policies and practices to prevent such transactions, within 2 years of the Act's enactment. If HHS determines that a state has not implemented and maintained these policies and practices, or if a state has not reported to HHS on its policies and practices, HHS may reduce the state's family assistance grant by an amount equal to 5 percent of the state's grant amount for the federal fiscal year following the 2-year period after enactment and each succeeding federal fiscal year in which the state does not demonstrate that it has implemented and maintained such policies and practices. However, HHS may reduce the amount of this penalty on the basis of the degree of noncompliance of the state in question. In addition, the Act specifies that states are not responsible for individuals who engage in fraudulent activity to circumvent the state's policies and practices, and will not face a reduction in their family assistance grant amounts in such cases. The Act defines liquor store as "any retail establishment which sells exclusively or primarily intoxicating liquor. Such term does not include a grocery store which sells both intoxicating liquor and groceries including staple foods (within the meaning of section 3(r) of the Food and Nutrition Act of 2008 (7 U.S.C. 2012(r)))." Id. The Act also contains requirements for states related to maintaining recipients' access to TANF cash assistance. As part of the plan that each state is required to submit to HHS, states must include policies and procedures to ensure that recipients have adequate access to their cash assistance. In addition, states must ensure that recipients have access to using or withdrawing assistance with minimal fees or charges, including an opportunity to access assistance with no fees or charges, and that they are provided information on applicable fees and surcharges that apply to electronic fund transactions involving the assistance, and that such information is made publicly available. HHS issued a request for public comment in April 2012, seeking information by June 2012 on: how states deliver TANF assistance to beneficiaries, whether states have implemented policies and practices to prevent electronic benefit transfer transactions at the locations mentioned above, states' experiences with these policies and practices, and other similar restrictions states place on TANF assistance usage. In its notice, HHS identified multiple questions for states to answer, including questions on the methods states use to track the locations where transactions occur, challenges states experienced when implementing any restrictions on transactions at certain locations, the initial and ongoing costs of restrictions, the effectiveness of restrictions and the factors influencing the effectiveness, and any concerns that have been raised about the restrictions, among other things. In addition, HHS requested input from states' EBT vendors on potential issues that states may face in implementing restrictions, including technical issues, cost implications, access implications, and mechanisms for addressing problems identified. Six of the 10 states we reviewed have taken steps to prevent certain types of inappropriate TANF transactions--restrictions that in some cases are broader than recent federal requirements that require states to take steps aimed at preventing transactions in casinos, liquor stores, and adult-entertainment establishments. These 6 states faced a variety of challenges in identifying inappropriate locations and preventing transactions at these locations. At the time these efforts were undertaken, there were no federal requirements that required states to take steps aimed at restricting such transactions. In addition, EBT transaction data from federal fiscal year 2010 from 4 of the 10 selected states were generally incomplete or unreliable, and were of limited use to the states for systematically identifying or monitoring inappropriate locations. While the federal requirements to restrict inappropriate transactions now exist, data issues and other challenges, if unaddressed, may continue to affect efforts to comply with these new requirements. Six of the 10 states we selected and reviewed have taken steps to prevent certain types of TANF transactions; these actions vary in their degree and means of implementation, from widespread disabling of EBT access at ATMs in certain locations across a state to, according to officials from one state, passing a law without implementing steps for enforcing it. The restrictions generally involve prohibiting the use of EBT cards at certain locations or prohibiting purchases of certain goods or services, or both, as shown in figure 1 below. In 4 of the 10 selected states, there were no restrictions on TANF transactions, as no transactions were unauthorized based on the location of the transactions or the nature of the goods or services purchased. As mentioned above, before the 2012 enactment of federal legislation, states were not required by the federal government to maintain or implement policies and practices aimed at preventing TANF transactions based on the location of the transactions. Figure 1 below, an interactive map, provides rollover information (see interactive instructions below) that describes the steps that selected states have taken aimed at preventing the use of TANF cash assistance for certain purchases or in certain locations. (See app. II for the steps taken within each selected state.) The purpose of TANF is to help needy families achieve self-sufficiency. Providing TANF benefits by means of electronic benefit cards helps the banked and unbanked TANF recipients, gives TANF recipients an alternate to cash, and allows states to use existing infrastructures. However, any misuse of TANF funds not only deprives low-income families of needed assistance, but also diminishes public trust in both the integrity of the program and the federal government. Before Congress passed the Welfare Integrity and Data Improvement Act, as part of the Middle Class Tax Relief and Job Creation Act of 2012, some states acted independently to implement restrictions on certain TANF transactions. As a result, their approach to enacting restrictions varies significantly. However, until HHS issues regulations or provides further guidance as to what policies and practices are sufficient to comply with the new federal requirements, it is unclear to what extent the various restrictions implemented by states would be in compliance. The experience of these states--especially any information related to the cost-effectiveness and success rates for various restrictions--could be beneficial for HHS to consider as it works toward determining what policies and practices are sufficient to comply with the new federal law. As we heard from officials in multiple states, preventing unauthorized transactions can be time- intensive and is impaired by flaws in available transaction data and other challenges. Addressing the limitations we found in transaction data that impede the identification and monitoring of certain locations could require significant resources. Therefore, restriction methods that do not rely on flawed transaction data may be the most practical, such as Washington state's requirement for businesses to independently disable EBT access or risk losing or not obtaining their state licenses to operate. We provided a draft of this report to HHS for comment. In its written comments, reproduced in appendix III, HHS noted that our report highlights many of the challenges and issues states and others face in issuing the TANF requirements that Congress enacted in February 2012. In addition, HHS stated that our report's findings and analysis will be helpful as HHS drafts implementing regulations relevant to these TANF requirements. HHS also provided technical comments that we incorporated, as appropriate. In May 2012, we also provided the 10 selected states with an opportunity to comment on our draft findings relevant to their specific TANF programs. In May 2012, 7 of the 10 selected states provided us with technical comments by e-mail, and we incorporated their technical comments as appropriate. Three states, Illinois, Massachusetts, and Pennsylvania, had no comments. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to other interested congressional committees and the Secretary of Health and Human Services. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Our objective was to determine the extent to which selected states have taken action to prevent unauthorized Temporary Assistance for Needy Families (TANF) transactions. To conduct our work, we reviewed TANF laws, regulations, and other documentation--including the Welfare Integrity and Data Improvement Act, part of the Middle Class Tax Relief and Job Creation Act of 2012, which introduced new state requirements for preventing certain TANF transactions--and interviewed officials from Health and Human Services (HHS). From each selected state, we reviewed information related to its laws, policies, practices, and other factors affecting its TANF program. In addition, we interviewed and reviewed documentation from several key industry stakeholders related to states' efforts to prevent unauthorized TANF transactions. We also interviewed officials from the top 10 states in terms of TANF basic block- grant dollars--California, New York, Michigan, Ohio, Pennsylvania, Illinois, Florida, Texas, Massachusetts, and Washington. Together, these 10 states represent a total of 66 percent of TANF basic block-grant funds. The industry stakeholders included: JP Morgan Chase and Affiliated Computer Services, the two largest vendors providing TANF electronic benefit card services to the states; the Electronic Funds Transfer Association, an industry trade association that conducts work related to electronic benefit card services for government agencies at the federal and state level; the National Conference of State Legislatures, a bipartisan organization that provides research and other services to state legislators and their staff; and the American Public Human Services Association, a bipartisan, nonprofit organization representing appointed state and local health and human-services agency commissioners. We obtained electronic benefit card transaction data from 4 of the 10 selected states--California, Florida, New York, and Texas--covering transactions from federal fiscal year 2010. We selected these 4 states based on geographical diversity. The results of our analysis of these 4 states' data cannot be generalized to other states. Using these data, we assessed the extent to which the data would allow the 4 selected states to conduct systematic monitoring of TANF transactions. Such monitoring might include an assessment of the prevalence of transactions at certain locations. To do so, we used a generalizable, random sample of each of the 4 selected states' Electronic Benefit Transfer (EBT) transaction data and compared it to electronic geo-coding information that pinpoints places and Subsequent visual inspection and manual cleaning of identifies locations.obvious address errors in the EBT data only resulted in a small portion of corrected location addresses. We also assessed whether the data would allow states to identify individual TANF transactions at certain types of locations. To do so, we conducted keyword searches of merchant names for terms that are potentially associated with casinos, liquor stores, and adult-entertainment establishments. We performed data checks to determine the reliability of the California, Florida, New York, and Texas EBT data for the purposes of our engagement. For all four states, we determined that the EBT data are not sufficiently reliable for the purpose of performing systematic monitoring, as the selected states' data contained incomplete or inaccurate information for the addresses of the locations where the transactions occurred. Given the combination of both completeness and accuracy issues in the 4 selected states, we also determined most of the data in the 4 selected states could not match to address location information that would allow for suitable comparisons to other potential data sources. However, we determined that the transaction data would support keyword searches of merchant names for terms that are associated potentially with casinos, liquor stores, and adult-entertainment establishments, for records that contain merchant names. We conducted this performance audit from October 2012 to July 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. The table below includes figure 1's (see above) rollover information and describes the steps that 6 of the 10 states we reviewed have taken that are aimed at preventing the use Temporary Assistance for Needy Families (TANF) cash assistance for certain purchases or in certain locations. In addition to the contact named above, Cindy Brown Barnes, Assistant Director; Erika Axelson, Assistant Director; Christopher W. Backley; Melinda Cordero; Justin Fisher; Katherine Forsyth; Gale Harris; Olivia Lopez; Grant Mallie; Flavio J. Martinez; Maria McMullen; James Murphy; Anna Maria Ortiz; Robert C. Rodgers; Rebecca Shea; and Timothy Walker made key contributions to this report.

The TANF block grant program provides federal grants to states for various benefits and activities, including cash welfare for needy families with children. TANF is overseen at the federal level by HHS, and administered by states. Most states disburse TANF cash assistance through electronic benefit cards, which can be used to withdraw money or make purchases. Media coverage highlighted cases of cardholders accessing benefits at casinos and other locations that were considered inconsistent with the purpose of TANF. In February 2012, Congress passed a law requiring states to prevent certain transactions at casinos, liquor stores, and adult-entertainment establishments. Within 2 years of enactment, the law also requires HHS to oversee states' compliance with these requirements. GAO was asked to review the ability of TANF recipients to withdraw TANF funds at certain locations inconsistent with the purpose of TANF, such as gambling or other establishments. To do so, GAO reviewed documentation and interviewed officials from HHS, key industry stakeholders, and the top 10 states in TANF basic block grant dollars. GAO also assessed the completeness and accuracy of EBT transaction data from federal fiscal year 2010 from 4 of the 10 states selected. GAO selected these 4 states on the basis of geographical diversity, and the results of this data analysis cannot be generalized to other states. Six of the 10 states reviewed by GAO took steps aimed at preventing certain Temporary Assistance for Needy Families (TANF) transactions determined to be inconsistent with the purpose of TANF, despite no federal requirement to do so at the time. Restrictions are based on selected states' laws, executive orders, and other regulations, and generally cover certain locations or certain types of purchases such as alcohol. In some cases, states' restrictions are broader than the new federal requirements. These restrictions vary in their degree and means of implementation, including widespread disabling of Electronic Benefit Transfer (EBT) access at automated teller machines located at certain locations across a state, such as at casinos. The other 4 states had no restrictions because no laws, executive orders, or other regulations prohibited certain transactions based on the location of the transactions or the nature of the goods or services purchased. These states did not implement restrictions due to concerns about cost-effectiveness or technical limitations, according to state officials. Challenges experienced by states in implementing their current restrictions could inhibit future restriction efforts, including those intended to address new federal requirements. These challenges included difficulties with identifying certain locations that could be prohibited and limitations in available data. For example, the transaction data states receive do not contain information that is accurate or detailed enough for them to identify locations that can potentially be prohibited or restricted. State officials suggested that improvements in the completeness and accuracy of transaction data might better enable them to prevent such transactions. In its assessment of the EBT transaction data from 4 states, GAO found that the data are insufficient for systematic monitoring. To effectively conduct systematic monitoring, including the identification of locations that could be blocked from TANF access, data should be complete and accurate. However, addressing the limitations that GAO found in the transaction data--such as requiring accurate merchant category codes for retailers--could involve significant resources. States that prohibit certain types of purchases generally do not have ways to track what items recipients buy with their cards, partially due to the lack of information in transaction data on specific goods or services purchased. States were also challenged in attempting to track the spending of cash withdrawn with cards. With no controls on how or where individuals spend withdrawn cash, a recipient could withdraw money at an authorized location and use it at certain locations or for certain purchases restricted by some states. As of July 2012, the Department of Health and Human Services (HHS) was at the beginning of its rulemaking process and did not yet know what form its regulations would take. Until HHS issues regulations or provides further guidance as to what policies and practices are sufficient to comply with new federal requirements, it is unclear to what extent the various restrictions implemented by states would be in compliance. States' restrictions could help inform HHS's oversight efforts, especially any information on the cost-effectiveness and success rates for various state restrictions. Restriction methods that do not rely on flawed transaction data may be the most practical. We provided HHS with a draft of our report for comment. HHS stated that our report's findings and analysis will be helpful as it drafts implementing regulations, and it provided technical comments that we incorporated, as appropriate. GAO is not making any recommendations.

The National Guard, with its dual federal and state roles, has been in demand to meet both overseas operations and homeland security requirements. Over the last decade the National Guard has experienced the largest activation of its forces since World War II. At the same time, the Guard's domestic activities have expanded from routine duties, such as responding to hurricanes, to include activities such as helping to secure U.S. borders. Generally, the National Guard can operate in three different statuses: (1) state status--state funded under the command and control of the governor; (2) Title 32 status--federally funded under command and control of the governor (Title 32 forces may participate in law enforcement activities); and (3) Title 10 status--federally funded under command and control of the Secretary of Defense. Forces serving in Title 10 status are generally prohibited from direct participation in law enforcement activities, without proper statutory authorization, but may work to support civilian law enforcement. Although National Guard forces working in support of law enforcement at the southwest land border have been activated under Title 32, the Secretary of Defense has limited their activities with regard to law enforcement. Specifically, these National Guard forces are not to make arrests. Since 2006, the National Guard has supported DHS's border security mission in the four southwest border states (California, Arizona, New Mexico, and Texas) through two missions: Operation Jump Start (June 2006-July 2008) involved volunteers from the border states and from outside the border states; its mission included aviation, engineering, and entry identification, among others, according to National Guard officials. Operation Phalanx (July 2010-September 30, 2011) involved volunteer units and in-state units. The Secretary of Defense limited the National Guard mission to entry identification, criminal analysis, and command and control, according to National Guard officials. In addition to the National Guard, DOD provided support at the southwest land border with active duty military forces operating in Title 10 status. While active duty forces are normally prohibited from direct participation in law enforcement, Congress has at times authorized it. For example, SS1004 of the National Defense Authorization Act for Fiscal Year 1991, as amended, allows the Secretary of Defense to provide support for the counterdrug activities of any other department or agency of the federal government or of any state, local, or foreign law enforcement agency if certain criteria, set out in the statute, are met. Various factors influence the cost of a DOD role at the southwest land border, such as the scope and duration of the mission. Federal agency officials have cited a variety of benefits from having a DOD role at the southwest land border. The National Defense Authorization Act for Fiscal Year 2011 mandated that we examine the costs and benefits of an increased DOD role to help secure the southwest land border. This mandate directed that we report on a number of steps that could be taken that might improve security on the border, including the potential deployment of additional units, increased use of ground-based mobile surveillance systems, use of mobile patrols by military personnel, and an increased deployment of unmanned aerial systems and manned aircraft to provide surveillance of the southern land border of the United States. In September 2011, we reported that DOD estimated a total cost of about $1.35 billion for two separate border operations--Operation Jump Start and Operation Phalanx--conducted by the National Guard forces in Title 32 status from June 2006 to July 2008 and from June 2010 through September 30, 2011, respectively. Further, DOD estimated that it has cost about $10 million each year since 1989 to use active duty Title 10 forces nationwide, through its Joint Task Force-North, in support of drug law enforcement agencies with some additional operational costs borne by the military services. As we considered the various steps we were directed to address in our report, we found that the factors that may affect the cost of a DOD effort are largely determined by the legal status and the mission of military personnel being used, specifically whether personnel are responding under Title 32 or Title 10 (federal status) of the Unites States Code. For example, in considering the deployment of additional units, if National Guard forces were to be used in Title 32 status, then the factors that may impact the cost include whether in-state or out-of-state personnel are used, the number of personnel, duration of the mission, ratio of officers to enlisted personnel, and equipment and transportation needs. The costs of National Guard forces working at the border in Title 32 status can also be impacted by specific missions. For example, DOD officials told us that if National Guardsmen were assigned a mission to conduct mobile patrols, then they would be required to work in pairs and would only be able to perform part of the mission (i.e., to identify persons of interest). They would then have to contact the Border Patrol to make possible arrests or seizures because the Secretary of Defense has precluded National Guardsmen from making arrests or seizures during border security missions. Border Patrol agents, however, may individually conduct the full range of these activities, thus making the use of Border Patrol agents for these activities more efficient. At the time of our review, Title 10 active duty military forces were being used for missions on the border, and cost factors were limited primarily to situations whereby DOD may provide military support to law enforcement agencies for counternarcotic operations. Support can include direct funding, military personnel, and equipment. With the estimated $10 million that DOD spends each year for Title 10 active duty forces in support of drug law enforcement agencies nationwide, DOD is able-- through its Joint Task Force-North--to support approximately 80 of about 400 requests per year for law enforcement assistance. These funds have been used for activities in support of law enforcement such as operations, engineering support, and mobile training teams. For example, DOD was able to provide some funding for DOD engineering units that constructed roads at the border. While DOD provided the manpower and equipment, CBP provided the materials. In addition, DOD was able to provide some funding for DOD units that provided operational support (e.g., ground based mobile surveillance unit) to law enforcement missions. We also reported on the cost factors related to deploying manned aircraft and unmanned aerial systems. DOD officials did not report any use of unmanned aerial systems for border security missions because these systems were deployed abroad. DOD officials, however, did provide us with cost factors for the Predator and Reaper unmanned aerial systems. Specifically, in fiscal year 2011, the DOD Comptroller reported that a Predator and a Reaper cost $859 and $1,456 per flight hour, respectively. DOD uses maintenance costs, asset utilization costs, and military personnel costs to calculate these figures. In addition, DOD officials identified other factors that may impact operating costs of unmanned aerial systems, including transportation for personnel and equipment, rental or lease for hanger space, and mission requirements. With regard to manned aircraft, DOD provided cost factors for a Blackhawk helicopter and a C-12 aircraft, which were comparable to the type of rotary and fixed-wing aircraft used by DHS. For example, in fiscal year 2011, DOD reported that a Blackhawk helicopter and a C-12 aircraft cost $5,897 and $1,370 per flight hour, respectively. DOD uses maintenance costs, asset utilization costs, and military personnel costs to develop their flight hour estimates. Furthermore, according to DOD officials, in fiscal year 2011, DOD contracted for a Cessna aircraft with a forward-looking infrared sensor (known as the Big Miguel Program), which costs $1.2 million per year and assisted at the southwest land border. Federal officials cited a variety of benefits from a DOD role to help secure the southwest land border. For example, DOD assistance has (1) provided a bridge or augmentation until newly hired Border Patrol agents are trained and deployed to the border; (2) provided training opportunities for military personnel in a geographic environment similar to combat theaters abroad; (3) contributed to apprehensions and seizures made by Border Patrol along the border; (4) deterred illegal activity at the border; (5) built relationships with law enforcement agencies; and (6) maintained and strengthened military-to-military relationships with forces from Mexico. Specifically with regard to Operation Jump Start (June 2006-July 2008), CBP officials reported that the National Guard assisted in the apprehension of 186,814 undocumented aliens, and in the seizure of 316,364 pounds of marijuana, among other categories of assistance, including rescues of persons in distress and the seizure of illicit currency. Based on these reported figures, the National Guard assisted in 11.7 percent of all undocumented alien apprehensions and 9.4 percent of all marijuana seized on the southwest land border. During the National Guard's Operation Phalanx (July 2010-June 30, 2011), CBP reported that as of May 31, 2011, the National Guard assisted in the apprehension of 17,887 undocumented aliens and the seizure of 56,342 pounds of marijuana. Based on these reported figures, the National Guard assisted in 5.9 percent of all undocumented alien apprehensions and 2.6 percent of all marijuana seized on the southwest land border. In fiscal year 2010, active duty military forces (Title 10), through Joint Task Force-North, conducted 79 missions with 842 DOD personnel in support of law enforcement and assisted in the seizure of about 17,935 pounds of marijuana, assisted in the apprehension of 3,865 undocumented aliens, and constructed 17.26 miles of road, according to DOD officials. With regard to unmanned aerial systems at the time of our report, DOD had fewer systems available, since they were deployed to missions abroad, including operations in Afghanistan, Iraq, and elsewhere. Moreover, DOD's access to the national airspace is constrained given the safety concerns about unmanned aerial systems raised by the Federal Aviation Administration, specifically the ability of the unmanned aerial system to detect, sense, and avoid an aircraft in flight. We also reported that, conversely, pilots of manned aircraft have the ability to see and avoid other aircraft, and thus may have more routine access to the national airspace. Further, DOD reports that manned aircraft are effective in the apprehension of undocumented aliens. For example, during fiscal year 2011, DOD leased a manned Cessna aircraft (the Big Miguel Program) that was used to assist in the apprehension of at least 6,500 undocumented aliens and the seizure of $54 million in marijuana, as reported to DOD by DHS. A number of challenges exist for both the National Guard and for active- duty military forces in providing support to law enforcement missions on the southwest land border. National Guard personnel involved in activities on the border have been under the command and control of the governors of the southwest border states and have received federal funding in Title 32 status. In this status, National Guard personnel are permitted to participate in law enforcement activities; however, the Secretary of Defense has limited their activities, which has resulted in the inability of the National Guard units to make arrests while performing border security missions. The National Guard mission limitations are based in part on concerns raised by both DOD and National Guard officials that civilians may not distinguish between Guardsmen and active duty military personnel in uniform, which may lead to the perception that the border is militarized. Therefore, all arrests and seizures at the southwest land border are performed by the Border Patrol. Additionally, we found that the temporary use of the National Guard to help secure the border may give rise to additional challenges. For example, we reported that the use of out-of-state Guardsmen for long- term missions in an involuntary status may have an adverse effect on future National Guard recruitment and retention, according to National Guard officials. Finally, CBP officials noted that the temporary nature of National Guard duty at the border could impact long-term border security planning. These impacts are due to difficulties of incorporating the National Guard into a strategic border security plan, given the variety and number of missions that the National Guard is responsible for, including disaster assistance. In meeting with DOD officials, we heard of multiple challenges to providing support to law enforcement missions. Specifically, there are legal restraints and other challenges that active duty forces must be mindful of when providing assistance to civilian law enforcement. For example, the 1878 Posse Comitatus Act, 18 U.S.C. SS1385, prohibits the direct use of Title 10 (federal) forces in domestic civilian law enforcement, except where authorized by the Constitution or an act of Congress. However, Congress has authorized military support to law enforcement agencies in specific situations such as support for the counterdrug activities of other agencies. DOD further clarifies restrictions on direct assistance to law enforcement with its guidance setting out the approval process for Title 10 forces providing operational support for counternarcotic law enforcement missions. meet a number of criteria, including that the mission must: The request of law enforcement agencies for support must Have a valid counterdrug nexus. Have a proper request from law enforcement (the request must come Provide a training opportunity to increase combat readiness. from an appropriate official, be limited to unique military capabilities, and provide a benefit to DOD or be essential to national security goals). Improve unit readiness or mission capability. Deputy Secretary of Defense Memorandum, Department Support to Domestic Law Enforcement Agencies Performing Counternarcotic Activities (October 2, 2003). Avoid the use of Title 10 forces (military services) for continuing, ongoing, long-term operation support commitments at the same location. Given the complexity of legal authorities and policy issues related to DOD providing support to law enforcement and the number of DOD entities that must approve a support mission by Title 10 forces, it can take up to 180 days to obtain final approval from the Office of the Secretary of Defense to execute a mission in support of law enforcement. While supporting law enforcement, DOD may be subject to certain limitations. For example, one limitation is that DOD units working on border missions cannot carry loaded weapons. Instead, DOD units working on the border rely on armed Border Patrol agents, who are assigned to each military unit to provide protection. In addition, we reported in September 2011 that DOD's operational tempo may impact the availability of DOD units to fill law enforcement support missions. While some DOD units are regularly available to meet specific mission needs at the border (e.g., mechanized units to construct roads), other DOD units (e.g., ground-based surveillance teams) are deployed or may be deployed abroad making it more difficult to fulfill law enforcement requests at any given time. Further, DOD officials we spoke with also raised information-sharing challenges when providing support to law enforcement missions. For example, DOD officials commented that because there are different types of law enforcement personnel that use information differently (e.g., make an immediate arrest or watch, wait, and grow an investigation leading to a later arrest), it was sometimes difficult for DOD to understand whether information sharing was a priority among law enforcement personnel. DOD officials also noted that a lack of security clearances for law enforcement officials affects DOD's ability to provide classified information to CBP. During our examination of an increased role for DOD at the southwest land border, agency officials we spoke with raised a number of broader issues and concerns surrounding any future expansion of such assistance. Agency officials identified four areas of concern: DOD officials expressed concerns about the absence of a comprehensive strategy for southwest border security and the resulting challenges to identify and plan a DOD role. DHS officials expressed concerns that DOD's border assistance is ad hoc in that DOD has other operational requirements. DOD assists when legal authorities allow and resources are available, whereas DHS has a continuous mission to ensure border security. Department of State and DOD officials expressed concerns that greater or extended use of military forces on the border could create a perception of a militarized U.S. border with Mexico, especially when Department of State and Justice officials are helping support civilian law enforcement institutions in Mexico to address crime and border issues. Federal Aviation Administration officials, who are part of the Department of Transportation, stated that they are concerned about safety in the national airspace, due to concerns about the ability of unmanned aerial systems to detect, sense, and avoid an aircraft in flight. The Federal Aviation Administration has granted DHS authority to fly unmanned aerial systems to support its national security mission along the U.S. southwest land border, and is working with DOD, DHS, and the National Aeronautics and Space Administration to identify and evaluate options to increase unmanned aerial systems access in the national airspace. We did not make any recommendations in our September 2011 report. Chairman Miller, Ranking Member Cuellar, and Members of the Subcommittee, this concludes my prepared statement. I am pleased to answer any questions that you may have at this time. For future questions about this statement, please contact me on (202) 512-4523 or [email protected]. Individuals making key contributions to this statement include Mark Pross, Assistant Director; Yecenia Camarillo; Carolynn Cavanaugh; Nicole Willems; Lori Kmetz; Charles Perdue; Richard Powelson; Terry Richardson; and Jason Wildhagen. Border Security: Additional Steps Needed to Ensure That Officers Are Fully Trained. GAO-12-269. Washington, D.C.: December 22, 2011. U.S. Customs and Boarder Protection's Border Security Fencing, Infrastructure and Technology Fiscal Year 2011 Expenditure Plan. GAO-12-106R. Washington, D.C.: November 17, 2011. Arizona Border Surveillance Technology: More Information on Plans and Costs Is Needed before Proceeding. GAO-12-22. Washington, D.C.: November 4, 2011. Observations on the Costs and Benefits of an Increased Department of Defense Role in Helping to Secure the Southwest Land Border. GAO-11-856R. Washington, D.C.: September 12, 2011. Homeland Security: DHS Could Strengthen Acquisitions and Development of New Technologies. GAO-11-829T. Washington, D.C.: July 15, 2011. Secure Border Initiative: Controls over Contractor Payments for the Technology Component Need Improvement. GAO-11-68. Washington, D.C.: May 25, 2011. Southwest Border: Border Patrol Operations on Federal Lands. GAO-11-573T. Washington, D.C.: April 15, 2011. Border Security: DHS Progress and Challenges in Securing the U.S. Southwest and Northern Borders. GAO-11-508T. Washington, D.C.: March 30, 2011. Border Security: Preliminary Observations on the Status of Key Southwest Border Technology Programs. GAO-11-448T. Washington, D.C.: March 15, 2011. Moving Illegal Proceeds: Opportunities Exist for Strengthening the Federal Government's Efforts to Stem Cross-Border Currency Smuggling. GAO-11-407T. Washington, D.C.: March 9, 2011. Border Security: Preliminary Observations on Border Control Measures for the Southwest Border. GAO-11-374T. Washington, D.C.: February 15, 2011. Border Security: Enhanced DHS Oversight and Assessment of Interagency Coordination Is Needed for the Northern Border. GAO-11-97. Washington, D.C.: December 17, 2010. Border Security: Additional Actions Needed to Better Ensure a Coordinated Federal Response to Illegal Activity on Federal Lands. GAO-11-177. Washington, D.C.: November 18, 2010. Moving Illegal Proceeds: Challenges Exist in the Federal Government's Effort to Stem Cross-Border Currency Smuggling. GAO-11-73. Washington, D.C.: October 25, 2010. Secure Border Initiative: DHS Needs to Strengthen Management and Oversight of Its Prime Contractor. GAO-11-6. Washington, D.C.: October 18, 2010. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

DHS reports that the southwest border continues to be vulnerable to cross-border illegal activity, including the smuggling of humans and illegal narcotics. Several federal agencies are involved in border security efforts, including DHS, DOD, Justice, and State. In recent years, the National Guard has played a role in helping to secure the southwest land border by providing the Border Patrol with information on the identification of individuals attempting to cross the southwest land border into the United States. Generally, the National Guard can operate in three different statuses: (1) state status--state funded under the command and control of the governor; (2) Title 32 status--federally funded under command and control of the governor; and (3) Title 10 status--federally funded under command and control of the Secretary of Defense. This testimony discusses (1) the costs and benefits of a DOD role to help secure the southwest land border, including the deployment of the National Guard, other DOD personnel, or additional units; (2) the challenges of a DOD role at the southwest land border; and (3) considerations of an increased DOD role to help secure the southwest land border. The information in this testimony is based on work completed in September 2011, which focused on the costs and benefits of an increased role of DOD at the southwest land border. See "Observations on the Costs and Benefits of an Increased Department of Defense Role in Helping to Secure the Southwest Land Border," GAO-11-856R (Washington, D.C.: Sept. 12, 2011). The National Defense Authorization Act for Fiscal Year 2011 mandated that GAO examine the costs and benefits of an increased Department of Defense (DOD) role to help secure the southwest land border. This mandate directed that GAO report on, among other things, the potential deployment of additional units, increased use of ground-based mobile surveillance systems, use of mobile patrols by military personnel, and an increased deployment of unmanned aerial systems and manned aircraft in national airspace. In September 2011, GAO reported that DOD estimated a total cost of about $1.35 billion for two separate border operations--Operation Jump Start and Operation Phalanx--conducted by National Guard forces in Title 32 status from June 2006 to July 2008 and from June 2010 through September 30, 2011, respectively. Further, DOD estimated that it has cost about $10 million each year since 1989 to use active duty Title 10 forces nationwide, through its Joint Task Force-North, in support of drug law enforcement agencies with some additional operational costs borne by the military services. Agency officials stated multiple benefits from DOD's increased border role, such as assistance to the Department of Homeland Security (DHS) Border Patrol until newly hired Border Patrol agents are trained and deployed to the border; providing DOD personnel with training opportunities in a geographic environment similar to current combat theaters; contributing to apprehensions and seizures and deterring other illegal activity along the border; building relationships with law enforcement agencies; and strengthening military-to-military relationships with forces from Mexico. GAO found challenges for the National Guard and for active-duty military forces in providing support to law enforcement missions. For example, under Title 32 of the United States Code, National Guard personnel are permitted to participate in law enforcement activities; however, the Secretary of Defense has precluded National Guard forces from making arrests while performing border missions because of concerns raised about militarizing the U.S. border. As a result, all arrests and seizures at the southwest border are performed by the Border Patrol. Further, DOD officials cited restraints on the direct use of active duty forces, operating under Title 10 of the United States Code in domestic civilian law enforcement, set out in the Posse Comitatus Act of 1878. In addition, GAO has reported on the varied availability of DOD units to support law enforcement missions, such as some units being regularly available while other units (e.g., ground-based surveillance teams) may be deployed abroad--making it more difficult to fulfill law enforcement requests. Federal officials stated a number of broad issues and concerns regarding any additional DOD assistance in securing the southwest border. DOD officials expressed concerns about the absence of a comprehensive strategy for southwest border security and the resulting challenges to identify and plan a DOD role. DHS officials expressed concerns that DOD's border assistance is ad hoc in that DOD has other operational requirements. DOD assists when legal authorities allow and resources are available, whereas DHS has a continuous mission to ensure border security. Further, Department of State and DOD officials expressed concerns about the perception of a militarized U.S. border with Mexico, especially when Department of State and Justice officials are helping civilian law enforcement institutions in Mexico on border issues.

Virtually all federal operations are supported by automated systems and electronic data, and agencies would find it difficult, if not impossible, to carry out their missions and account for their resources without these information assets. Therefore, it is important for agencies to safeguard their systems against risks such as loss or theft of resources (such as federal payments and collections), modification or destruction of data, and unauthorized uses of computer resources or to launch attacks on other computer systems. Sensitive information, such as taxpayer data, Social Security records, medical records, and proprietary business information could be inappropriately disclosed, browsed, or copied for improper or criminal purposes. Critical operations could be disrupted, such as those supporting national defense and emergency services or agencies' missions could be undermined by embarrassing incidents, resulting in diminished confidence in their ability to conduct operations and fulfill their responsibilities. Cyber threats to federal systems and critical infrastructures can be unintentional and intentional, targeted or nontargeted, and can come from a variety of sources. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt systems. Intentional threats include both targeted and nontargeted attacks. A targeted attack is when a group or individual specifically attacks a critical infrastructure system. A nontargeted attack occurs when the intended target of the attack is uncertain, such as when a virus, worm, or malware is released on the Internet with no specific target. The Federal Bureau of Investigation has identified multiple sources of threats to our nation's critical information systems, including foreign nation states engaged in information warfare, domestic criminals, hackers, virus writers, and disgruntled employees working within an organization. Table 1 summarizes those groups or individuals that are considered to be key sources of cyber threats to our nation's information systems and infrastructures. As federal information systems increase their connectivity with other networks and the Internet and as the system capabilities continue to increase, federal systems will become increasingly more vulnerable. Data from the National Vulnerability Database, the U.S. government repository of standards-based vulnerability management data, showed that, as of February 6, 2008, there were about 29,000 security vulnerabilities or software defects that can be directly used by a hacker to gain access to a system or network. On average, close to 17 new vulnerabilities are added each day. Furthermore, the database revealed that more than 13,000 products contained security vulnerabilities. These vulnerabilities become particularly significant when considering the ease of obtaining and using hacking tools, the steady advances in the sophistication and effectiveness of attack technology, and the emergence of new and more destructive attacks. Thus, protecting federal computer systems and the systems that support critical infrastructures has never been more important. Over five years have passed since Congress enacted FISMA, which sets forth a comprehensive framework for ensuring the effectiveness of security controls over information resources that support federal operations and assets. FISMA's framework creates a cycle of risk management activities necessary for an effective security program, and these activities are similar to the principles noted in our study of the risk management activities of leading private sector organizations--assessing risk, establishing a central management focal point, implementing appropriate policies and procedures, promoting awareness, and monitoring and evaluating policy and control effectiveness. More specifically, FISMA requires the head of each agency to provide information security protections commensurate with the risk and magnitude of harm resulting from the unauthorized access, use, disclosure, disruption, modification or destruction of information and information systems used or operated by the agency or on behalf of the agency. In this regard, FISMA requires that agencies implement information security programs that, among other things, include * periodic assessments of the risk; * risk-based policies and procedures; * subordinate plans for providing adequate information security for networks, facilities, and systems or groups of information systems, as appropriate; * security awareness training for agency personnel, including contractors and other users of information systems that support the operations and assets of the agency; * periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, performed with a frequency depending on risk, but no less than annually; * a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies; * procedures for detecting, reporting, and responding to security * plans and procedures to ensure continuity of operations. In addition, agencies must develop and maintain an inventory of major information systems that is updated at least annually and report annually to the Director of OMB and several Congressional Committees on the adequacy and effectiveness of their information security policies, procedures, and practices and compliance with the requirements of the act. OMB and agency IGs also play key roles under FISMA. Among other responsibilities, OMB is to develop policies, principles, standards, and guidelines on information security and is required to report annually to Congress on agency compliance with the requirements of the act. OMB has provided instructions to federal agencies and their IGs for annual FISMA reporting. OMB's reporting instructions focus on performance metrics related to the performance of key control activities such as certifying and accrediting systems, testing and evaluating security controls, and providing security training to personnel. Its yearly guidance also requires agencies to identify any physical or electronic incidents involving the loss of, or unauthorized access to, personally identifiable information. FISMA also requires agency IGs to perform an independent evaluation of the information security programs and practices of the agency to determine the effectiveness of such programs and practices. Each evaluation is to include (1) testing of the effectiveness of information security policies, procedures, and practices of a representative subset of the agency's information systems and (2) assessing compliance (based on the results of the testing) with FISMA requirements and related information security policies, procedures, standards, and guidelines. These required evaluations are then submitted by each agency to OMB in the form of an OMB-developed template that summarizes the results. In addition to the template submission, OMB encourages agency IGs to provide any additional narrative in an appendix to the report to the extent they provide meaningful insight into the status of the agency's security or privacy program. Federal agencies continue to report progress in implementing key information security activities. The President's proposed fiscal year 2009 budget for IT states that the federal government continues to improve information security performance relative to the certification and accreditation of systems and the testing of security controls and contingency plans. According to the budget, in 2007 the percentage of certified and accredited systems rose from 88 percent to 92 percent. Even greater gains were reported in testing of security controls--from 88 percent of systems to 95 percent of systems-- and for contingency plan testing--from 77 percent to 86 percent. The proposed budget also noted improvements related to agency IG qualitative assessments of certain IT security processes. It reported that the overall quality of the certification and accreditation processes as determined by agency IGs increased compared to 2006, with 76 percent of agencies reporting ''satisfactory'' or better processes, up from 60 percent the prior year. In addition, the budget noted that 76 percent of agencies demonstrated that they had an effective process in place for identifying and correcting weaknesses using plans of action and milestone management processes. Although we have not yet verified the information security performance information for fiscal year 2007 contained in the President's proposed budget, the information is consistent with historical trends. As we reported last year, agencies reported increased percentages in most OMB performance metrics for fiscal year 2006 when compared to fiscal year 2005 (see fig. 1) including those related to: Percentage of employees and contractors receiving IT Percentage of employees with significant security responsibilities who received specialized security training, Percentage of systems whose controls were tested and evaluated, Percentage of systems with tested contingency plans, Percentage of 24 major agencies with 96-100 percent complete inventories of major information systems, and Percentage of systems certified and accredited. However, for the fiscal year 2006 reporting period, IGs identified weaknesses with their agencies' implementations of those key control activities. For example, according to agency IGs, five major agencies reported challenges in ensuring that contractors had received security awareness training. In addition, they reported that not all systems had been tested and evaluated at least annually, including some high impact systems, and that weaknesses existed in agencies' monitoring of contractor systems or facilities. They highlighted other weaknesses such as contingency plans not being completed for critical systems and inventories of systems that were incomplete. Furthermore, IGs reported weaknesses in agencies' certification and accreditation processes, a key activity OMB uses to monitor agencies' implementation of information security requirements. Our work and that of IGs show that significant weaknesses continue to threaten the confidentiality, integrity, and availability of critical information and information systems used to support the operations, assets, and personnel of federal agencies. In their fiscal year 2007 performance and accountability reports, 20 of 24 major agencies indicated that inadequate information security controls were either a significant deficiency or a material weakness (see fig. 2). Our audits continue to identify similar conditions in both financial and non-financial systems, including agencywide weaknesses as well as weaknesses in critical federal systems. Persistent weaknesses appear in five major categories of information system controls: (1) access controls, which ensure that only authorized individuals can read, alter, or delete data; (2) configuration management controls, which provide assurance that only authorized software programs are implemented; (3) segregation of duties, which reduces the risk that one individual can independently perform inappropriate actions without detection; (4) continuity of operations planning, which provides for the prevention of significant disruptions of computer-dependent operations; and (5) an agencywide information security program, which provides the framework for ensuring that risks are understood and that effective controls are selected and properly implemented. Figure 3 shows the number of major agencies with weaknesses in these five areas. A basic management control objective for any organization is to protect data supporting its critical operations from unauthorized access, which could lead to improper modification, disclosure, or deletion of the data. Access controls, which are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities, can be both electronic and physical. Electronic access controls include use of passwords, access privileges, encryption, and audit logs. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. Most agencies did not implement controls to sufficiently prevent, limit, or detect access to computer networks, systems, or information. Our analysis of IG, agency, and our own reports uncovered that agencies did not have adequate controls in place to ensure that only authorized individuals could access or manipulate data on their systems and networks. To illustrate, 19 of 24 major agencies reported weaknesses in such controls. For example, agencies did not consistently (1) identify and authenticate users to prevent unauthorized access, (2) enforce the principle of least privilege to ensure that authorized access was necessary and appropriate, (3) establish sufficient boundary protection mechanisms, (4) apply encryption to protect sensitive data on networks and portable devices, and (5) log, audit, and monitor security-relevant events. Agencies also lacked effective controls to restrict physical access to information assets. We previously reported that many of the data losses occurring at federal agencies over the past few years were a result of physical thefts or improper safeguarding of systems, including laptops and other portable devices. In addition to access controls, other important controls should be in place to protect the confidentiality, integrity, and availability of information. These controls include the policies, procedures, and techniques for ensuring that computer hardware and software are configured in accordance with agency policies and that software patches are installed in a timely manner; appropriately segregating incompatible duties; and establishing plans and procedures to ensure continuity of operations for systems that support the operations and assets of the agency. However, agencies did not always configure network devices and services to prevent unauthorized access and ensure system integrity, patch key servers and workstations in a timely manner, or segregate incompatible duties to different individuals or groups so that one individual does not control all aspects of a process or transaction. Furthermore, agencies did not always ensure that continuity of operations plans contained all essential information. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of information. An underlying cause for information security weaknesses identified at federal agencies is that they have not yet fully or effectively implemented all the FISMA-required elements for an agencywide information security program. An agencywide security program, required by FISMA, provides a framework and continuing cycle of activity for assessing and managing risk, developing and implementing security policies and procedures, promoting security awareness and training, monitoring the adequacy of the entity's computer-related controls through security tests and evaluations, and implementing remedial actions as appropriate. Our analysis determined that 19 of 24 major federal agencies had not fully implemented agencywide information security programs. Our recent reports illustrate that agencies often did not adequately design or effectively implement policies for elements key to an information security program. We identified weaknesses in information security program activities, such as agencies' risk assessments, information security policies and procedures, security planning, security training, system tests and evaluations, and remedial actions. For example, * One agency's risk assessment was completed without the benefit of an inventory of all the interconnections between it and other systems. In another case, an agency had assessed and categorized system risk levels and conducted risk assessments, but did not identify many of the vulnerabilities we found and had not subsequently assessed the risks associated with them. * Agencies had developed and documented information security policies, standards, and guidelines for information security, but did not always provide specific guidance for securing critical systems or implement guidance concerning systems that processed Privacy Act- protected data. * Security plans were not always up-to-date or complete. * Agencies did not ensure all information security employees and contractors, including those who have significant information security responsibilities, received sufficient training. * Agencies had tested and evaluated information security controls, but their testing was not always comprehensive and did not identify many of the vulnerabilities we identified. * Agencies did not consistently document weaknesses or resources in remedial action plans. As a result, agencies do not have reasonable assurance that controls are implemented correctly, operating as intended, or producing the desired outcome with respect to meeting the security requirements of the agency, and responsibilities may be unclear, misunderstood, and improperly implemented. Furthermore, agencies may not be fully aware of the security control weaknesses in their systems, thereby leaving their information and systems vulnerable to attack or compromise. Consequently, federal systems and information are at increased risk of unauthorized access to and disclosure, modification, or destruction of sensitive information, as well as inadvertent or deliberate disruption of system operations and services. In prior reports, we and the IGs have made hundreds of recommendations to agencies to address specific information security control weaknesses and program shortfalls. Until agencies effectively and fully implement agencywide information security programs, including addressing the hundreds of recommendations that we and IGs have made, federal information and information systems will not be adequately safeguarded to prevent their disruption, unauthorized use, disclosure, or modification. The need for effective information security policies and practices is further illustrated by the number of security incidents experienced by federal agencies that put sensitive information at risk. Personally identifiable information about millions of Americans has been lost, stolen, or improperly disclosed, thereby potentially exposing those individuals to loss of privacy, identity theft, and financial crimes. Reported attacks and unintentional incidents involving critical infrastructure systems demonstrate that a serious attack could be devastating. Agencies have experienced a wide range of incidents involving data loss or theft, computer intrusions, and privacy breaches, underscoring the need for improved security practices. These incidents illustrate that a broad array of federal information and critical infrastructures are at risk. * The Department of Veterans Affairs (VA) announced that computer equipment containing personally identifiable information on approximately 26.5 million veterans and active duty members of the military was stolen from the home of a VA employee. Until the equipment was recovered, veterans did not know whether their information was likely to be misused. VA sent notices to the affected individuals that explained the breach and offered advice concerning steps to reduce the risk of identity theft. The equipment was eventually recovered, and forensic analysts concluded that it was unlikely that the personal information contained therein was compromised. * The Transportation Security Administration (TSA) announced a data security incident involving approximately 100,000 archived employment records of individuals employed by the agency from January 2002 until August 2005. An external hard drive containing personnel data, such as Social Security number, date of birth, payroll information, and bank account and routing information, was discovered missing from a controlled area at the TSA Headquarters Office of Human Capital. * A contractor for the Centers for Medicare and Medicaid Services reported the theft of one of its employee's laptop computer from his office. The computer contained personal information including names, telephone numbers, medical record numbers, and dates of birth of 49,572 Medicare beneficiaries. * The Census Bureau reported 672 missing laptops, of which 246 contained some degree of personal data. Of the missing laptops containing personal information, almost half (104) were stolen, often from employees' vehicles, and another 113 were not returned by former employees. The Commerce Department reported that employees had not been held accountable for not returning their laptops. * The Department of State experienced a breach on its unclassified network, which daily processes about 750,000 e-mails and instant messages from more than 40,000 employees and contractors at 100 domestic and 260 overseas locations. The breach involved an e-mail containing what was thought to be an innocuous attachment. However, the e-mail contained code to exploit vulnerabilities in a well-known application for which no security patch existed. Because the vendor was unable to expedite testing and deploy a new patch, the department developed its own temporary fix to protect systems from being further exploited. In addition, the department sanitized the infected computers and servers, rebuilt them, changed all passwords, installed critical patches, and updated their anti-virus software. * In August 2006, two circulation pumps at Unit 3 of the Tennessee Valley Authority's Browns Ferry nuclear power plant failed, forcing the unit to be shut down manually. The failure of the pumps was traced to excessive traffic on the control system network, possibly caused by the failure of another control system device. * Officials at the Department of Commerce's Bureau of Industry and Security discovered a security breach in July 2006. In investigating this incident, officials were able to review firewall logs for an 8- month period prior to the initial detection of the incident, but were unable to clearly define the amount of time that perpetrators were inside its computers, or find any evidence to show that data was lost as a result. * The Nuclear Regulatory Commission confirmed that in January 2003, the Microsoft SQL Server worm known as "Slammer" infected a private computer network at the idled Davis-Besse nuclear power plant in Oak Harbor, Ohio, disabling a safety monitoring system for nearly 5 hours. In addition, the plant's process computer failed, and it took about 6 hours for it to become available again. When incidents such as these occur, agencies are to notify the federal information security incident center--US-CERT. As shown in figure 4, the number of incidents reported by federal agencies to US-CERT has increased dramatically over the past 3 years, increasing from 3,634 incidents reported in fiscal year 2005 to 13,029 incidents in fiscal year 2007, (about a 259 percent increase). Incidents are categorized by US-CERT in the following manner: * Unauthorized access: In this category, an individual gains logical or physical access without permission to a federal agency's network, system, application, data, or other resource. * Denial of service: An attack that successfully prevents or impairs the normal authorized functionality of networks, systems, or applications by exhausting resources. This activity includes being the victim or participating in a denial of service attack. * Malicious code: Successful installation of malicious software (e.g., virus, worm, Trojan horse, or other code-based malicious entity) that infects an operating system or application. Agencies are not required to report malicious logic that has been successfully quarantined by antivirus software. * Improper usage: A person violates acceptable computing use policies. * Scans/probes/attempted access: This category includes any activity that seeks to access or identify a federal agency computer, open ports, protocols, service, or any combination of these for later exploit. This activity does not directly result in a compromise or denial of service. * Investigation: Unconfirmed incidents that are potentially malicious or anomalous activity deemed by the reporting entity to warrant further review. As noted in figure 5, the three most prevalent types of incidents reported to US-CERT in fiscal year 2007 were unauthorized access, improper usage, and investigation. In prior reports, GAO and IGs have made hundreds of recommendations to agencies for actions necessary to resolve prior significant control deficiencies and information security program shortfalls. For example, we recommended agencies correct specific information security deficiencies related to user identification and authentication, authorization, boundary protections, cryptography, audit and monitoring and physical security. We have also recommended that agencies fully implement comprehensive, agencywide information security programs by correcting weaknesses in risk assessments, information security policies and procedures, security planning, security training, system tests and evaluations, and remedial actions. The effective implementation of these recommendations will strengthen the security posture at these agencies. In addition, recognizing the need for common solutions to improving security, OMB and certain federal agencies have continued or launched several government wide initiatives that are intended to enhance information security at federal agencies. These key initiatives are discussed below. * The Information Systems Security Line of Business: The goal of this initiative is to improve the level of information systems security across government agencies and reduce costs by sharing common processes and functions for managing information systems security. Several agencies have been designated as service providers for IT security awareness training and FISMA reporting. * Federal Desktop Core Configuration: This initiative directs agencies that have Windows XP deployed and plan to upgrade to Windows Vista operating systems to adopt the security configurations develop by NIST, DOD, and DHS. The goal of this initiative is to improve information security and reduce overall IT operating costs. * SmartBUY: This program, led by GSA, is to support enterprise-level software management through the aggregate buying of commercial software governmentwide in an effort to achieve cost savings through volume discounts. The SmartBUY initiative was expanded to include commercial off-the-shelf encryption software and to permit all federal agencies to participate in the program. The initiative is to also include licenses for information assurance. * Trusted Internet Connections initiative: This is an effort designed to optimize individual agency network services into a common solution for the federal government. The initiative is to facilitate the reduction of external connections, including Internet points of presence, to a target of fifty. In addition to these initiatives, OMB has issued several policy memorandums over the past two years to help agencies protect sensitive data. For example, it has sent memorandums to agencies to reemphasize their responsibilities under law and policy to (1) appropriately safeguard sensitive and personally identifiable information, (2) train employees on their responsibilities to protect sensitive information, and (3) report security incidents. In May 2007, OMB issued additional detailed guidelines to agencies on safeguarding against and responding to the breach of personally identifiable information, including developing and implementing a risk-based breach notification policy, reviewing and reducing current holdings of personal information, protecting federal information accessed remotely, and developing and implementing a policy outlining the rules of behavior, as well as identifying consequences and potential corrective actions for failure to follow these rules. Opportunities also exist to enhance policies and practices related to security control testing and evaluation, FISMA reporting, and the independent annual evaluations of agency information security programs required by FISMA. * Clarify requirements for testing and evaluating security controls. Periodic testing and evaluation of information security controls is a critical element for ensuring that controls are properly designed, operating effectively, and achieving control objectives. FISMA requires that agency information security programs include the testing and evaluation of the effectiveness of information security policies, procedures, and practices, and that such tests be performed with a frequency depending on risk, but no less than annually. We previously reported that federal agencies had not adequately designed and effectively implemented policies for periodically testing and evaluating information security controls. Agency policies often did not include important elements for performing effective testing such as how to determine the frequency, depth, and breadth of testing according to risk. In addition, the methods and practices for at six test case agencies were not adequate to ensure that assessments were consistent, of similar quality, or repeatable. For example, these agencies did not define the assessment methods to be used when evaluating security controls, did not test controls as prescribed, and did not include previously reported remedial actions or weaknesses in their test plans to ensure that they had been addressed. In addition, our audits of information security controls often identify weaknesses that agency or contractor personnel who tested the controls of the same systems did not identify. Clarifying or strengthening federal policies and requirements for determining the frequency, depth, and breadth of security controls according to risk could help agencies better assess the effectiveness of the controls protecting the information and systems supporting their programs, operations, and assets. * Enhance FISMA reporting requirements. Periodic reporting of performance measures for FISMA requirements and related analyses provides valuable information on the status and progress of agency efforts to implement effective security management programs. In previous reports, we have recommended that OMB improve FISMA reporting by clarifying reporting instructions and requesting IGs to report on the quality of additional performance metrics. OMB has taken steps to enhance its reporting instructions. For example, OMB added questions regarding incident detection and assessments of system inventory. However, the current metrics do not measure how effectively agencies are performing various activities. Current performance measures offer limited assurance of the quality of agency processes that implement key security policies, controls, and practices. For example, agencies are required to test and evaluate the effectiveness of the controls over their systems at least once a year and to report on the number of systems undergoing such tests. However, there is no measure of the quality of agencies' test and evaluation processes. Similarly, OMB's reporting instructions do not address the quality of other activities such as risk categorization, security awareness training, intrusion detection and prevention, or incident reporting. OMB has recognized the need for assurance of quality for agency processes. For example, it specifically requested that the IGs evaluate the certification and accreditation process. The qualitative assessments of the process allows the IG to rate its agency's certification and accreditation process using the terms "excellent," "good," "satisfactory," "poor," or "failing." Providing information on the quality of the processes used to implement key control activities would further enhance the usefulness of the annually reported data for management and oversight purposes. We also previously reported that OMB's reporting guidance and performance measures did not include complete reporting on certain key FISMA-related activities. For example, FISMA requires each agency to include policies and procedures in its security program that ensure compliance with minimally acceptable system configuration requirements, as determined by the agency. In our report on patch management, we stated that maintaining up-to-date patches is key to complying with this requirement. As such, we recommended that OMB address patch management in its FISMA reporting instructions. Although OMB addressed patch management in its 2004 FISMA reporting instructions, it no longer requests this information. As a result, OMB and the Congress lack information that could identify governmentwide issues regarding patch management. This information could prove useful in demonstrating whether or not agencies are taking appropriate steps for protecting their systems. * Consider conducting FISMA-mandated annual independent evaluations in accordance with audit standards or a common approach and framework. We previously reported that the annual IG FISMA evaluations lacked a common approach and that the scope and methodology of the evaluations varied across agencies. For example: * IGs stated that they were unable to conduct evaluations of their respective agency's inventory because the information provided to them by the agency at that time was insufficient (i.e. incomplete or unavailable). * IGs reported interviewing officials and reviewing agency documentation, while others indicated conducting tests of implementation plans (e.g. security plans). * IGs indicated in the scope and methodology sections of their reports that their reviews were focused on selected components, whereas others did not make any reference to the breadth of their review. * Reports were solely comprised of a summary of relevant information security audits conducted during the fiscal year, while others included additional evaluation that addressed specific FISMA-required elements, such as risk assessments and remedial actions. * The percentage of systems reviewed was varied. Twenty-two of 24 IGs tested the information security program effectiveness on a subset of systems; two IGs did not review any systems. * One IG noted that the agency's inventory was missing certain web applications and concluded that the agency's inventory was only 0-50 percent complete, although the report also noted that, due to time constraints, the IG had been unable to determine whether other items were missing. * Two IGs indicated basing a portion of their template submission solely on information provided to them by the agency, without conducting further investigation. As we previously reported, the lack of a common methodology, or framework, had culminated in disparities in audit scope, methodology, and content of the IGs' annual independent evaluations. As a result, the collective IG community may be performing their evaluations without optimal effectiveness and efficiency. Conducting the evaluations in accordance with generally accepted government auditing standards and/or a commonly used framework or methodology could provide improved effectiveness, increased efficiency, quality control, and consistency in assessing whether the agency has an effective information security program. IGs may be able to use the framework to be more efficient by focusing evaluative procedures on areas of higher risk and by following an integrated approach designed to gather evidence efficiently. Having a documented methodology may also offer quality control by providing a standardized methodology, which can help the IG community obtain consistency of application. In summary, agencies have reported progress in implementing control activities, but persistent weaknesses in agency information security controls threaten the confidentiality, integrity, and availability of federal information and information systems, as illustrated by the increasing number of reported security incidents. Opportunities exist to improve information security at federal agencies. OMB and certain federal agencies have initiated efforts that are intended to strengthen the protection of federal information and information systems. Opportunities also exist to enhance policies and practices related to security control testing and evaluation and FISMA reporting. Similarly, a consideration for strengthening the statutory requirement for the independent annual evaluations of agency information security programs required by FISMA could include requiring IGs to conduct the evaluation in accordance with generally accepted government auditing standards. Until such opportunities are seized and fully exploited and the hundreds of GAO and IG recommendations to mitigate information security control deficiencies and implement agencywide information security programs are fully and effectively implemented, federal information and systems will remain at undue and unnecessary risk. Mr. Chairmen and Members of the Subcommittees, this concludes my statement. I would be happy to answer questions at this time. If you have any questions regarding this report, please contact Gregory C. Wilshusen, Director, Information Security Issues, at (202) 512-6244 or [email protected]. Other key contributors to this report include Nancy DeFranceso (Assistant Director), Larry Crosland, Neil Doherty, Nancy Glover, Rebecca LaPaze, Stephanie Lee, and Jayne Wilson. 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.

Information security is especially important for federal agencies, where the public's trust is essential and poor information security can have devastating consequences. Since 1997, GAO has identified information security as a governmentwide high-risk issue in each of its biennial reports to the Congress. Concerned by reports of significant weaknesses in federal computer systems, Congress passed the Federal Information Security Management Act (FISMA) of 2002, which permanently authorized and strengthened information security program, evaluation, and annual reporting requirements for federal agencies. GAO was asked to testify on the current state of federal information security and compliance with FISMA. This testimony summarizes (1) agency progress in performing key control activities, (2) the effectiveness of information security at federal agencies, and (3) opportunities to strengthen security. In preparing for this testimony, GAO reviewed prior audit reports; examined federal policies, guidance, and budgetary documentation; and analyzed agency and inspector general (IG) reports on information security. Over the past several years, federal agencies consistently reported progress in performing certain information security control activities. According to the President's proposed fiscal year 2009 budget for information technology, the federal government continued to improve information security performance in fiscal year 2007 relative to key performance metrics established by the Office of Management and Budget (OMB). The percentage of certified and accredited systems governmentwide reportedly increased from 88 percent to 92 percent. Gains were also reported in testing of security controls - from 88 percent of systems to 95 percent of systems - and for contingency plan testing - from 77 percent to 86 percent. These gains continue a historical trend that GAO reported on last year. Despite reported progress, major federal agencies continue to experience significant information security control deficiencies. Most agencies did not implement controls to sufficiently prevent, limit, or detect access to computer networks, systems, or information. In addition, agencies did not always manage the configuration of network devices to prevent unauthorized access and ensure system integrity, patch key servers and workstations in a timely manner, assign duties to different individuals or groups so that one individual did not control all aspects of a process or transaction, and maintain complete continuity of operations plans for key information systems. An underlying cause for these weaknesses is that agencies have not fully or effectively implemented agencywide information security programs. As a result, federal systems and information are at increased risk of unauthorized access to and disclosure, modification, or destruction of sensitive information, as well as inadvertent or deliberate disruption of system operations and services. Such risks are illustrated, in part, by an increasing number of security incidents experienced by federal agencies. Nevertheless, opportunities exist to bolster federal information security. Federal agencies could implement the hundreds of recommendations made by GAO and IGs to resolve prior significant control deficiencies and information security program shortfalls. In addition, OMB and other federal agencies have initiated several governmentwide initiatives that are intended to improve security over federal systems and information. For example, OMB has established an information systems security line of business to share common processes and functions for managing information systems security and directed agencies to adopt the security configurations developed by the National Institute of Standards and Technology and Departments of Defense and Homeland Security for certain Windows operating systems. Opportunities also exist to enhance policies and practices related to security control testing and evaluation, FISMA reporting, and the independent annual evaluations of agency information security programs required by FISMA.

Developing Area Navigation (RNAV) and Required Navigation Performance (RNP) procedures, often called performance-based navigation procedures, with significant benefits is one way to leverage existing technology in the near term and provide immediate benefits to industry, but developing these procedures expeditiously will be a challenge for FAA. According to the Task Force, developing RNAV and RNP procedures could be a key part of relieving current congestion and delays at major metropolitan airports. Benefits of RNAV and RNP can also include reduced fuel usage, reduced carbon emissions, reduced noise, shorter flights, fewer delays, less congestion, and improved safety. For example, Southwest Airlines demonstration flights show that RNP can reduce fuel burn and carbon dioxide emissions by as much as 6 percent per flight. In 2008, Alaska Airlines estimated that it used RNP procedures 12,308 times and saved 1.5 million gallons of fuel, thereby reducing carbon dioxide emissions by approximately 17,000 metric tons and operating costs by $17 million. Even greater benefits can be realized when the procedures are part of a comprehensive airspace redesign that includes more efficient flight paths, and are not simply overlays of historical aircraft flight paths. Deriving benefits from RNAV and RNP technology depends less on equipping aircraft with the technology required to fly these procedures, than on developing procedures with significant benefits in a timely manner. MITRE Corporation, which collects and retains data on equipage levels for the existing fleet, estimates that for aircraft in commercial operations in 2009, equipage rates are more than 90 percent for RNAV, more than 60 percent for RNP, and more than 40 percent for RNP equipment that allows for higher levels of precision. These figures indicate that the equipment necessary to take advantage of RNAV and RNP technology is already substantially deployed. However, comparatively few procedures have been developed for airlines to use the equipment. Since 2004 FAA has published 305 RNAV procedures, 206 RNAV routes, and 192 RNP approaches, but much remains to be done (see table 1). FAA believes that it can annually develop about 50 RNAV and RNP procedures, 50 RNAV routes, and 50 RNP approaches. At this pace of development, a simple calculation suggests that it would require decades to complete the thousands of procedures currently targeted for development. The Task Force report suggests that FAA and industry create joint teams to focus on performance-based navigations issues at certain locations and to prioritize procedures for development at these locations. Such an effort would likely lead to changes in FAA's current development targets. Nonetheless, accelerating the development of procedures would require a shift in FAA's resources, or additional human resources and expertise. In addition to FAA, numerous companies have expertise and experience to develop procedures and are doing this work for air navigation service providers around the world. FAA recognizes the potential benefits of involving these private companies and has taken steps to use them more. FAA recently authorized one such company, Naverus, which has a long history of expertise in procedure development, to validate public and private flight procedures that the company has developed for the U.S. market. This authorization will allow the company to validate performance-based navigation flight procedures from beginning to end. While private sector development may be one way to accelerate procedure development, issues related to FAA's capacity to approve these procedures remain, according to some stakeholders. In addition, questions such as who can use the procedures and how oversight of third-party developers is to be provided must also be resolved. While FAA tracks the number of navigation procedures completed, stakeholders have told us that developing procedures with significant benefits is more important than developing a specific number of procedures. For example, according to Southwest Airlines, FAA has developed 69 RNP procedures for the routes it flies, 6 which they view as useful to the airline because of the resulting reduction in flight miles or emissions. Some stakeholders have suggested that FAA use other metrics that better capture benefits to industry from advanced procedures, such as fuel savings, time savings, or mileage savings, which could lead to more of a focus on the development of procedures that maximize these benefits. The Task Force report identified the establishment of performance metrics as an important part of following up on and tracking the implementation its recommendations, and we have ongoing work for this committee reviewing FAA's performance metrics related to this and other aspects of NextGen development. As FAA develops new procedures to make more efficient use of airspace in congested metropolitan areas, it will be challenged to complete the necessary environmental reviews quickly and address local concerns about the development of new procedures and airspace redesign. Anytime an airspace redesign or a new procedure changes the noise footprint around an airport, an environmental review is initiated under the National Environmental Policy Act (NEPA). Under NEPA, varying levels of environmental review must be completed depending on the extent to which FAA deems its actions to have a significant environmental impact. There are three possible levels: 1. Categorical exclusion determination. Under a categorical exclusion, an undertaking may be excluded from a detailed environmental review if it meets certain criteria and a federal agency has previously determined that the undertaking will have no significant environmental impact. 2. Environmental assessment/finding of no significant impact (EA/FONSI). A federal agency prepares a written environmental assessment (EA) to determine whether or not a federal undertaking would significantly affect the environment. If the answer is no, the agency issues a finding of no significant impact (FONSI). 3. Environmental impact statement (EIS). If the agency determines while preparing the EA that the environmental consequences of a proposed federal undertaking may be significant, an EIS is prepared. An EIS is a more detailed evaluation of the proposed action and alternatives. The more extensive the analysis required, the longer the process can take. A full EIS can take several years to complete. EAs and categorical exclusions, by contrast, take less time and resources to complete. Because NEPA does not allow consideration of the net impact of an action such as the introduction of new procedures or broader airspace redesign--which may increase noise in some areas but increase capacity at an airport and reduce noise and emissions overall--these actions can often result in extensive and time-consuming reviews. FAA is exploring situations in which it might be more appropriate to use a categorical exclusion or an EA instead of an EIS. The 2009 FAA reauthorization legislation includes language that may expedite the environmental review process. For example, the legislative proposal would allow airport operators to use grant funds for environmental reviews of proposals to implement flight procedures. The proposal would also allow project sponsors to provide FAA with funds to hire additional staff as necessary to expedite completion of the environmental review necessary to implement flight procedures. According to stakeholders and Task Force members, and as we have previously reported, FAA faces organizational and cultural challenges in implementing NextGen operational capabilities. FAA has traditionally developed and acquired new systems through its acquisition process. However, most NextGen technologies and capabilities, such as Automatic Dependent Surveillance Broadcast (ADS-B), rely on components in the aircraft, on the ground, and in space for their use. They also require controllers and pilots to be trained and flight procedures to be developed in order to maximize their benefits. Different offices within FAA-- including its Aircraft Certification Service, Flight Standards Service, and Air Traffic Organization (ATO), among others--are responsible for ensuring the completion of all the activities required to maximize the use of a technology or capability. While FAA has recently made organizational changes to address integration issues, several stakeholders told us, and our previous and ongoing work suggests, that FAA's structure and culture continues to hamper its ability to ensure that all the actions necessary to maximize use of a technology or capability in the national airspace system are completed efficiently. For example, stakeholders identified coordination and integration as particular challenges to implementing operational capabilities in the surface operations area identified by the Task Force. Implementing capabilities in this area will require greater coordination among offices within ATO, airport operators, pilots, and controllers, among others. While many of the operational improvements identified by the Task Force align with FAA's current plans, a senior FAA official indicated that in several instances, FAA may need to adjust its plans, budgets, and priorities as it decides how it will respond to the Task Force's recommendations. According to this senior FAA official, potential budgetary changes are already being identified, and a comprehensive analysis of what additional changes to existing plans would be necessary to respond to the recommendations is underway. Until this analysis is completed, it is difficult to know exactly what changes FAA would need to make to implement the Task Force's recommendations. In some cases, the Task Force's recommendations, if accepted and fully implemented, will require altering the course of initiatives that are already underway or programs that are being implemented. For example, a recommendation to expand surveillance of airspace around certain general aviation airports may require an increase in the scope of the current ADS-B program, which does not cover those areas. In addition, recommendations to expand information sharing to improve surface situational awareness and traffic management could affect the current plans for FAA programs such as System-Wide Information Management (SWIM), according to one stakeholder. Responding to the Task Force's recommendations will require a willingness to change and reprioritize current plans and programs. Inefficiencies in FAA's certification, operational approval, and procedure design processes constitute another challenge to delivering near-term benefits to stakeholders, instilling confidence in FAA plans, and investing in new equipment. Our prior work has identified this issue and concluded that the time required to complete such activities will have to be balanced against the need to ensure reliability and safety of procedures and systems before they are used in the national airspace system. Stakeholders, including airlines and general aviation groups, including one that represents avionics manufacturers, as well as the Task Force, have said that these processes take too long and impose costs on industry that discourage the stakeholders from investing in NextGen aircraft equipment. For example, the President of GE Aviation Systems recently testified, and other stakeholders have told us, that the process of approving and deploying RNP navigation procedures remains extremely slow and that FAA's review and approval of a given original RNP design often takes years. A 1999 RTCA task force also identified a need to streamline the certification and operational approval processes and made a number of recommendations to FAA. According to a senior FAA official, while FAA has made progress in addressing many of these recommendations, it has yet to take action on others and some challenges remain. For example, the NextGen Task Force reports that FAA aircraft certification offices face resource issues and applicants for many required installation approvals wait about 6 months until FAA engineers are available to oversee their project. Other suggestions to streamline the equipment certification process include increasing staffing at FAA's certification offices to process applications and having NextGen-specific equipment certification processes that allow quicker approvals of equipment. Another challenge for FAA will be to continue involving stakeholders--- including industry and controllers, as well as others as appropriate--in implementation and key decisions related to the Task Force's recommendations. The Task Force recommends, and we agree, that FAA and industry establish institutional mechanisms to facilitate continued transparency and collaboration in planning and implementing actions to address the Task Force's recommendations, particularly as these actions lead to changes in the NextGen Implementation Plan. The Task Force recommended the creation of a NextGen Implementation Workgroup under the RTCA Air Traffic Management Advisory Committee (ATMAC). An FAA official indicated that several mechanisms, including a variety of advisory boards and working groups, currently exist and can also be used to improve collaboration among stakeholders. We have previously reported that the roles of these various groups have become somewhat unclear, even to stakeholders involved in them. FAA will need to work with industry and key stakeholders to come to agreement on how, where, and when stakeholders will be involved. Continued transparency and collaboration are key to developing industry's trust that FAA is making changes to implement NextGen. In addition, FAA will need to continue to work toward changing the nature of its relationship with controllers and the controllers' union to create more effective engagement and collaboration. In September 2009, FAA and NATCA signed a new 3-year contract. FAA views the new contract as a framework for helping meet the challenges of implementing NextGen. NATCA states that the contract starts a process to discuss ways for getting NATCA representatives involved in all NextGen-related issues. One particular change that would affect the relationship between controllers and FAA, as well as facilitate NextGen's implementation, would be to modify the incentives that influence how controllers apply FAA's aircraft separation standards. More specifically, a change that encouraged controllers to decrease the separation between aircraft during landing or takeoff would improve system capacity and efficiency and was one of the Task Force's overarching recommendations. Currently, according to NATCA, controllers are encouraged to increase the separation between aircraft, because they are penalized if separation thresholds are crossed. Moreover, according to MITRE, controllers often separate aircraft by more than the prescribed minimum distances to address any uncertainty about the actual positions of aircraft as well as to reduce the likelihood of violating the required separation distances. NextGen technologies and procedures can provide controllers with more precise information about the locations of aircraft and allow for aircraft to operate closer to one another. Recent changes to the Operational Error program and the Air Traffic Safety Action Program (ATSAP) program are aimed at establishing a nonpunitive safety reporting program and are a positive first step towards changing the culture and establishing a more collaborative relationship with controllers. The Task Force's focus was on making better use of the equipment that has already been installed or is available for installation. However, as NextGen progresses and as the Task Force's recommendations are implemented, operators will need to acquire additional equipment to take full advantage of the benefits of NextGen. In some cases the federal government may deem financial or other incentives desirable to speed the deployment of new equipment. Appropriate incentives will depend on the technology and the potential for an adequate and timely return on investment. A discussion of options to accelerate equipage discussed in our prior work and identified by the Task Force follows. The first option is mandating the installation of equipment. Traditionally, FAA mandates the equipage of aircraft for safety improvements and provides several years for operators to comply. According to academic researchers, among these mandated safety improvements are ground proximity warning sensors, extended ground proximity warning sensors, and traffic collision and avoidance systems. Mandates can be effective because they force operators to equip even when there may not be clear and timely benefits to operators that justify the cost of equipping. In the NextGen context, FAA has proposed a rule that mandates equipage with ADS-B Out for affected aircraft by 2020. However, operators may not equip until the deadline for compliance is near because the cost of early investment in new technologies is often high and the return on investment limited. This is particularly true for general aviation operators who typically do not fly enough to recoup a large investment in new aircraft equipment. According to a general aviation stakeholder, general aviation operators typically fly hundreds of flight hours a year, while scheduled airlines fly thousands a year. Our prior work has identified a variety of other disincentives to early investment. These disincentives include the possibility that a technology may not work as intended, may not provide any operational benefits until a certain percentage of all aircraft are equipped, or may become obsolete because a better technology is available. Other risks to early investors include potential changes in the proposed standards or requirements for the technology, later reductions in the price of technologies and installations, or the risk that FAA may not implement the requisite ground infrastructure and procedures to provide operators with benefits that would justify their costs to equip. Moreover, because equipage mandates are designed to cover a broad range of users in a single action, they may lead to objections and lobbying from users, such as general aviation operators, on whom significant costs are imposed. A second option to accelerate equipage is to develop operational improvements that make use of equipment that is already widely deployed to produce benefits for operators to justify the costs of equipage. The Task Force's recommendations are geared toward this option. A large part of the fleet is equipped with technologies that operators cannot fully use until FAA has implemented operational improvements. If FAA can implement such improvements for operators that have this equipment, it could provide a return on investment for them and create a financial incentive for others to equip. But because FAA has not always taken the actions needed for operators to take full advantage of investments in equipage, such as for Controller Pilot Data Link Communications, some industry stakeholders question whether FAA will now follow through with the tasks required to allow operators to achieve the full benefit of their investment in a timely manner. Early success in implementing some of the Task Force's near-term recommendations will help build trust between FAA and operators that FAA will provide operational improvements that allow operators to take advantage of the required equipment and realize benefits. A third option proposed by FAA and known as "best equipped, best served" requires that FAA ensure some form of operational benefit for operators that do equip, such as preferred airspace, routings, or runway access, which can save time or fuel. If early equippers get a clear competitive advantage, other operators may be encouraged to follow their example, providing further incentive for all operators to fully equip their fleets. An advantage of pursuing this option is that no federal financial incentives are required for equipage, so costs to the federal government are generally lower. However, designing such incentives and analyzing how they will work in practice is a major challenge and has only begun to move forward. For example, giving a better-equipped aircraft preference over lesser-equipped aircraft to land or depart may increase delays and holding patterns for the lesser-equipped aircraft, potentially increasing delays and fuel usage overall, and resulting in lower systemwide benefits. Furthermore, according to airline stakeholders, the best equipped, best served option will require controllers to accept procedures that they have expressed safety concerns about in the past. Mechanisms will also have to be created so that controllers know which aircraft are best equipped, and these mechanisms cannot adversely affect controller workload or safety. The Task Force's report does not address the practical implications of how a best equipped, best served option would work, but recommends that the option be explored in the context of specific operational capabilities and locations. A fourth option is to provide financial incentives where operators do not have a clear and timely return on investment for equipping aircraft. Financial incentives can accelerate investment in equipment, which, in turn, can accelerate the operational and public benefits expected from implementing additional capabilities. According to the Commission on the Future of the United States Aerospace Industry, one argument for some form of federal financial assistance is that the total cost to the federal government of fully financing the communication, navigation, and other airborne equipment required for more efficient operations would be less than the costs to the economy of system delays and inefficiencies that new equipment would help address. In previous work, we concluded that the federal government's sharing of costs is most justifiable when there are adequate aggregate net benefits to be realized through equipage, but those who need to make the investments in the equipment do not accrue enough benefits themselves to justify their individual investments. Financial assistance can come in a variety of forms including grants, cost- sharing arrangements, loans, and tax incentives. As we have previously reported, prudent use of taxpayer dollars is always important; therefore, financial incentives should be applied carefully and in accordance with key principles. For example, mechanisms for financial assistance should be designed so as to effectively target parts of the fleet and geographical locations where benefits are deemed to be greatest, avoid unnecessarily equipping aircraft (e.g., those that are about to be retired), and not displace private investment that would otherwise occur. Furthermore, it is preferable that the mechanism used for federal financial assistance result in minimizing the use of government resources (e.g., some mechanisms may cost the government more to implement or place the government at greater risk than others). We also reported that, of the various forms of assistance available to the federal government, tax incentives have several disadvantages because (1) many scheduled airlines may not have any tax liability that tax credits could be used immediately to offset, (2) a tax credit would provide a more valuable subsidy for carriers that are currently profitable than for those that are not, and (3) using the tax system to provide a financial incentive can impose an administrative burden on the Internal Revenue Service. One financing option proposed by the Task Force to encourage the purchase of aircraft equipment is the use of equipage banks, which provide federal loans to operators to equip their aircraft. Recent legislation proposes that FAA establish a pilot program that would permit the agency to work with up to five states to establish ADS-B equipage banks for making loans to help facilitate aircraft equipage locally. The Task Force suggests that equipage banks could be used to provide funds for operators to equip with a NextGen technology when there may not be a benefit or return on investment for doing so. By providing for a variety of NextGen technologies, an equipage bank can avoid penalizing those who have already invested in a particular NextGen technology. The federal government has used a similar financing option in the past to fund other infrastructure projects including highway improvements. Thank you Mr. Chairman. This concludes my prepared statement. I would be pleased to answer any questions that you or Members of the Subcommittee may have at this time. For further information on this testimony, please contact Dr. Gerald L. Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Andrew Von Ah (Assistant Director), Amy Abramowitz, Kieran McCarthy, Kevin Egan, Bess Eisenstadt, and Bert Japikse. 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.

On September 9, 2009, the Next Generation Air Transportation System (NextGen) Midterm Implementation Task Force (Task Force) issued its final report and recommendations. The Task Force was to reach a consensus on the operational improvements to the air transportation system that should be implemented between now and 2018. Its recommendations call for the Federal Aviation Administration (FAA) to develop improvements that allow operators to take advantage of equipment that has been widely deployed or is available for installation in existing aircraft. FAA is now considering how to modify its existing plans and programs in response to the Task Force's recommendations and must do so in a way that retains safety as the highest priority. This testimony highlights the NextGen challenges previously identified by GAO and others that affect FAA's response to the Task Force's recommendations. GAO groups these challenges into three areas: (1) directing resources and addressing environmental issues, (2) adjusting its culture and business practices, and (3) developing and implementing options to encourage airlines and general aviation to equip aircraft with new technologies. GAO's testimony updates prior GAO work with interviews with agency officials and industry stakeholders and includes an analysis of the Task Force report. Directing resources and addressing environmental issues. Allocating resources for advanced navigational procedures and airspace redesign requires FAA to balance benefits to operators against resource limits and other challenges to the timely implementation of NextGen. Procedures that allow more direct flights--versus those that overlay existing routes--and redesigned airspace in congested metropolitan areas can save operators time, fuel, and costs, and reduce congestion, delays, and emissions. However, FAA does not have the capacity to expedite progress towards its current procedure development targets. While FAA has begun to explore the use of the private sector to help develop procedures, issues related to public use of these procedures and oversight of developers remain. In addition, required environmental reviews can be lengthy, especially when planned changes in noise patterns create community concerns during reviews. Challenges to FAA include deciding whether to start in more or less complex metropolitan areas, and finding ways to expedite the environmental review process and proactively ameliorate community concerns. Changing FAA's culture and business practices. According to stakeholders and Task Force members, and as GAO has previously reported, FAA faces cultural and organizational challenges in implementing NextGen capabilities. Whereas FAA's culture and organization formerly supported the acquisition of individual air traffic control systems, FAA will now have to integrate and coordinate activities across multiple lines of business, as well as reprioritize some of its plans and programs, to implement near-term and midterm capabilities. FAA is currently analyzing what changes may be required to respond to the recommendations. StreamliningFAA's certification, operational approval, and procedure design processes, as a prior task force recommended, will also be essential for timely implementation. And sustaining a high level of involvement and collaboration with stakeholders--including operators, air traffic controllers, and others--will also be necessary to ensure progress. Developing and implementing options to encourage equipage. The Task Force focused on making better use of equipment that has already been widely deployed in aircraft, but as NextGen progresses, new equipment will have to be installed to implement future capabilities and FAA may have to offer incentives for operators to accelerate their installation of equipment that may not yield an immediate return on investment. While FAA could mandate equipage, mandates take time to implement and can impose costs, risks, and other disincentives on operators that discourage early investment in equipment. The Task Force identified several options to encourage equipage, including offering operational or financial benefits to early equippers. Challenges to implementing these options include defining how operational incentives would work in practice, designing financial incentives so as not to displace private investment that would otherwise occur, and targeting incentives where benefits are greatest.

MIPPA defines ADI services to include diagnostic CT, MRI, and NM, including positron emission tomography (PET). CT is an imaging modality that uses ionizing radiation and computers to produce cross- sectional images of internal organs and body structures. MRI is an imaging modality that uses powerful magnets, radio waves, and computers to create cross-sectional images of internal body tissues. NM is the use of radioactive materials in conjunction with an imaging modality to produce images that show both structure and function within the body. During an NM service, such as a PET scan, a patient is administered a small amount of radioactive substance, called a radiopharmaceutical or radiotracer, which is subsequently tracked by a radiation detector outside the body to render time-lapse images of the radioactive material as it moves through the body. Imaging equipment that uses ionizing radiation--such as CT and NM-- poses greater potential short- and long-term health risks to patients than other imaging modalities, such as ultrasound. This is because ionizing radiation has enough energy to potentially damage DNA and thus increase a person's lifetime risk of developing cancer. In addition, exposure to very high doses of this radiation can cause short-term injuries, such as burns or hair loss. Each of the modalities using ionizing radiation uses different amounts of such radiation. For example, conventional X-ray imaging, in which X-rays are projected through a patient's body to produce two-dimensional pictures of organs and tissue, uses relatively low amounts of radiation in order to render a diagnostic- quality radiographic image. Because CT and NM services can involve repeated or extended exposure to ionizing radiation, they are associated with the administration of higher radiation doses than conventional X-ray imaging systems. In its 2010 initiative to reduce unnecessary radiation, FDA reported that the effective dose from a CT is roughly equivalent to 100 to 800 chest X-rays, whereas a NM service is equivalent to 10 to 2,050 chest X-rays.higher-resolution images, FDA advises that an optimal radiation dose is one that is as low as reasonably achievable while maintaining sufficient image quality to meet the clinical need. Although MRIs do not use ionizing radiation, they pose other potential dangers; for example, magnetic fields from the MRI unit can result in a "projectile effect," in which magnetic material, such as the metal in oxygen cylinders or wheelchairs, can be pulled suddenly and--often violently--toward the imaging equipment at times while a patient lies in the center of the magnet and while medical personnel are attending to the patient. MIPPA requires the establishment of procedures to ensure that accrediting organizations include standards specific to each imaging modality for ADI suppliers in the following five areas: (1) qualifications of medical personnel who are not physicians and who furnish the technical component of ADI services; (2) qualifications and responsibilities of medical directors and supervising physicians; (3) procedures to ensure that equipment used in furnishing the technical component of ADI services meets performance specifications; (4) procedures to ensure the safety of beneficiaries and staff; and (5) establishment and maintenance of a quality-assurance and quality-control program that ensures the reliability, clarity, and accuracy of the technical quality of diagnostic images produced by suppliers. MIPPA accreditation applies only to suppliers paid under the Medicare physician fee schedule that provide the technical component of ADI services. Suppliers paid under the physician fee schedule include physician offices and independent diagnostic testing facilities, which are independent of a hospital or physician office and provide only diagnostic outpatient services. MIPPA accreditation does not apply to the technical component of ADI services provided in Medicare settings not paid under the physician fee schedule, such as hospital inpatient or outpatient departments.of the three CMS-designated organizations and pay the organization an accreditation fee. Among other things, CMS requires accrediting organizations to evaluate ADI suppliers during the initial application regarding compliance with MIPPA requirements--such as qualifications of personnel--as well as during mid-cycle audit procedures to ensure suppliers maintain compliance for the duration of the accreditation cycle, which is a 3-year period. ACR and IAC primarily grant initial accreditation through an online application and review of suppliers' documents, while TJC uses an online application but also conducts an on-site visit for each supplier prior to granting accreditation. To become accredited, ADI suppliers must first select one Information about the three accrediting organizations that CMS has designated for ADI suppliers--ACR, IAC, and TJC--follows in table 1. CMS has several responsibilities to ensure the quality of ADI services paid under Medicare's physician fee schedule. In addition to selecting accrediting organizations, CMS is responsible for ensuring that Medicare payment is made only to ADI suppliers accredited by a CMS-approved accrediting organization. MIPPA requires CMS to oversee the accrediting organizations and authorizes CMS to modify the list of selected accrediting organizations, if necessary. Federal regulations specify that CMS may conduct "validation audits" of accredited ADI suppliers and provide for the withdrawal of CMS approval of an accrediting organization at any time if CMS determines that the accrediting organization no longer adequately ensures that ADI suppliers meet or exceed Medicare requirements. In addition, accrediting organizations are required to report serious care problems that pose immediate jeopardy to a beneficiary or to the general public to CMS within 2 business days of identifying such problems. CMS also has ongoing requirements for accrediting organizations; among other things, accrediting organizations are responsible for using mid-cycle audit procedures, such as unannounced site visits, to ensure that accredited suppliers maintain compliance with MIPPA's requirements for the duration of the accreditation cycle. MQSA, as amended by the Mammography Quality Standards Reauthorization Acts of 1998 and 2004, established national quality standards for mammography to help ensure the high quality of images and image interpretation that mammography facilities produce. Under MQSA, FDA--acting on behalf of the Department of Health and Human Services (HHS)--has several responsibilities to ensure the quality of mammography: establishing quality standards for mammography equipment, personnel, and practices; ensuring that all mammography facilities are accredited by an FDA- approved accrediting body and have obtained a certificate permitting them to provide mammography services from FDA or an FDA- approved certification agency; ensuring that all mammography equipment is evaluated at least annually by a qualified medical physicist and that all mammography facilities receive an annual compliance inspection from an FDA- approved inspector; and performing annual evaluations of the accreditation bodies and certification agencies. CMS did not establish minimum national standards for ADI accreditation, and instead required each accrediting organization to establish its own specific standards for quality and safety of ADI services. In 2009, CMS solicited applications from accrediting organizations and outlined the information that needed to be furnished by each organization to be considered for approval. As part of its application requirements, CMS adopted the broad MIPPA criteria for ADI accreditation and required each accrediting organization to provide a detailed description of how its standards satisfy these requirements. For example, CMS required each accrediting organization to have standards regarding qualifications for suppliers' technologists and medical directors, but allowed the accrediting organizations to establish their own minimum certification, experience, and continuing education requirements. In addition, CMS required accrediting organizations to provide documentation of other requirements, such as detailed information about the individuals who perform evaluations for accrediting organizations and a description of the organization's data management and analysis capabilities in support of its surveys and accreditation decisions. CMS received three applications from its solicitation and in January 2010, the agency reported that an internal professional panel had reviewed the applications and determined that all three organizations provided sufficient evidence of their ability to accredit ADI suppliers on the basis of CMS's requirements. CMS drafted more specific standards for the accreditation of ADI suppliers in 2010, but did not publish these standards or propose adopting them. A CMS official told us that the agency developed the draft standards in conjunction with FDA and incorporated comments from each of the accrediting organizations. This official also told us that the draft standards were not put through the rulemaking process because the agency was focused on developing regulations for the Patient Protection and Affordable Care Act, which was enacted 2010. As of January 2013, these CMS standards remained in draft form, and officials told us that the agency did not have a specific timeline for publishing the standards in a proposed rule. Representatives from the three approved accrediting organizations--as well as 9 of the 11 organizations with imaging expertise from which we obtained information--recommended that CMS adopt minimum national standards, which would help to ensure that all accredited ADI suppliers meet a minimum level of quality and safety. In addition, we have reported that the quality of mammography services improved under MQSA primarily as a result of setting national quality- assurance standards--such as those related to personnel qualifications and clinical image quality--and establishing enforcement mechanisms to ensure that the standards are met by all mammography providers. The list of recommended standards was derived from recommendations obtained from at least 5 of 11 organizations with imaging expertise about the specific types of standards that they would expect accrediting organizations to use. variation in state requirements for training and certification of technologists, and lack of training is widely recognized as a cause of significant errors in the provision of ADI services. Another of the 11 organizations, the American Society of Radiologic Technologists, reported that imaging services performed by individuals who are not experienced, educated, or certified in a specific imaging modality could compromise the quality of images or jeopardize the health or safety of supplier staff or Medicare beneficiaries. In addition, prior to granting accreditation, both ACR and IAC evaluate suppliers' patient images (called "clinical images") to ensure that images meet specific criteria, as recommended by 8 of the 11 organizations with imaging expertise. One of the 8, the American College of Cardiology, called the review of clinical images an essential component for assessing the capability of imaging equipment and the proficiency of staff in acquiring images. ACR and IAC also evaluate suppliers' phantom images prior to granting accreditation, which are images of a solid object designed to mimic critical imaging characteristics of patients that are used for the assessment of certain performance parameters of imaging equipment, as recommended by 5 of the 11 organizations. One of the 5, the American Association of Physicists in Medicine, reported that phantom images permit more objective evaluations of ADI equipment performance and a standardized format against which the imaging performance of various facilities can be evaluated. Further, FDA- approved accrediting bodies are also required to review mammography suppliers' clinical and phantom images, and we have reported with regard to mammography that evaluating phantom images is one of the most important processes for testing equipment. TJC does not systematically evaluate suppliers' clinical or phantom images to ensure that images meet specific criteria, although TJC representatives reported assessing compliance with standards that require suppliers to identify and implement activities necessary to maintain the reliability, clarity, and accuracy of the technical quality of images. According to TJC representatives, health care services are provided in an environment that must be comprehensively assessed, and no single checklist can fulfill this. For example, they reported that evaluating an image does not reveal anything about the systems that support imaging safety such as the adequacy of safety checks, equipment maintenance, expertise of staff, and whether there is a primacy on patient and staff safety that permeates the facility's culture and process. However, ADI suppliers have been delayed accreditation by ACR and IAC on the basis of problems with the quality of their clinical images, such as inadequate anatomic coverage or excessive artifacts. We and others have reported that quality problems with medical images can have serious consequences, such as missed or inaccurate diagnoses or inappropriate treatment.that can result from poor-quality images, there are currently no image review requirements or other national standards for ADI accreditation. CMS's oversight efforts have focused primarily on ensuring that only accredited suppliers' claims are paid; the agency does not have a systematic oversight process for other aspects of the ADI accreditation requirement. CMS has not developed a framework for evaluating accrediting organization performance, and its current guidance is insufficient to ensure that suppliers maintain compliance with standards for the duration of the accreditation cycle and to ensure that serious care problems are consistently identified and reported. CMS's oversight efforts have primarily focused on ensuring that only accredited suppliers' claims are paid. To ensure payment is made only to accredited suppliers, CMS officials told us that they require accrediting organizations to submit updated information about accredited suppliers on a weekly basis, including their national provider identifier (NPI), enrollment number, address, name, and dates of accreditation for each modality. They explained that these data are uploaded into the Medicare Provider Enrollment, Chain and Ownership System (PECOS)--CMS's centralized database for Medicare provider enrollment information--and are matched against all claims submitted by ADI suppliers. If the NPI on a supplier's claim does not match an accredited supplier listed in PECOS, the claim is denied. CMS officials told us that there were problems with accredited suppliers' claims being denied when the accreditation requirement first went into effect because suppliers used an incorrect NPI; however, CMS officials and representatives from two of the accrediting organizations reported that these issues generally have been resolved. Although CMS is responsible for evaluating the performance of accrediting organizations, and CMS officials have indicated that its goal is to improve the quality of ADI services, it has not developed an oversight framework that would enable it to monitor and measure performance. A CMS official knowledgeable about the accreditation requirement stated that the requirement had been in effect for less than 1 year at the time of our review, and acknowledged that the agency's oversight process was not as robust as it could be. This official reported that primary responsibility for oversight of the accreditation requirement was in the process of being transferred from CMS's Center for Program Integrity to the Center for Clinical Standards and Quality. Although the accreditation requirement became effective January 1, 2012, it has been enacted into law since 2008 and CMS had selected accrediting organizations in January 2010, providing the agency with nearly 2 years to develop a plan for evaluating their performance before the effective date of the requirement. We found that as of January 2013, CMS had not yet established specific performance expectations or developed plans for conducting validation audits of accredited suppliers, which are one of the most effective techniques CMS has for collecting information about accrediting organization performance. Federal regulations provide for audits of a representative sample of accredited suppliers, which enable CMS to validate the processes used by approved accrediting organizations. These regulations also note that CMS may notify an accrediting organization of its intent to withdraw approval for an accrediting organization on the basis of the disparity between its findings and those of the respective accrediting organization. Further, in the absence of minimum national standards, it is unclear what measures CMS would use in its audits to validate the accreditation process and determine whether services provided by accredited ADI suppliers meet a sufficient level of quality and safety. In addition, CMS does not systematically collect or analyze readily available data to monitor accrediting organization performance. Collecting and analyzing information from accrediting organizations on accreditation results, such as the proportion of suppliers delayed accreditation and the types of care problems identified, could provide useful information about accrediting organization performance and help CMS ensure that accreditation is improving the quality and safety of ADI services. CMS does not systematically collect or analyze data on the proportion of suppliers that were not granted accreditation after the first attempt, and we found significant variation among accrediting organizations on the rates of these "delayed" accreditations. For calendar year 2012, IAC and ACR representatives reported that the proportion of CT suppliers delayed accreditation was 81 percent with IAC and 25 percent with ACR; likewise, the proportion of NM suppliers delayed accreditation was 60 percent with IAC and 4 percent with ACR.were due to actual variations in the quality of services provided by suppliers or to differences in approaches used by accrediting organizations to enforce compliance with their standards. Similarly, CMS does not define the care problems, or "deficiencies," that may be identified by accrediting organizations that can result in delayed or denied accreditations, nor does it systematically collect information about or analyze the deficiencies identified. We found wide variation in the types of deficiencies most frequently identified by each accrediting organization during the accreditation process, which raises questions about whether organizations are consistently identifying care problems. For example, ACR most frequently identified problems with suppliers failing to submit required information, including clinical images of diagnostic quality; IAC most frequently identified problems with the interpretive reports written by physicians; and TJC most frequently identified problems on a wider range of issues, including problems with clinical privileges, equipment maintenance, medication management, infection control, and leadership. Although CMS requires accrediting organizations to conduct mid-cycle audits of accredited suppliers--including unannounced site visits--to help ensure they maintain compliance for the duration of the accreditation cycle, CMS does not specify minimum expectations for this task, such as the minimum number or percentage of audits required or the types of supplier activities that should be assessed during such audits. We found that the mid-cycle audits conducted by accrediting organizations varied in number and type. ACR conducted unannounced site visits for approximately 1 percent of its accredited suppliers in 2012, but ACR intends to increase this amount to approximately 15 percent in 2013. IAC representatives stated that they ensure that all accredited suppliers undergo at least one unannounced site visit or a performance audit-- which requires accredited suppliers to submit specified documentation including clinical images, interpretive reports, and quality-improvement documentation--to ensure continued compliance with IAC standards over the 3-year accreditation period. TJC representatives stated that they conduct unannounced site visits for 2 percent of its accredited suppliers and also require all accredited suppliers to demonstrate ongoing compliance with TJC standards on an annual basis by having TJC conduct an on-site assessment or by means of electronic submission of an annual self-assessment. In contrast, federal regulations governing mammography accreditation specify the minimum number or percentage of on-site visits that should be conducted annually of accredited facilities to monitor ongoing compliance with standards and outline the activities that should be conducted during these visits. In addition, CMS guidance is not sufficient to ensure that accrediting organizations consistently identify and report serious care problems that pose immediate jeopardy to Medicare beneficiaries or suppliers' staff. CMS developed a definition of immediate jeopardy, but did not provide specific examples of the types of problems that pose an immediate health risk for ADI services. We found a difference of opinion among the accrediting organizations about the sufficiency of CMS's guidance. Representatives from TJC stated that CMS's guidance was clear, while ACR and IAC stated that the definition was too broad and stated that additional guidance is needed on the types of activities that constitute immediate jeopardy to either Medicare beneficiaries or suppliers' staff. We also found a difference of opinion about the types of activities that could constitute immediate jeopardy. For example, ACR reported that identifying metallic objects in the MRI suite would definitely constitute immediate jeopardy, whereas TJC told us that this could constitute immediate jeopardy if it was related to other pervasive lapses in safety. ACR representatives stated that without more specific guidance, CMS relies on accrediting organizations to determine what constitutes immediate jeopardy, and noted that FDA's guidance on this topic for mammography accreditation is more helpful. Although federal regulations require the accrediting organizations to report immediate-jeopardy deficiencies of accredited suppliers to CMS within 2 business days, CMS officials reported that none had been reported since the accreditation requirement went into effect. It is unclear whether CMS's lack of guidance has contributed to the fact that no immediate-jeopardy deficiencies have been reported. For example, representatives from one accrediting organization reported that there were circumstances in which they may not report potential immediate jeopardy deficiencies to CMS because they were not certain of exactly what constituted immediate jeopardy. The MIPPA accreditation requirement is an important step in helping to ensure the safety and quality of imaging services. To meet the January 1, 2012, implementation date for MIPPA's accreditation requirement, CMS focused its initial efforts on selecting accrediting organizations and ensuring that only accredited suppliers were paid. However, there are significant differences among the accrediting organizations, which arise from CMS's lack of minimum national standards. As a result, important aspects of imaging, such as qualifications of technologists and medical directors and the quality of clinical images, are difficult for CMS to monitor and assess. CMS lacks an oversight framework for evaluating the performance of selected accrediting organizations, and lacks specific guidance to help ensure that a sufficient number or percentage of mid- cycle audits occurs and that the types of serious care problems that could constitute immediate jeopardy are clear to all accrediting organizations. To help ensure that ADI suppliers provide consistent, safe, and high- quality imaging to Medicare beneficiaries, we recommend that the Administrator of CMS take the following three actions: determine the content of and publish minimum national standards for the accreditation of ADI suppliers, which could include specific qualifications for supplier personnel and requiring accrediting organization review of clinical images; develop an oversight framework for evaluating accrediting organization performance, which could include collecting and analyzing information on accreditation results and conducting validation audits; and develop more specific requirements for accrediting organization mid- cycle audit procedures and clarify guidance on immediate-jeopardy deficiencies to ensure consistent identification and timely correction of serious care problems for the duration of accreditation. We provided a draft of this report to HHS and to the three CMS-approved accrediting organizations for comment. In its written response, reproduced in appendix I, HHS concurred with all of our recommendations and identified actions that the department and CMS officials plan to take to implement them. Specifically, HHS stated these actions would include facilitating discussions with stakeholders and national experts to gather feedback on national standards for accreditation of ADI suppliers; developing an oversight framework for evaluating accrediting developing more specific requirements for accrediting organizations' review procedures and providing guidance and education on immediate-jeopardy deficiencies. The three accrediting organizations also reviewed and provided comments on a draft of this report. ACR and IAC concurred with the report's findings and recommendations. IAC representatives also said that minimum standards for ADI accreditation should include a review of suppliers' interpretive reports of patient images, in addition to the other standards identified in the report. In contrast, TJC disagreed with the report's findings and methodology. A summary of TJC's specific comments and our response follows. The three accrediting organizations also provided technical comments, which we incorporated as appropriate. TJC stated that the report's methodology was flawed and that it provided an incomplete portrayal of the necessary components of an ADI accreditation program. TJC indicated that the 11 organizations from which we obtained information on standards focused only on imaging and did not include organizations that focus more broadly on quality and safety. As a result, TJC stated that the report excluded other factors that affect quality oversight and improvement, and indicated that we lacked data to analyze the effectiveness of the different approaches used by each of the three organizations. Our purpose was not to compare the effectiveness of the three ADI accreditation programs, but rather to assess the ADI standards currently in use and determine whether CMS has adequate assurance that all accredited suppliers meet a minimum level of quality and safety. Further, we did not intend to conduct a comprehensive evaluation of TJC's overall accreditation program, which considers aspects of quality and safety that go beyond criteria outlined in MIPPA for imaging accreditation, such as examining whether a supplier creates and maintains a culture of safety and quality throughout the organization. Rather, because our study is focused on imaging in particular, we determined whether the three CMS-selected accrediting organizations use standards specific to imaging that were recommended by organizations with expertise in this area. TJC also questioned our threshold for presenting standards that were recommended by 5 of 11 of the organizations, indicating that this represented agreement from less than 50 percent of the organizations. Because the 11 organizations have expertise in different areas of imaging, not all organizations commented on all sections of the questionnaire we sent to them. For example, the American Board of Orthopaedic Surgery recommended standards related to the qualifications of medical directors, but not procedures to ensure that equipment meets performance specifications. As a result, it would not be reasonable or appropriate to expect consensus for all recommended standards, as some standards were outside of an organization's area of expertise. We indicate in the report that the standards the 11 organizations identified do not represent the full range of possible standards for the accreditation of ADI suppliers, but rather provide a framework for comparing the standards used by the accrediting organizations selected by CMS. HHS has indicated that it plans to facilitate discussions with stakeholders and national experts to gather feedback on national standards for accreditation of ADI suppliers. Finally, TJC stated that the report places inordinate value on image accuracy and professional credentials. We discuss those aspects of imaging in the report because they were among the nine standards that were identified by at least 5 of the 11 organizations with imaging expertise. For example, 8 of the 11 organizations believe that examining clinical images is an important aspect of accreditation for ADI services, and it is unclear how problems with image quality can be detected without reviewing images. Similarly, TJC stated that we provided no data to show that phantom testing results in better image quality in practice. Phantom image testing was recommended by 5 of the 11 organizations with imaging expertise, and has been required by FDA for over a decade to test imaging conducted by mammogram facilities under MQSA. Further, phantom images provide a standardized format against which imaging performance of various suppliers can be evaluated; this is important given that factors outside of a supplier's control, such as a patient's weight or particular health conditions, can affect a supplier's ability to produce high- quality images. While our report assessed the standards currently in use for ADI accreditation, it is ultimately CMS's responsibility to determine the content of minimum national standards for ADI accreditation. This could include, for example, determining whether clinical image review and phantom testing should be required for ADI accreditation, a decision that could be informed by its planned discussions with stakeholders and national experts. We stand by our report and findings, and believe that by adopting our recommendations for minimum national standards, as HHS has stated it intends to do, CMS will significantly enhance its ability to ensure both imaging quality and patient safety. We are sending copies of this report to the Secretary of Health and Human Services and relevant congressional committees. The report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, Phyllis Thorburn, Assistant Director; William Black; Kye Briesath; William A. Crafton; Beth Morrison; Jennifer Whitworth; and Rachael Wojnowicz made key contributions to this report.

MIPPA required that beginning January 1, 2012, suppliers that produce the images for ADI services, such as physician offices and independent diagnostic testing facilities, be accredited by an organization approved by CMS. MIPPA directed GAO to conduct a preliminary report on the accreditation requirement in 2013 and a final report in 2014. In this report, GAO assessed (1) CMS's standards for accreditation of ADI suppliers, and (2) CMS's oversight of the accreditation requirement. To assess CMS's standards and oversight, GAO reviewed CMS regulations related to MIPPA, interviewed and reviewed information from CMS and CMS-approved accrediting organizations, and reviewed information on recommended standards for ADI accreditation from 11 organizations with imaging expertise. The Centers for Medicare & Medicaid Services (CMS) did not establish minimum national standards for the accreditation of suppliers of advanced diagnostic imaging (ADI) services, which cover the production of images for computed tomography, magnetic resonance imaging, and nuclear medicine services. While CMS adopted the broad criteria from the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) for ADI accreditation, it relied on the three accrediting organizations it selected to establish their own standards for quality and safety. To establish a framework for assessing the ADI standards currently in use, GAO developed a list of nine standards based on recommendations from 11 organizations with imaging expertise from which GAO obtained information. Two of the three accrediting organizations that CMS selected use all nine standards, while the third organization uses six of the nine standards. For example, while two of the organizations evaluate suppliers' patient images, the third said that it instead assesses suppliers' compliance with other standards necessary to maintain image quality, such as those related to inspection and testing of imaging equipment. As a result of these significant differences among the accrediting organizations, which arise from the lack of minimum national standards, important aspects of imaging, such as qualifications of technologists and medical directors and the quality of clinical images, are difficult for CMS to monitor and assess. Nine of the 11 organizations with imaging expertise and representatives from all three accrediting organizations recommended that CMS adopt minimum national standards. CMS drafted standards in 2010, but did not publish them because the agency was focused on other priorities. CMS's current oversight for the accreditation requirement is limited, as the agency focused its initial oversight efforts on ensuring that claims were paid only to accredited suppliers. Although CMS is responsible for evaluating the performance of accrediting organizations, the agency has not developed an oversight framework that would enable it to monitor and measure performance. CMS has not established specific performance expectations or developed plans for the validation audits of accredited suppliers as described in its regulations. Our previous work has shown that such independent evaluations are one of the most effective techniques CMS has to collect information about whether serious deficiencies are being identified. In addition, CMS's guidance to accrediting organizations on mid-cycle audits and serious care problems is limited. For example, CMS requires accrediting organizations to conduct mid-cycle audits to help ensure accredited suppliers maintain compliance for the 3-year accreditation cycle, but did not specify minimum expectations for this task, such as the minimum number or percentage of audits required or the types of supplier activities that should be assessed. In addition, two of the three accrediting organizations reported that CMS's guidance on identifying and reporting deficiencies that pose immediate jeopardy to Medicare beneficiaries or suppliers' staff was unclear. A CMS official stated that the accreditation requirement had been in operation for less than 1 year at the time of GAO's review, and reported that responsibility for oversight of the accreditation requirement was in the process of being transferred to another group within the agency. To help ensure that ADI suppliers provide safe and high-quality imaging to Medicare beneficiaries, GAO recommends that the Administrator of CMS determine the content of and publish minimum national standards for the accreditation of ADI suppliers; develop an oversight framework for evaluating accrediting organization performance; and develop more specific requirements for accrediting organization audits and clarify guidance on immediate-jeopardy deficiencies. The Department of Health and Human Services, which oversees CMS, concurred with GAO's recommendations.

Recognizing the critical need to address the issue of nuclear waste disposal, the Congress enacted the Nuclear Waste Policy Act of 1982 to establish a comprehensive policy and program for the safe, permanent disposal of commercial spent fuel and other highly radioactive wastes in one or more mined geologic repositories. The act created the Office of Civilian Radioactive Waste Management within DOE to manage its nuclear waste program. Amendments to the act in 1987 directed DOE to investigate only the Yucca Mountain site. The Nuclear Waste Policy Act also set out important and complementary roles for other federal agencies: The Environmental Protection Agency (EPA) was required to establish health and safety standards for the disposal of wastes in repositories. EPA issued standards for the Yucca Mountain site in June 2001 that require a high probability of safety for at least 10,000 years. NRC is responsible for licensing and regulating repositories to ensure their compliance with EPA's standards. One prerequisite to the secretary's recommendation was obtaining NRC's preliminary comments on the sufficiency of DOE's site investigation for the purpose of a license application. NRC provided these comments on November 13, 2001. If the site is approved, then NRC, upon accepting a license application from DOE, has 3 to 4 years to review the application and decide whether to issue a license to construct, and then to operate, a repository at the site. The Nuclear Waste Technical Review Board (the board) reviews the technical and scientific validity of DOE's activities associated with investigating the site and packaging and transporting wastes. The board must report its findings and recommendations to the Congress and the secretary of energy at least twice each year, but DOE is not required to implement these recommendations. DOE has designated the nuclear waste program, including the site investigation, as a "major" program that is subject to senior management's attention and to its agencywide guidelines for managing such programs and projects. The guidelines require the development of a cost and schedule baseline, a system for managing changes to the baseline, and independent cost and schedule reviews. DOE is using a management contractor to carry out the work on the program. The contractor develops and maintains the baseline, but senior DOE managers must approve significant changes to cost or schedule estimates. In February 2001, DOE hired Bechtel SAIC Company, LLC (Bechtel), to manage the program and required the contractor to reassess the remaining technical work and the estimated schedule and cost to complete this work. DOE is not prepared to submit an acceptable license application to NRC within the statutory limits that would take effect if the site is approved. Specifically, DOE has entered into 293 agreements with NRC to gather and/or analyze additional technical information in preparation for a license application that NRC would accept. DOE is also continuing to address technical issues raised by the board. In September 2001, Bechtel concluded, after reassessing the remaining technical work, that DOE would not be ready to submit an acceptable license application to NRC until January 2006. Moreover, while a site recommendation and a license application are separate processes, DOE will need to use essentially the same data for both. Also, the act states that the president's recommendation to the Congress is that he considers the site qualified for an application to NRC for a license. The president's recommendation also triggers an express statutory time frame that requires DOE to submit a license application to NRC within about 5 to 8 months. The 293 agreements that DOE and NRC have negotiated address areas of study within the program where NRC's staff has determined that DOE needs to collect more scientific data and/or improve its technical assessment of the data. According to NRC, as of March 4, 2002, DOE had satisfactorily completed work on 38 of these agreements and could resolve another 22 agreements by September 30 of this year. These 293 agreements generally relate to uncertainties about three aspects of the long-term performance of the proposed repository: (1) the expected lifetime of engineered barriers, particularly the waste containers; (2) the physical properties of the Yucca Mountain site; and (3) the supporting information for the mathematical models used to evaluate the performance of the planned repository at the site. The uncertainties related to engineered barriers revolve around the longevity of the waste containers that would be used to isolate the wastes. DOE currently expects that these containers would isolate the wastes from the environment for more than 10,000 years. Minimizing uncertainties about the container materials and the predicted performance of the waste containers over this long time period is especially critical because DOE's estimates of the repository system's performance depend heavily on the waste containers, in addition to the natural features of the site, to meet NRC's licensing regulations and EPA's health and safety standards. The uncertainties related to the physical characteristics of the site center on how the combination of heat, water, and chemical processes caused by the presence of nuclear waste in the repository would affect the flow of water through the repository. The NRC staff's concerns about DOE's mathematical models for assessing the performance of the repository primarily relate to validating the models; that is, presenting information to provide confidence that the models are valid for their intended use and verifying the information used in the models. Performance assessment is an analytical method that relies on computers to operate mathematical models to assess the performance of the repository against EPA's health and safety standards, NRC's licensing regulations, and DOE's guidelines for determining if the Yucca Mountain site is suitable for a repository. DOE uses the data collected during site characterization activities to model how a repository's natural and engineered features would perform at the site. According to DOE, the additional technical work surrounding the 293 agreements with NRC's staff is an insignificant addition to the extensive amount of technical work already completed--including some 600 papers cited in one of its recently published reports and a substantial body of published analytic literature. DOE does not expect the results of the additional work to change its current performance assessment of a repository at Yucca Mountain. "lthough significant additional work is needed prior to the submission of a possible license application, we believe that agreements reached between DOE and NRC staff regarding the collection of additional information provide the basis for concluding that development of an acceptable license application is achievable." The board has also consistently raised issues and concerns over DOE's understanding of the expected lifetime of the waste containers, the significance of the uncertainties involved in the modeling of the scientific data, and the need for an evaluation and comparison of a repository design having a higher temperature with a design having a lower temperature. The board continues to reiterate these concerns in its reports. For example, in its most recent report to the Congress and the secretary of energy, issued on January 24, 2002, the board concluded that, when DOE's technical and scientific work is taken as a whole, the technical basis for DOE's repository performance estimates is "weak to moderate" at this time. The board added that gaps in data and basic understanding cause important uncertainties in the concepts and assumptions on which DOE's performance estimates are now based; providing the board with limited confidence in current performance estimates generated by DOE performance assessment model. As recently as May 2001, DOE projected that it could submit a license application to NRC in 2003. It now appears, however, that DOE may not complete all of the additional technical work that it has agreed to do to prepare an acceptable license application until January 2006. In September 2001, Bechtel completed, at DOE's direction, a detailed reassessment in an effort to reestablish a cost and schedule baseline. Bechtel estimated that DOE could complete the outstanding technical work agreed to with NRC and submit a license application in January 2006. This date, according to the contractor, was due to the cumulative effect of funding reductions in recent years that had produced a "...growing bow wave of incomplete work that is being pushed into the future." Moreover, the contractor's report said, the proposed schedule did not include any cost and schedule contingencies. The contractor's estimate was based on guidance from DOE that, in part, directed the contractor to assume annual funding for the nuclear waste program of $410 million in fiscal year 2002, $455 million in fiscal year 2003, and $465 million in fiscal year 2004 and thereafter. DOE has not accepted this estimate because, according to program officials, the estimate would extend the date for submitting a license application too far into the future. Instead, DOE accepted only the fiscal year 2002 portion of Bechtel's detailed work plan and directed the contractor to prepare a new plan for submitting a license application to NRC by December 2004. Under the Nuclear Waste Policy Act, DOE's site characterization activities are to provide information necessary to evaluate the Yucca Mountain site's suitability for submitting a license application to NRC for placing a repository at the site. In implementing the act, DOE's guidelines provide that the site will be suitable as a waste repository if the site is likely to meet the radiation protection standards that NRC would use to reach a licensing decision on the proposed repository. Thus, as stated in the preamble (introduction) to DOE's guidelines, DOE expects to use essentially the same data for the site recommendation and the license application. In addition, the act specifies that, having received a site recommendation from the secretary, the president shall submit a recommendation of the site to the Congress if the president considers the site qualified for a license application. Under the process laid out in the Nuclear Waste Policy Act, once the secretary makes a site recommendation, there is no time limit under which the president must act on the secretary's recommendation. However, when the president recommended, on February 15, that the Congress approve the site, specific statutory time frames were triggered for the next steps in the process. Figure 1 shows the approximate statutory time needed between a site recommendation and submission of a license application and the additional time needed for DOE to meet the conditions for an acceptable license application. The figure assumes that Nevada disapproves the site but that the Congress overrides the state's disapproval. As shown in the figure, Nevada has 60 days--until April 16--to disapprove the site, and if disapproved, the Congress has 90 days (of continuous session) in which to enact legislation overriding the state's disapproval. If the Congress overrides the state's disapproval and the site designation takes effect, the next step is for the secretary to submit a license application to NRC within 90 days after the site designation is effective. In total, these statutory time frames provide about 150 to 240 days, or about 5 to 8 months, from the time the president makes a recommendation to DOE's submittal of a license application. On the basis of Bechtel's September 2001 program reassessment, however, DOE would not be ready to submit a license application to NRC until January 2006. DOE states that it may be able to open a repository at Yucca Mountain in 2010. The department has based this expectation on submitting an acceptable license application to NRC in 2003, receiving NRC's authorization to construct a repository in 2006, and constructing essential surface and underground facilities by 2010. However, Bechtel, in its September 2001 proposal for reestablishing technical, schedule, and cost baselines for the program, concluded that January 2006 is a more realistic date for submitting a license application. Because of uncertainty over when DOE may be able to open the repository, the department is exploring alternatives that might still permit it to begin accepting commercial spent fuel in 2010. An extension of the license application date to 2006 would almost certainly preclude DOE from achieving its long-standing goal of opening a repository in 2010. According to DOE's May 2001 report on the program's estimated cost, after submitting a license application in 2003, DOE estimates that it could receive an authorization to construct the repository in 2006 and complete the construction of enough surface and underground facilities to open the repository in 2010, or 7 years after submitting the license application. This 7-year estimate from submittal of the license application to the initial construction and operation of the repository assumes that NRC would grant an authorization to construct the facility in 3 years, followed by 4 years of construction. Assuming these same estimates of time, submitting a license application in January 2006 would extend the opening date for the repository until about 2013. Furthermore, opening the repository in 2013 may be questionable for several reasons. First, a repository at Yucca Mountain would be a first-of- a-kind facility, meaning that any schedule projections may be optimistic. DOE has deferred its original target date for opening a repository from 1998 to 2003 to 2010. Second, although the Nuclear Waste Policy Act states that NRC has 3 years to decide on a construction license, a fourth year may be added if NRC certifies that it is necessary. Third, the 4-year construction time period that DOE's current schedule allows may be too short. For example, a contractor hired by DOE to independently review the estimated costs and schedule for the nuclear waste program reported that the 4-year construction period was too optimistic and recommended that the construction phase be extended by a year-and-a-half. Bechtel anticipates a 5-year period of construction between the receipt of a construction authorization from NRC and the opening of the repository. A 4-year licensing period followed by 5 years of initial construction could extend the repository opening until about 2015. Finally, these simple projections do not account for any other factors that could adversely affect this 7- to 9-year schedule for licensing, constructing, and opening the repository. Annual appropriations for the program in recent years have been less than $400 million. In contrast, according to DOE, it needs between $750 million and $1.5 billion in annual appropriations during most of the 7- to 9-year licensing and construction period in order to open the repository on that schedule. In its August 2001 report on alternative means for financing and managing the program, DOE stated that unless the program's funding is increased, the budget might become the "determining factor" whether DOE will be able to accept wastes in 2010. In part, DOE's desire to meet the 2010 goal is linked to the court decisions that DOE--under the Nuclear Waste Policy Act and as implemented by DOE's contracts with owners of commercial spent fuel--is obligated to begin accepting spent fuel from contract holders not later than January 31, 1998, or be held liable for damages. Courts are currently assessing the amount of damages that DOE must pay to holders of spent fuel disposal contracts. Estimates of potential damages for the estimated 12-year delay from 1998 to 2010 range widely from the department's estimate of about $2 billion to $3 billion to the nuclear industry's estimate of at least 50 billion. The damage estimates are based, in part, on the expectation that DOE would begin accepting spent fuel from contract holders in 2010. The actual damages could be higher or lower, depending on when DOE begins accepting spent fuel. Because of the uncertainty of achieving the 2010 goal for opening the Yucca Mountain repository, DOE is examining alternative approaches that would permit it to meet the goal. For example, in a May 2001 report, DOE examined approaches that might permit it to begin accepting wastes at the repository site in 2010 while spreading out the construction of repository facilities over a longer time period. The report recommended storing wastes on the surface until the capacity to move wastes into the repository has been increased. Relatively modest-sized initial surface facilities to handle wastes could be expanded later to handle larger volumes of waste. Such an approach, according to the report, would permit partial construction and limited waste emplacement in the repository, at lower than earlier estimated annual costs, in advance of the more costly construction of the facility as originally planned. Also, by implementing a modular approach, DOE would be capable of accepting wastes at the repository earlier than if it constructed the repository described in the documents that the secretary used to support a site recommendation. DOE has also contracted with the National Research Council to provide recommendations on design and operating strategies for developing a geologic repository in stages, which is to include reviewing DOE's modular approach. The council is addressing such issues as the (1) technical, policy, and societal objectives and risks for developing a staged repository; (2) effects of developing a staged repository on the safety and security of the facility and the effects on the cost and public acceptance of such a facility; and (3) strategies for developing a staged system, including the design, construction, operation, and closing of such a facility. The council expects to publish interim and final reports on the study in late March 2002 and in December 2002, respectively. As of December 2001, DOE expected to submit the application to NRC in 2003. This date reflects a delay in the license application milestone date last approved by DOE in March 1997 that targeted March 2002 for submitting a license application. The 2003 date was not formally approved by DOE's senior managers or incorporated into the program's cost and schedule baseline, as required by the management procedures that were in effect for the program. At least three extensions for the license application date have been proposed and used by DOE in program documents, but none of these proposals have been approved as required. As a result, DOE does not have a baseline estimate of the program's schedule and cost-- including the late 2004 date in its fiscal year 2003 budget request--that is based on all the work that it expects to complete through the submission of a license application. DOE's guidance for managing major programs and projects requires, among other things, that senior managers establish a baseline for managing the program or project. The baseline describes the program's mission--in this case, the safe disposal of highly radioactive waste in a geologic repository--and the expected technical requirements, schedule, and cost to complete the program. Procedures for controlling changes to an approved baseline are designed to ensure that program managers consider the expected effects of adding, deleting, or modifying technical work, as well as the effects of unanticipated events, such as funding shortfalls, on the project's mission and baseline. In this way, alternative courses of action can be assessed on the basis of each action's potential effect on the baseline. DOE's procedures for managing the nuclear waste program require that program managers revise the baseline, as appropriate, to reflect any significant changes to the program. After March 1997, according to DOE officials, they did not always follow these control procedures to account for proposed changes to the program's baseline, including the changes proposed to extend the date for license application. According to these same officials, they stopped following the control procedures because the secretary of energy did not approve proposed extensions to the license application milestone. As a result, the official baseline did not accurately reflect the program's cost and schedule to complete the remaining work necessary to submit a license application. In November 1999, the Yucca Mountain site investigation office proposed extending the license application milestone date by 10 months, from March to December 2002, to compensate for a $57.8 million drop in funding for fiscal year 2000. A proposed extension in the license application milestone required the approval of both the director of the nuclear waste program and the secretary of energy. Neither of these officials approved this proposed change nor was the baseline revised to reflect this change even though the director subsequently began reporting the December 2002 date in quarterly performance reports to the deputy secretary of energy. The site investigation office subsequently proposed two other extensions of the license application milestone, neither of which was approved by the program's director or the secretary of energy or incorporated into the baseline for the program. Nevertheless, DOE began to use the proposed, but unapproved, milestone dates in both internal and external reports and communications, such as in congressional testimony delivered in May 2001. Because senior managers did not approve these proposed changes for incorporation into the baseline for the program, program managers did not adjust the program's cost and schedule baseline. By not accounting for these and other changes to the program's technical work, milestone dates, and estimated costs in the program's baseline since March 1997, DOE has not had baseline estimates of all of the technical work that it expected to complete through submission of a license application and the estimated schedule and cost to complete this work. This condition includes the cost and schedule information contained in DOE's budget request for fiscal year 2003.

As required by law, the Department of Energy (DOE) has been investigating a site at Yucca Mountain, Nevada, to determine its suitability for disposing of highly radioactive wastes in a mined geologic repository. If the site is approved, DOE must apply to the Nuclear Regulatory Commission (NRC) for authorization to construct a repository. If the site is not approved for a license application, or if NRC denies a license to construct a repository, the administration and Congress will have to consider other options for the long-term management of existing and future nuclear wastes. DOE is not prepared to submit an acceptable license application to the NRC within the statutory limits that would take effect if the site is approved. DOE is unlikely to achieve its goal of opening a repository at Yucca Mountain by 2010. Sufficient time would not be available for DOE to obtain a license from NRC and construct enough of the repository to open it in 2010. Another key factor is whether DOE will be able to obtain the increases in annual funding that would be required to open the repository by 2010. DOE currently does not have a reliable estimate of when, and at what cost, a license application can be submitted or a repository can be opened because DOE stopped using its cost and schedule baselines to manage the site investigation in 1997.

According to AAR, hazardous materials comprise about 8 percent of commodities shipped by rail in North America--about 2.35 million out of 29.4 million annual carloads shipped in 2015. According to the most recent Bureau of Transportation Statistics data available (2012), railroads ship about 4 percent of the hazardous materials in the United States by tonnage, but railroad shipments account for about 28 percent of distance traveled by hazardous materials. The freight railroad industry is dominated by the seven Class I railroads, which transport the majority of freight--including hazardous materials--in freight containers, portable tanks, and other types of rail cars, including tank cars that travel across a network of 140,000 miles of track. In addition, numerous Class II and hundreds of Class III railroads have essential roles in moving freight, typically linking rural communities to the larger railroad network. Often providing "first mile" and "last mile" movements, these smaller railroads, taken together, operate on 50,000 miles of track or nearly 40 percent of the national railroad network and handle in origination or destination one of every four cars moving on the national system. PHMSA, through its Office of Hazardous Materials Safety, regulates shippers and railroads transporting hazardous materials by rail and other modes. One way PHMSA fulfills this mission is through the promulgation of the HMR for the safe transport of hazardous materials. These regulations pertain to the classifying, handling, and packaging of shipments of hazardous materials, including rail shipments, and include seven requirements that emergency response information must include for each hazardous material being shipped. These are: 1. The basic description and technical name of the hazardous material. 2. Immediate hazards to health. 3. Risks of fire or explosion. 4. Immediate precautions to be taken in the event of an accident. 5. Immediate methods for handling fires. 6. Initial methods for handling spills or leaks in the absence of fire. 7. Preliminary first aid measures. The HMR also require railroads to have a document, often referred to as the train consist, that identifies basic information about the position in the train of each rail car containing hazardous materials. The consist also typically includes information on the train's contents, including basic descriptions of the hazardous materials transported, and their destinations, and may include supplemental emergency response information, such as details on how to respond to releases of specific hazardous materials. FRA provides regulatory oversight for passenger and freight rail, issuing and enforcing safety regulations through its Office of Railroad Safety. FRA enforces the HMR and its own regulations through inspections and audits by FRA officials, including about 400 federal safety inspectors and state partners in some states. For example, according to DOT officials, FRA conducts inspections to ensure that railroads carry the required emergency response information mentioned above as well as an emergency response telephone number in train documentation and conduct and keep records of required general-awareness and function- specific hazardous material training for train crews. When a rail accident occurs, local emergency responders--police, emergency medical technicians, and firefighters--and railroad train crews are typically first on the scene of, and often provide the initial response to, a rail accident involving hazardous materials. For example, local and sometimes regional officials may be responsible for advising the public on taking shelter-in-place actions or conducting evacuations of affected populations. In addition, assuming the crews are not affected by an accident, railroad train crews are expected to provide local emergency responders with information about the position, type, and quantity of hazardous materials on the train as well as written emergency-response and contact information for the specific commodities (see fig. 1). The HMR also requires railroads to provide immediate notice of certain hazardous materials accidents to the National Response Center. The ERG, published every 4 years by PHMSA, is a 400-page document that contains emergency response information for thousands of hazardous materials and for all modes of transportation. It is intended to help first responders identify the characteristics of the hazardous materials involved in an accident through a table of markings, labels, and placards, specific risks associated with the hazardous materials how first responders can protect themselves, and procedures for containing the accident as quickly and safely as possible. The ERG is organized into four color-coded sections to help users navigate the document. For example, the orange section of the ERG divides hazardous materials into 63 categories--such as flammable liquids-toxic, flammable gases, and oxidizers --with an individual guide for each that provides information on types of potential hazards each category poses, including health, fire, or explosion hazards. The green section provides specific information, such as initial isolation and protective action distances for small or large spills occurring during the day or night, for hazardous materials that are considered to be a toxic inhalation hazard (see fig. 2). To assist railroads in complying with the HMR, AAR, with the input of railroads, develops and makes available to all subscribing railroads the United States Hazardous Materials Instructions for Rail, which provides general guidelines to the train crew on handling hazardous material shipments or incidents safely and efficiently and in accordance with local, state, and federal regulations. For example, this document provides information on required emergency response information, how the train crew and emergency responders are to interact, and what to do when a fire or vapor cloud is visible. This document also recommends that train crews carry the ERG. Selected railroads typically carry two sources of emergency response information--the train documents and the ERG--to meet the emergency response information requirements in federal regulations. Our review of selected train documents determined that they always contained the position and content of rail cars and the basic descriptions of hazardous materials on board the train. In addition, our analysis determined that the train documents sometimes included supplemental emergency response information. Fifteen of the 18 railroads we spoke with told us that they use AAR's United States Hazardous Materials Instructions for Rail as their guidance for meeting train documentation requirements, including emergency response information. According to the train crews' unions, the ERG and the train documents are kept in the locomotive of the train by the train crew, usually a conductor and an engineer. According to FRA and PHMSA officials, the ERG's use is not required by regulation, but is viewed by the rail industry as a national standard for emergency response information requirements. All railroads that we interviewed told us that the ERG is carried aboard its trains as a source of emergency response information. For shipments of hazardous materials, the HMR requires the train crew to carry documents with specific information about the hazardous materials on board. Our review of selected train documents showed that the selected railroads included this information in their train documents. Additionally, most of the selected railroads included the information in their train consist, which identifies the position in the train of each rail car and includes other information about the rail car, such as its contents and destination. This information includes a basic description of each hazardous material being transported on that train, including the identification number and proper shipping name, as well as an emergency response telephone number, which is provided by the shipper of the regulated hazardous material (see fig. 3). This telephone number is required to be located on documentation carried by the train crew on the shipping documents for transportation of the material. This basic description of the hazardous material the train is transporting meets the first of seven emergency-response information requirements in the HMR. Our review revealed that some railroads also include supplemental emergency response information for each hazardous material on the train at the end of the train consist or in a separate document. According to AAR, it provides this information to some railroads from its Hazardous Materials Emergency Response Database, which AAR develops and maintains. Six of the 7 Class I railroads and 5 of the 11 selected Class II and III railroads included this supplemental information in their trains' documents. Our analysis showed that the amount and content of the supplemental emergency response information varied depending on the number and type of hazardous materials being transported on a train. For each hazardous material on the train, the information can include 5 to 10 paragraphs, covering 1 to 2 pages of paper. Supplemental emergency response information may include information on how to handle fires; precautions to be taken in the event of an accident; first aid responses; or how to handle air, water, or land spills for that particular hazardous material (rather than groups of hazardous materials as with the ERG). AAR told us the railroads carry this information because, prior to the development of the ERG, it was the only source of emergency response information carried on trains. However, as discussed later, AAR plans to discontinue the use of this database because, among other reasons, new sources of information, along with the ERG, have become available to emergency responders that contain this type of information. According to the four emergency response associations we spoke to, when responding to a rail accident involving hazardous materials, emergency responders primarily rely on information from the train documents and the ERG during the first 30 minutes. These associations and two local responders we spoke to told us that responders will want to immediately learn what hazardous materials are on the train and their exact location. There are a couple of ways a responder might begin to identify what is on the train. According to all selected responders, if the train crew is located quickly, responders would use the train documents to identify and locate the hazardous materials on the train. If the train crew is incapacitated or cannot be found right away, responders could use placards, labels, or markings on the train to identify the hazardous materials, according to one emergency response association. According to four emergency response associations, responders then may consult the ERG to gather more information about the hazardous materials. PHMSA, the four emergency response associations, and one local responder told us that the ERG is the go-to source for first responders during the first 30 minutes or initial phase of an accident. In addition, two selected responders told us that the train documents are the best source for the most updated list of the hazardous materials on the train and their locations. According to officials from two emergency response associations, emergency response should be thought of in terms of an accident timeline. According to these officials, the goal of emergency responders is to obtain more specific and detailed information as time goes on, beyond the first 30 minutes. During the management of an accident, emergency responders move from having unknowns to knowns. According to four emergency response associations and two local responders we interviewed, as the incident timeline matures, a responder should be seeking more comprehensive sources of information on the hazardous materials involved in the incident (see fig. 4). One emergency response association told us that a responder might consult CHEMTREC, the Wireless Information System for Emergency Responders (WISER) application, the National Institute for Occupational Safety and Health (NIOSH) Pocket Guide to Chemical Hazards, or hotlines for the hazardous materials shippers themselves to obtain more specific information on chemical properties or tactical information. Below is an example of a sequence of actions a responder might take in the event of a hazardous materials accident, according to our analysis and interviews: A responder must first identify the hazardous material involved and its location. This could occur using the train documents from the train crew if they are located quickly, or if the train crew is incapacitated or cannot be found right away, using placards, labels, or markings on the train. Next, the responder determines initial response actions. Using the ERG, the responder might locate the material in the ERG and determine which of the 63 guides (orange section) applies. These guides provide the basic hazardous material information that a responder might want to know immediately, such as evacuation distances, risks of fire or explosions, potential health hazards, or protective clothing to wear. If the hazardous material is a toxic inhalation hazard, the ERG would direct a responder to its green section to gather additional information on isolation and protective action distances for small and large spills during the day or night. After locating the train crew and the train documents, a responder might also consult the supplemental emergency-response information in the train's documents for specifics about the hazardous materials involved in the accident. The new AskRail app, developed by AAR with data from all the Class I railroads, is another tool that provides first responders immediate access to information about the hazardous materials on the train. It provides access to real-time train consist information and corresponds directly to the emergency response information in the ERG associated with each hazardous material on the train. Later, after the material has been identified and initial response actions have been taken, a responder could consult previously mentioned sources such as WISER or CHEMTREC about the reactivity of the chemical, suggested environmental response measures, or suggested first aid measures for that particular hazardous material rather than a group of hazardous materials. The interaction between the train crew and emergency responders after a rail accident is important because it is the train crew who must provide train documents to the responders that lets them know the rail car order, the contents of the rail cars, and emergency response information for any hazardous materials that the train is transporting. The United States Hazardous Materials Instructions for Rail provides guidelines for how this interaction between the train crew and responders is to occur. Each railroad may modify parts of the United States Hazardous Materials Instructions for Rail to reflect their individual policies. Our analysis of the instructions provided by selected Class I, II, and III railroads found that they had generally consistent guidance on train crew cooperation with emergency responders. In each of the instructions that we reviewed, the train crew is expected to immediately share any requested information from the train documents with emergency response personnel. In addition, the train crews are instructed to help emergency response personnel identify the rail cars and commodities involved, using train documents or observation from a safe distance. Five of the seven Class I railroads added information to their hazardous materials instructions on the process for sharing information with emergency responders. As an example, the guidance of one Class I railroad says, "If an extra copy is not available, share (DO NOT SURRENDER) the copy you have with the emergency response personnel." One Class II railroad asks its employees to note the time, along with the name and title of the person provided with the (emergency response) information. Training received by emergency responders informs the emergency response actions taken following a rail hazardous materials accident. For example, according to one emergency response association we interviewed, emergency responders with basic training, called awareness level training, receive training on the ERG, how to read train documents, and the other sources of emergency response information that provide more specific information on hazardous materials. On the other hand, according to one emergency response association and one local responder, responders with more advanced training may consult other sources of information even in the first 30 minutes of a response. For example, a hazardous materials technician for a local responder in Montgomery County, MD, told us that he does not use the ERG, but instead relies on the NIOSH pocket guide in the first 30 minutes of an incident because it provides more precise information than the ERG. Training for emergency responders may be provided by emergency response associations, railroads, or state and local emergency management agencies, among others. According to PHMSA, PHMSA also conducts outreach to emergency responders to train them on the ERG, including any changes to the ERG if a new version is forthcoming. For example, PHMSA officials visited 46 firehouses in fiscal year 2016-- including visits in Olympia, WA, Houston, TX, and Greenville, SC-- to provide training on the ERG. PHMSA also developed a new online training program in April 2016 that introduces emergency responders to the hazardous materials regulations and that may also be used to meet the requirements for awareness level training, or as the basis for developing more advanced training programs. The content in the ERG and the supplemental emergency response information in the train documents we reviewed was generally similar, largely aligning with the seven categories of required emergency response information for hazardous materials shipments set forth in the HMR (see table 1). We used the seven requirements in the code of federal regulations as a baseline by which to compare the ERG and supplemental emergency response information. The specific content was the same in certain instances. For example, both sources recommended that, in response to an incident involving propane, responders move victims to fresh air and give them artificial respiration if they are not breathing. The existence of identical content was, in part, because the ERG was one of the sources for the information in the AAR Hazardous Materials Emergency Response Database, which, as discussed earlier, was the source of the supplemental emergency response information in the train documents we reviewed. While the general content and certain information in the ERG and the supplemental emergency response information we reviewed was similar, the ERG mostly provided emergency response information for groups of hazardous materials based on their general hazards, while the supplemental emergency response information was specific to each hazardous material onboard the train (see table 1). The supplemental emergency response information that we reviewed was intended to augment the ERG and provided more specificity in certain areas. For example, for an incident involving chlorine, the supplemental emergency response information we reviewed recommended digging a pit, pond, lagoon, or holding area to contain the spill, while the ERG generally recommended preventing entry of the spill into waterways, sewers, basements, or confined areas, but did not offer a specific means by which to do so. Additionally, for an incident involving sodium hydroxide solution-- which is commonly present in commercial drain and oven cleaners-- the supplemental emergency response information we reviewed recommended the use of specific materials for protective clothing, such as butyl rubber and neoprene, while the ERG generally recommended wearing protective clothing recommended by the manufacturer of the hazardous material. The supplemental emergency response information we reviewed also provided information that went beyond what is required by federal regulations and included in the ERG, such as physical characteristics of the hazardous material, uses, water solubility, and environmental hazards. However, in one area, the ERG often provided more detail than the supplemental emergency response information we reviewed. The ERG provided specific initial isolation and evacuation distances for incidents involving groups of hazardous materials, while the supplemental information offered no distance recommendations or deferred to the ERG in most of the train documents we reviewed. For example, for a large spill of gasoline, the ERG recommended an initial downwind evacuation of at least 300 meters, while the supplemental emergency response information we reviewed said to consult the ERG for all evacuation distances. The ERG and the supplemental emergency response information we reviewed also at times differed on the type of information that was given for certain emergency response recommendations. For example, for handling spills or leaks, the ERG often provided recommendations according to the size of the incident, such as small or large spills, while the supplemental information we reviewed often provided recommendations according to the environment, such as air, land, or water spills. In reviewing the ERG and train documents in our nonprobability sample belonging to our selected Class I, II, and III railroads, we found inconsistent information for 8 of the 72 hazardous materials we selected. Two inconsistencies involved differences in a first aid response recommendation regarding the amount of time to flush skin or eyes with running water in case of contact with the substance. The differences were 5 minutes in one instance and 10 minutes in another. Six inconsistencies involved discrepancies between the recommended evacuation distances in the two sources. o For four of the six hazardous materials with evacuation distance inconsistencies, the supplemental emergency response information recommended an evacuation distance of a half mile for an incident involving fire, while the ERG recommended one mile. These four hazardous materials were all labeled as United Nations identification number 1075, which represents multiple liquefied petroleum gases. o For another of the hazardous materials, sodium chlorate, the ERG recommended an evacuation distance of a half mile, while the supplemental emergency response information recommended the same distance, but only if the resulting fire was uncontrollable. o For the final hazardous material, ammonium nitrate, the ERG recommended an evacuation distance of a half mile in all directions for an incident involving fire, while the supplemental emergency response information recommended one mile for an uncontrollable fire. The NTSB report on the Paulsboro, New Jersey, incident highlighted inconsistencies between recommended evacuation distances in the supplemental emergency response information in the train documents and the ERG for two of the hazardous materials on the train, chlorine and vinyl chloride. This finding led to NTSB's recommendation that AAR update its database to ensure that its guidance is consistent with and at least as protective as the ERG. In response to NTSB's recommendation, AAR replaced all existing evacuation distance statements in its Hazardous Materials Emergency Response Database, effective August 1, 2014, with a statement to consult the ERG for protective action considerations, including initial isolation or evacuation distances and shelter-in-place recommendations. Additionally, AAR made other changes to the database effective December 1, 2014. NTSB found AAR's response actions to be unacceptable because AAR did not revise emergency response information that was less conservative than the equivalent precautions contained in the ERG. As described above, our analysis showed that some railroads did not capture these changes, including the new evacuation distance recommendations, and continued to provide specific evacuation distances for hazardous materials in their train documents that were inconsistent with the ERG. AAR is planning a change that is intended to remove the potential for such discrepancies. Specifically, according to AAR, AAR hazardous materials committee members--which consist of representatives of the 7 Class I railroads--unanimously voted in August 2016 to discontinue the support, production, and distribution of the AAR Hazardous Materials Emergency Response Database. According to AAR, although the Class II and III railroads did not vote on the change, the database will no longer be supported, produced, or distributed, making it effective for all railroads. Since emergency responders have access to the ERG and other resources with more specific information than the ERG--such as WISER, the NIOSH pocket guide, safety data sheets, CHEMTREC, and the shipper--the supplemental emergency response information has become obsolete, according to one AAR official. We provided a draft of this report to DOT and NTSB for their review and comment. DOT provided a technical comment about hazardous material training requirements, which we incorporated. NTSB provided a technical comment about AAR's response to their recommendation to revise discrepancies between emergency response information found in AAR's database and the ERG, which we incorporated. We will send copies of this report to the appropriate congressional committees and to the Secretary of Transportation and the Chairman of the National Transportation Safety Board. In addition, the report will be available at no charge on the GAO website at http://gao.gov. If you or your staff have any questions about this report, please contact Susan 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 report. Major contributors to this report are listed in appendix II. Our objectives were to examine: (1) what emergency response information is carried on trains by selected railroads that transport hazardous materials and how responders use it and (2) how the supplemental emergency response information carried on trains of these railroads compares to the information in the Emergency Response Guidebook (ERG). To inform both of our objectives, we reviewed relevant literature, including the National Transportation Safety Board (NTSB) report on the Paulsboro, New Jersey incident, the ERG, and a prior GAO report on emergency response to rail incidents. We reviewed the Association of American Railroads' (AAR) United States Hazardous Materials Instructions for Rail, to understand industry guidelines on how to meet federal hazardous material regulations, including the emergency response information to be carried on trains and how railroad personnel are expected to interact with first responders. We also examined relevant sections of the Hazardous Materials Regulations (HMR) to determine requirements for railroads related to emergency response information carried on trains transporting hazardous materials. Additionally, we interviewed officials from the Pipeline and Hazardous Materials Safety Administration (PHMSA) and the Federal Railroad Administration (FRA) within the Department of Transportation (DOT) and NTSB to understand their roles in developing, regulating, and making recommendations regarding emergency response information on trains. To identify what emergency response information is carried on trains by selected railroads that transport hazardous materials and how responders use it, we interviewed two railroad associations, AAR and the American Short Line and Regional Railroad Association (ASLRRA), and all seven Class I railroads. ASLRRA told us it represents approximately 450 of the about 550 Class II and III railroads, of which 300 to 400 transport hazardous materials. We selected seven Class II and seven Class III railroads that carry hazardous materials and are ASLRRA members, using PHMSA's Office of Hazardous Materials Safety Incident Reports Database and a member list provided by ASLRRA. We searched PHMSA's database for railroads that experienced an incident in transit during 2015, which resulted in a list of railroads that carry hazardous materials that we could cross-reference with the ASLRRA member list. The railroads we selected are also geographically distributed across the United States. Of those fourteen selected Class II and III railroads, we spoke with representatives of five Class II and six Class III railroads. The other three did not respond to our requests for an interview. The results of the interviews cannot be generalized to the entire population of Class II and Class III railroads. As described below, we also reviewed information on hazardous materials in selected train documents from some of these railroads. Fifteen (7 Class Is, 4 Class IIs, and 4 Class IIIs) of the 18 railroads we interviewed provided us with at least one set of train documents. We selected one set of train documents from each of those railroads to determine how the basic description and technical name of hazardous materials the train is transporting and the emergency response telephone number are displayed. The results of the analysis are not generalizable to all of the train documents of the selected railroads or all railroads. We also spoke with CHEMTREC regarding its role in providing information to first responders. Additionally, we interviewed three of the five largest shippers of hazardous materials in the United States--Exxon- Mobil, Dow Chemical Company, and BASF--to determine what emergency response information they provide to railroads and emergency responders. CHEMTREC identified and provided the contact information for the three shippers based on their criteria and resources. We also interviewed local emergency responders in Montgomery County, MD, Westmoreland County, PA, and Culbertson, MT to learn their perspective on the emergency response information carried on trains and how and when emergency responders use the information. We chose the first organization because of its proximity to the audit team in Washington, D.C. and the other two because of their involvement in responding to rail incidents involving hazardous materials in 2014 and 2015, respectively. We determined their involvement by searching PHMSA's Incident Reports Database for serious rail incidents in transit over the last 5 years that resulted in a hazardous materials' release and talking to the first responders associated with the city or county listed in the database. We also interviewed representatives from four emergency response associations--three national associations representing local emergency responders, including the International Association of Fire Chiefs, International Association of Firefighters, and the National Volunteer Fire Council, as well as the National Fire Protection Association, which develops, among other things, standards for emergency response to hazardous materials incidents. Additionally, we spoke with two train crew unions--the Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal, Air, Rail and Transportation Workers--to understand the role of the train crews in emergency response and how they interact with emergency responders following a rail incident. To understand how the supplemental emergency-response information carried on trains of selected railroads compares to the information in the ERG, we analyzed information on a nonprobability sample of hazardous materials discussed in the ERG and in train documents. We used the 2012 ERG, as opposed to the recently released 2016 ERG, because not all of selected railroads had begun using the 2016 version during the timeframe that the sample was taken. We asked each of the 18 railroads that we interviewed to provide us with a nonprobability sample of their train documents, including the "train consist" and any supplemental emergency response information, for 15 trains carrying at least two different hazardous materials and traveling between May 12, 2016, and June 30, 2016. Eleven of the 18 railroads (6 Class Is, 2 Class IIs, and 3 Class IIIs) provided train documents that contained supplemental emergency response information. From those train documents, we selected a sample of 72 unique hazardous materials that were in either the AAR's top 125 hazardous commodities list as measured by loaded tank car originations or top 25 hazardous commodities list as measured by loaded non-tank-car originations (e.g., intermodal trailers or containers on flat cars) in 2014. The sample represented 70 unique sets of train documents from 10 of the 11 railroads that carried the supplemental emergency response information. The sample included 10 hazardous materials in 10 sets of train documents from five of the six Class I railroads, 10 in 8 sets of train documents from the sixth Class I railroad, 5 in 5 sets of train documents from both Class II railroads, and 1 in 1 set of train documents from two of the three Class III railroads. To make the comparisons, we first determined which parts of the ERG and the supplemental emergency response information in the train documents contained information that is associated with the seven requirements for emergency response information outlined in the HMR. We then examined each hazardous material in the sample by comparing the relevant sections in each source and determining where there are similarities and differences, as well as any conflicting information. The results of our analysis are not generalizable to all train documents or all hazardous materials in the ERG. Furthermore, AAR provided us access to its Hazardous Materials Emergency Response Database. We determined that the supplemental emergency response information associated with the sample of hazardous materials in the reviewed train documents from the 10 railroads was reliable for the purposes of our report and objectives because all of the information came from the AAR Hazardous Materials Emergency Response Database. We determined that the database was the appropriate source of the information in the reviewed train documents through interviews with officials from each of the 10 railroads. We compared the supplemental emergency response information on the sample of hazardous materials in the reviewed train documents to the information on those hazardous materials in the source database for the time period reflected by the dates of the train documents (May 12, 2016, to June 30, 2016). The results of our analysis are not generalizable to all train documents or all hazardous materials in the AAR Hazardous Materials Emergency Response Database. We also interviewed supply chain software providers ShipXpress and GE Transportation to learn how the Class II and Class III railroads receive access to the AAR Hazardous Materials Emergency Response Database. We conducted this performance audit from March 2016 through December 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 individual name above, Nancy Lueke (Assistant Director), Kieran McCarthy (Analyst in Charge), Moira Lenox, Garrett Riba, Josh Ormond, William Egar, Dave Hooper, Delwen Jones, Reuben Montes de Oca, and Kelly Rubin made key contributions to this report.

In November 2012, a train derailed in Paulsboro, New Jersey, releasing about 20,000 gallons of vinyl chloride, a hazardous material. The National Transportation Safety Board (NTSB) found, among other issues, that the supplemental information in the train's documents on responding to emergencies involving vinyl chloride was inconsistent with and less protective than emergency response guidance in the ERG . Congress included a provision in statute for GAO to evaluate the differences between the emergency response information carried by trains transporting hazardous materials and the ERG guidance. This report examines (1) what emergency response information is carried on trains by selected railroads transporting hazardous materials and how responders use it, and (2) how selected railroads' supplemental emergency response information compares to information in the ERG . GAO reviewed the ERG and other relevant literature and met with DOT and NTSB officials, among others. GAO interviewed all 7 larger Class I railroads and 11 smaller Class II and III railroads that carried hazardous materials in 2015. GAO compared the supplemental emergency response information with ERG information for 72 frequently shipped hazardous materials from a nonprobability sample of train documents provided by 10 of the 18 selected railroads. To help emergency responders safely handle rail accidents involving hazardous materials, selected railroads transporting hazardous materials typically carry two sources of information: the Department of Transportation's (DOT) Emergency Response Guidebook ( ERG ) and information in the trains' documents. Federal Hazardous Material Regulations require railroads and other hazardous material transporters to carry emergency response information that describes immediate hazards to health and risks of fire or explosion, among other things. Representatives from all 18 railroads GAO interviewed told us that they carry the ERG on their trains. According to DOT officials, the ERG's use is not required by regulation, but the rail industry views it as a national standard for emergency response information. Our review of selected train documents showed that they always have a basic description of each hazardous material being transported, including the identification number and proper shipping name, as well as an emergency response telephone number. Six of the 7 Class I railroads and 5 of the 11 selected Class II and III railroads also included emergency response information in these documents. According to four emergency response associations, in the first 30 minutes after a rail incident, emergency responders primarily use the train documents to locate and identify hazardous materials and use the ERG to identify potential response actions. ERG differed from the supplemental emergency response information which is provided by the Association of American Railroads' (AAR) Hazardous Materials Emergency Response Database. AAR decided in August 2016 to discontinue the database, removing the potential for discrepancies between the ERG and the supplemental emergency response information from AAR going forward. GAO is not making recommendations. DOT and NTSB provided technical comments, which GAO incorporated.

The United States is currently undergoing a transition from analog to digital broadcast television, often referred to as the DTV transition. The transition will enable the government to allocate valuable spectrum from analog broadcast to public safety and other purposes. Further, digital transmission of television signals provides several advantages compared to analog transmission, such as enabling better quality picture and sound reception as well as using the radiofrequency spectrum more efficiently than analog transmission. With traditional analog technology, pictures and sounds are converted into "waveform" electrical signals for transmission through the radiofrequency spectrum, while digital technology converts these pictures and sounds into a stream of digits consisting of zeros and ones for transmission. 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 and to broadcast solely digital transmissions after February 17, 2009. As we have previously reported, households with analog televisions that rely solely on over-the-air television signals received through a rooftop antenna or indoor antenna must take action to be able to view digital broadcast signals after the termination of analog broadcasts. Options available to these households include (1) purchasing a digital television set that includes a tuner capable of receiving, processing, and displaying a digital signal; (2) purchasing a digital-to-analog converter box, which converts the digital broadcast signals to analog so they can be viewed on an existing analog set; or (3) subscribing to a cable, satellite, or other service to eliminate the need to acquire a digital-to-analog converter box. The act also directed NTIA to establish a $1.5 billion subsidy program through which households can obtain coupons toward the purchase of digital-to-analog converter boxes. The last day for consumers to request coupons is March 31, 2009, and coupons can be redeemed through July 9, 2009. As required by law, all coupons expire 90 days after issuance. Consumers can redeem their coupons at participating retailers (both "brick and mortar" and online) for eligible converter boxes. To help inform consumers about the transition, eight private sector organizations launched the DTV Transition Coalition in February 2007. These eight organizations are the Association for Maximum Service Television, Association of Public Television Stations, Consumer Electronics Association, Consumer Electronic Retailers Coalition, Leadership Conference on Civil Rights, LG Electronics, National Association of Broadcasters, and the National Cable and Telecommunications Association. These founding organizations comprise the Coalition's steering committee and make decisions on behalf of the Coalition. To better represent the interests of at-risk or underserved populations--such as the elderly--AARP later joined the steering committee. The Coalition's mission is to ensure that no consumer is left without broadcast television due to a lack of information about the transition. Currently, the Coalition has over 160 member organizations comprised of business, trade and industry groups, as well as FCC. Recent surveys conducted by industry trade associations indicate that consumer awareness of the digital transition is low. The Association for Public Television Stations reported in January 2007 that 61 percent of participants surveyed had "no idea" that the transition was taking place. Another study conducted by the National Association of Broadcasters focused on households that primarily receive their television signals over- the-air--and will therefore be most affected by the transition--and reported that 57 percent of those surveyed were not aware of the transition. Both surveys found that most people with some awareness of the transition had limited awareness of the date the transition will take place. Federal and private stakeholders are making progress in educating consumers about the DTV transition, with both independent and coordinated efforts underway. FCC and NTIA have been involved in consumer education and awareness programs and some private sector organizations are voluntarily taking the lead on outreach efforts. FCC has taken several steps toward educating consumers about the transition. For example, FCC has launched a Web site (DTV.gov), which, among other things, provides background information on the DTV transition and answers common consumer questions. In addition, FCC has met with some industry groups, consumer groups, and other government agencies and participated in public events intended to educate audiences about the transition. Moreover, in April 2007, FCC adopted a rule requiring all sellers of television-receiving equipment that does not include a digital tuner to prominently display a consumer alert that such devices will require a converter box to receive over-the-air broadcast television after February 17, 2009. To ensure that retailers are in compliance, FCC staff have inspected over 1,000 retail stores and Web sites and issued over 250 citations with potential fines exceeding $3 million. In addition, FCC has issued notices to television manufacturers with potential fines over $2.5 million for importing televisions without digital tuners. In June 2007, FCC announced that it had re-chartered an intergovernmental advisory committee comprised of 15 representatives from local, state, and tribal governments to help it address, among other things, consumer education about the DTV transition. Similarly, it re-chartered a consumer advisory committee that will also make recommendations to FCC about the transition on behalf of consumers, with specific representation for people with disabilities and other underserved or at-risk populations. NTIA has also taken initial steps towards educating consumers about the transition. NTIA has statutory responsibility for the converter box subsidy program, for which Congress appropriated up to $5 million for education efforts. According to NTIA, its education efforts are focused on the subsidy program and more specifically on five groups most likely to lose all television service as a result of the transition: (1) senior citizens, (2) the economically disadvantaged, (3) rural residents, (4) people with disabilities, and (5) minorities. According to NTIA, it has begun outreach efforts to these groups through partnerships with private organizations as well as other federal agencies. Also, it has created "information sheets" for consumers, retailers, and manufacturers that outline the subsidy program and are available on its Web site. NTIA said it has provided informational brochures in English and Spanish to the public and provided a copy to every member of Congress and federal agencies that serve some of the populations noted above. The agency also created a consumer hotline that provides information about the transition in English and Spanish, and TTY numbers that provide information in English and Spanish to the hearing impaired. In addition, in August 2007, NTIA contracted with IBM to implement the broad consumer education component about the program. On a voluntary basis, some private stakeholders have begun implementing measures to inform consumers about the DTV transition. As previously mentioned, one such private-sector led effort is the DTV Transition Coalition, which has developed and consumer tested various messages about the transition, using surveys and focus groups of the affected consumers--the general population, senior citizens, minority groups, and over-the-air analog television households--to understand what messages are most effective in informing them about the transition. Subsequently, the Coalition said it agreed upon one concise message that includes information about the transition itself, the rationale for the transition, and the ways consumers can effectively switch to DTV. In particular, the Coalition suggests consumers can prepare for the transition by purchasing a DTV converter box, purchasing a new television set with a built in digital tuner, or subscribing to a pay television service such as cable, satellite, or telephone company video service provider. The Coalition said its member organizations will distribute this information to their constituents, including senior citizens, the disabled, and minority groups. The Coalition message will also be delivered to media outlets. In addition to coordinated efforts within the Coalition, private sector organizations also have independent education efforts underway. For example, a number of industry associations host Web sites that inform consumers of, among other things, common consumer questions about the transition, how to check if the television they own is digital-ready, and how to dispose of analog television sets. One national retailer told us that it added a feature to its registers so that when a consumer purchases an analog television, a message about the transition is printed on the bottom of the receipt. Widespread and comprehensive consumer education efforts have yet to be implemented, but additional efforts are currently being planned. FCC, NTIA, and private sector stakeholders have plans to further educate consumers as the digital transition nears. The converter box subsidy program, to be administered by NTIA, will also have a consumer education component implemented by its contractor, IBM. Because many education efforts are in the planning or initial stages of implementation, it is too early to tell how effective these efforts will be. FCC has solicited input on proposed consumer education programs. In August 2007, in response to a letter containing proposals on advancing consumer education submitted by members of Congress, FCC released a notice of proposed rulemaking soliciting public comments. These proposals include requiring television broadcasters to conduct on-air consumer education efforts and regularly report on the status of these efforts, requiring cable and satellite providers to insert periodic notices in customers' bills about the transition and their future viewing options, and requiring manufacturers to include information on the transition with any television set or related device they import or distribute in the United States. Each of the requirements mentions civil penalties for noncompliance. Another proposal on which FCC sought comment would have FCC work with NTIA to require that retailers participating in the converter box subsidy program detail their employee training and consumer information plans, as well as have FCC staff spot check the retailers for compliance. Also, FCC sought comments on a proposal requiring partners identified on FCC's DTV.gov Web site to report their specific consumer outreach efforts. The comment period on the notice of proposed rulemaking is scheduled to close on September 19, 2007; the period to file any rebuttal closes October 1, 2007. NTIA also has not fully implemented education efforts about its subsidy program in large part because it is contracting out the consumer education component of its program. The contract was recently awarded in the middle of August 2007 to IBM and plans are in the development stage. Many private sector consumer education efforts are in the planning stages and have yet to be fully implemented. Representatives from private sector organizations told us there are several reasons why they are waiting to fully launch their consumer education campaigns. In particular, some said they are trying to time their education efforts for maximum effectiveness and that they do not want to start too early and possibly lose the attention of consumers later on. Another reason is that they are waiting for key events to occur, such as the availability of converter boxes in retail stores, so that education efforts can contain complete information. A number of nonprofit organizations told us that a lack of dedicated funding hampers their ability to educate and outreach to their constituents. Through its many member organizations, the DTV Transition Coalition intends to disseminate information about the transition in a variety of formats, including through presenting at conferences, creating media attention, and distributing informational materials to Congressional offices. The National Cable and Telecommunications Association has created public service announcements about the transition in both Spanish and English, which will be aired by cable operators and networks in markets throughout the country in the fall of 2007. The National Association of Broadcasters also has plans to launch a public service announcement campaign related to the transition by the end of 2007, which will air on its local television broadcasting affiliates, independent stations, and broadcast networks. Despite efforts currently underway and those being planned, difficulties remain in the implementation of consumer education programs. Private sector organizations are participating in outreach efforts, but these actions are voluntary and therefore the government cannot be assured of the extent of private sector efforts. Moreover, given the different interests represented by industry stakeholders, messages directed at consumers vary and might lead to confusion. For example, in addition to providing information about why the transition is occurring, some industry stakeholders have incentives to provide consumers with information on a wide host of technology equipment or services that consumers could purchase, at varying costs. Advocates for the elderly, disabled, and non- English speaking households told us that they are concerned that their members will become confused by the options and end up purchasing equipment they do not need or more expensive equipment than necessary to maintain their television viewing. Further, we heard from strategic communication experts from industry, government, and academia that potential challenges might obstruct consumer education efforts. In particular, the experts and others highlighted several challenges: Prioritizing limited resources. With limited time and financial resources, it is likely to be a challenge for stakeholders to determine how best to allocate those resources within the campaign--for example, whether to target a smaller audience over a set period of time, versus targeting a broader audience over a shorter period of time. This is applicable because, according to industry stakeholders, there may be specific groups that are more vulnerable than others to losing television service. Educating consumers who do not necessarily need to take action. Many of the outreach efforts will be focused on educating consumers on what to do to keep their television sets from going dark after the termination of analog broadcasts. However, a large proportion of U.S. households will not need to do anything--for example, because they have cable or satellite television service that will enable their analog set to continue to display programming. Because many messages focus on the actions that households that rely on over-the-air analog broadcasting need to take, consumers unaffected by the transition might become confused and purchase equipment they do not need. In our past work looking at a similar digital transition in Germany, we have described this potential confusion to cable and satellite households as a challenge of educating consumers about the transition. Reaching underserved populations. Conveying the message to underserved populations, such as senior citizens, the disabled, those residing in rural areas, or non-English speaking households, will provide an added challenge. Many groups reaching out to consumers about the transition are doing so on Web sites, which may not be available to people who lack Internet access or are less technically savvy. Another challenge is providing information in a wide variety of formats, such as in different languages for non-English speaking consumers and in text, video, voice, and Braille for the disabled. Overall, a challenge of consumer education is that those households in need of taking action may be the least likely to be aware of the transition. Aligning stakeholders. Industry representatives also noted the challenge of aligning stakeholders--some of whom are natural competitors--to work together. In our past work, we have reported that federal agencies engaged in collaborative efforts--such as the transition--need to create the means to monitor and evaluate their efforts to enable them to identify areas for improvement. Reporting on these activities can help key decision makers within the agencies, as well as clients and stakeholders, to obtain feedback for improving both policy and operational effectiveness. Some progress in aligning stakeholders, such as the formation of the DTV Transition Coalition, has been made, but some stakeholders may have competing interests. For example, recent announcements produced by the National Cable and Telecommunications Association invoke the DTV transition, but ultimately promote the role of cable television in the transition. In our ongoing work for the House Energy and Commerce committee and this committee, we plan to assess the progress of consumer education and awareness about the DTV transition. We will continue to monitor consumer education programs and plan to conduct a series of consumer surveys throughout the year prior to the transition date. These surveys will be aimed at determining the population that will be affected by the DTV transition and the public awareness of the transition. In determining the affected population, we will look at the percent of the population relying on over-the-air broadcasts for their primary television, as well as the percent of the population with non-primary televisions being used to watch over-the-air television. Additionally, we will review the demographic characteristics of the affected population to determine what groups might be most disrupted by the transition. We will survey for public awareness of the DTV transition, and specific knowledge of the transition, such as when the transition will take place. We will seek to determine the level of public awareness of those who will be affected by the transition and awareness of the converter box subsidy program and other options for viewing digital signals after the transition. We plan to report on changes in consumer awareness over time by conducting surveys throughout the transition process. Furthermore, we will continue to assess government and industry consumer education efforts and will analyze the efforts compared with key practices for consumer outreach. We will review the government's responsibility for consumer education, monitor the outcome of FCC's notices of proposed rulemaking regarding the transition, and collect details on IBM's consumer education plan as they become available. 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 questions regarding this testimony, please contact Mark L. Goldstein on (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony included Matthew Cail, Colin Fallon, Simon Galed, Bert Japikse, Crystal Jones, Sally Moino, Andrew Stavisky, and Margaret Vo. 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.

On February 17, 2009, federal law requires all full-power television stations in the United States to cease analog broadcasting and broadcast digital-only transmissions, often referred to as the digital television (DTV) transition. Federal law also requires the National Telecommunications and Information Administration (NTIA) to create a program that subsidizes consumers' purchases of digital-to-analog converter boxes. After the transition, households with analog sets that rely on over-the-air broadcast signals must take action or they will lose television service, but some households might not be aware of this potential disruption. This testimony provides preliminary information on (1) the consumer education efforts currently underway, (2) education efforts being planned, (3) difficulties with the implementation of consumer education programs, and (4) ongoing GAO work on consumer education and awareness regarding the transition. GAO interviewed officials with the Federal Communications Commission (FCC) and NTIA. Further, GAO met with a wide variety of industry and other stakeholders involved with the transition, including members of the DTV Transition Coalition--a group of public and private stakeholders, and experts on strategic communications. GAO discussed this testimony with FCC and NTIA officials and incorporated their comments. A number of federal and private stakeholders have begun consumer education campaigns, with both independent and coordinated efforts underway. FCC has taken several steps to promote consumer awareness, such as launching a Web site, participating in events intended to educate the public, and requiring sellers of televisions to include consumer alerts on non-digital televisions. NTIA has created brochures in English and Spanish to provide the public information about its converter box subsidy program and is partnering with organizations to perform outreach to disadvantaged groups. Earlier this year, the DTV Transition Coalition was launched to help ensure that no consumer is left without broadcast television due to a lack of information. Over 160 private, public, and non-profit groups have joined the Coalition to coordinate consumer education efforts. While widespread and comprehensive consumer education efforts have yet to be implemented, various efforts are currently being planned. FCC, NTIA, and private sector stakeholders have plans to further educate consumers as the DTV transition nears. For example, voluntary public service announcements to raise awareness of the transition are planned by industry groups and FCC is considering requiring broadcasters, manufacturers and cable and satellite providers to insert various messages and alerts in their products and programming. In addition, the converter box subsidy program will have a consumer education component. Because many education efforts are in the planning or early stages of implementation, it is too early to tell how effective these efforts will be. Various factors make consumer education difficult. While private sector stakeholders are participating in outreach efforts, these actions are voluntary and therefore the government cannot be assured of the extent of private sector efforts. Strategic communications experts from industry, government, and academia identified potential challenges to a consumer education campaign, including (1) prioritizing limited resources to target the right audience, (2) educating consumers to help protect them from making unnecessary purchases, (3) reaching underserved populations, and (4) aligning stakeholders to form a consistent, coordinated effort. GAO has work planned to assess the progress of consumer awareness. In particular, GAO plans to conduct a series of surveys to determine the population affected by the DTV transition, levels of awareness about the transition, and demographic information about the affected population. Throughout the transition, GAO will continue to monitor government and industry education efforts and analyze these efforts relative to best practices for consumer education campaigns. GAO plans to review the government's responsibility for consumer education, monitor the outcome of FCC's rulemaking related to consumer education, and collect details of the consumer education component of the converter box subsidy program.

GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. The fiscal year 2002 performance plan is the fourth of these annual plans under GPRA. The fiscal year 2000 performance report is the second of these annual reports under GPRA. The issuance of the agencies' performance reports, due by March 31, 2001, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. USDA is one of the nation's largest federal agencies, employing over 110,000 people and managing a budget of over $78 billion. Its agencies and offices are responsible for operating more than 200 programs. These programs support the profitability of farming, promote domestic agricultural markets and the export of food and farm products, provide food assistance for the needy, ensure the safety of the nation's food supply, manage the national forests, protect the environment, conduct biotechnological and other agricultural research, and improve the well being of rural America. This section discusses our analysis of USDA's performance in achieving the selected key outcomes and the strategies the agency has in place to achieve these outcomes, particularly for strategic human capital management and information technology. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the department provided assurance that its reported performance information is credible. USDA's fiscal year 2000 performance report, which was issued in March 2001, indicated that the department continued to make some progress toward achieving this outcome. For example, USDA reported that it met its goals for stabilizing peanut and tobacco prices and maintaining the economic viability of peanut and tobacco producers. However, it is difficult to assess USDA's progress because the department did not provide an overall evaluation of this outcome in its report. According to the performance report, USDA met about 72 percent of the performance goals related to this outcome, less than last year when USDA reported it met over 80 percent of its goals. USDA did not select the outcome of providing an adequate and reasonably priced food supply as a key departmental strategic goal in its fiscal year 2002 performance plan, which was issued in June 2001. Some of USDA's efforts to achieve this outcome are discussed under the top ranked departmental strategic goal of expanding economic and trade opportunities for U.S. agricultural producers and a USDA official stated that this outcome continues to be important for the department. USDA's discussion of this strategic goal stated that farming and ranching is being transformed by changes in biological and information technology, environmental and conservation concerns, greater threats from pests and diseases spreading across continents, natural disasters and the industrialization of agriculture, and globalization of markets. Under this goal, USDA chose as its first objective to provide an effective safety net and to promote a strong, sustainable U.S. farm economy. USDA explained that if it is to achieve its goal of promoting a strong farm economy that is less dependent of government support, then it must also place a heavy emphasis on helping farmers proactively manage the risks inherent in agriculture and improve farmers income. USDA's second objective under this strategic goal is to expand export markets--USDA illustrated the opportunity for exports by estimating that 96 percent of American agriculture's potential customers reside outside the United States. Some of the performance goals presented for this strategic goal are to improve farmers' incomes, reduce pest and disease outbreaks, and expand international sales opportunities. USDA reported progress in fiscal year 2000 that was similar to its performance last year in that it met some of its goals and indicators for this outcome. USDA stated that it exceeded its targets for two key goals. The gross trade value of markets created, expanded, or retained annually due to market access activities reached $4.35 billion, significantly higher than its $2 billion target. USDA attributed $2 billion of this gain to negotiations on China's accession to the World Trade Organization in fiscal year 2000. Similarly, annual sales, which were reported by U.S. exporters from on-site sales at international trade shows, reached $367 million in fiscal year 2000, compared to USDA's target of $250 million. Despite these successes, USDA fell short in meeting other goals. The department reported $837 million in U.S. agricultural exports resulted from the implementation of trade agreements under the World Trade Organization, below its target of $2 billion. It also reported that the total value of U.S. agricultural exports supported by its export credit guarantee programs reached $3.1 billion, falling short of its $3.8 billion target. USDA uses a questionable methodology for measuring the success of its efforts to expand and maintain global markets for U.S. agricultural products. USDA's goals and indicators emphasize growth in the U.S. share of the global agricultural market--measured by changes in the dollar value of exports resulting from the implementation of trade agreements, market access enhancements, sales from annual trade shows, and agricultural exports. Yet, the dollar value of exports is subject to powerful external variables that transcend USDA's authority and ability to affect change in international trade. These variables include exchange rates, government policies, global and national economic conditions, climactic changes, and numerous other factors over which USDA has no control or strategies to address. For example, the decrease in the value and volume of U.S. agricultural exports over the last several years is generally recognized by economists, government officials, and private sector representatives to be the result of deteriorating economic conditions, particularly in the Asian market, over which USDA has no control. USDA's Economic Research Service has consistently held that U.S. agricultural export performance results more from market forces, which include multiple variables beyond the control of USDA, than from the actions of the U.S. government to expand international market opportunities. Along with other research institutions, it has confirmed that the decline in the value of U.S. agricultural exports from $60 billion in fiscal year 1996 to $50.9 billion in fiscal year 2000 was not attributable to U.S. government trade policies, programs, and activities. It further observed that USDA programs typically have a limited effect on the dollar value of U.S. exports and market share. We have previously raised questions about the extent of the relationship between USDA's export policies and programs and increased exports. USDA's fiscal year 2002 plan is based on the assumption that government policies, programs, and activities have a significant influence on the U.S. share of the global agricultural market. USDA has set a goal to increase exports by $14 billion by fiscal year 2010, or about 22 percent of the global market. This level would return the United States to the same global market share it held in the early 1990s. USDA's plan is consistent with the assumption that the government's impact is enhanced when the government works with the private sector to create a facilitative environment to expand sales of agricultural products abroad. USDA's strategies are to include a long-range integrated marketing plan, which would provide a generalized framework that goes beyond the traditional narrow and short-term programmatic and reactive export oriented approaches. Among its goals are those for (1) developing a long-range marketing plan that enlists USDA's network of domestic and foreign field offices in an effort to assist U.S. producers in capturing new market opportunities, (2) partnering with private U.S. market development groups to leverage resources aimed at expanding market opportunities abroad for U.S. food and agricultural products, (3) expanding U.S. access to foreign markets through active participation in the World Trade Organization and international trade forums, and (4) continuing to monitor international trade agreements and negotiating new agreements to open overseas markets to U.S. food and agricultural products. However, what is not yet spelled out are the key elements of the integrated marketing plan that will move beyond a generalized concept to the reality of specific actions that will lead to success. Among the elements that could be further addressed would be the organizational structure, the human capital and technological resources, and the operational concepts and methods that will actually enable USDA to meet its global marketing objectives. USDA's Foreign Agricultural Service said that its plans are necessarily generalized at this point in time and should be considered as their first steps in developing an integrated marketing plan. The Service also said that it would be instituting quarterly reporting to track progress. In addition, the Service disagreed with our views about its departmental level strategic performance goal to affect U.S. market share, and said that it believed it had selected the ultimate measure of change for international agricultural markets. However, as previously discussed, we disagree with the selection of this goal because USDA's activities have little influence on the overall level of international market shares. Since the GPRA was designed to lead to better insights into the performance of government, USDA will need to adopt a realistic departmental performance goal to meet this purpose. According to its performance report, USDA reported continued progress toward this outcome and met about 80 percent of its goals. USDA's performance exceeded that of fiscal year 1999. For example, the department reported meeting its goals for distributing food nutrition education information to low-income Americans, for increasing the number of schools that meet USDA's dietary guidelines, and for improving the effectiveness and efficiency of commodity acquisition and distribution to support domestic and international food assistance programs. Some of the goals do not have specific performance targets, so it is not always clear what USDA is actually accomplishing. For example, USDA determined that it is meeting its goal of improving the nutritional status of Americans by such actions as distributing revised dietary guidelines and by promoting media coverage, and observing seminar attendance and web-page usage related to improved nutrition and diet. These measures of performance do not tell us whether USDA's actions are improving Americans' nutritional status. USDA's fiscal year 2002 departmental performance plan contains many general strategies for achieving its goals and measures. For example, one general strategy called for reallocating funds from areas with excess funds to areas with high demand for the Special Supplemental Nutrition Program for Women, Infants, and Children. However, some of the general strategies make it difficult to assess USDA's progress. For example, USDA's goal to improve food security for children and low-income individuals calls for expanding program access to the needy--and the plan's strategies for doing this involves "effectively delivering assistance" and "continuing efforts" to ensure that the Food Stamp Program is accessible. Such strategies provide little insight into the specific actions USDA intends to take to achieve its goals. In addition, at the time of our review, USDA's Food and Nutrition Service, the agency primarily responsible for this outcome, had yet to draft a performance plan for fiscal year 2002. The detailed goals and strategies that the agency level plan would contain are needed to support USDA's departmental plan. The Acting Administrator of the Food and Nutrition Service reported that the agency is assembling a policy team and will issue a draft performance plan after the team is selected. According to its performance report, USDA met or exceeded nearly all of its fiscal year 2000 performance goals for ensuring a safe and wholesome food supply. USDA stated that it met its goals for key areas, such as the percentage of federally inspected meat and poultry slaughter and/or processing plants that had implemented the basic hazard analysis and critical control points (HACCP) requirements. GAO issued a report on this subject in 1997. USDA also reported that it exceeded its goal for the number of reviews it conducted of foreign meat and poultry food safety programs to ensure their compliance with U.S. safety standards. GAO also issued a report on this subject in 1998. When performance goals were not met, USDA generally provided specific explanations, including describing external factors when applicable, for not achieving the performance goals. For example, USDA reported that it fell short of meeting its goal for deploying 607 computers to state inspection programs because 4 states did not have the funding available to meet their 50-percent share of the computers' costs. In another example, USDA did not meet its goal to perform 68,000 laboratory tests, falling short of its target by 8,000 tests. USDA did not provide any additional strategies for achieving this goal in the following fiscal year, but it stated that it believed many of the difficulties in meeting the goal have been alleviated by the implementation of the new HACCP system. USDA's fiscal year 2002 performance plan describes several strategies to ensure a safe and wholesome food supply. Such strategies include (1) strengthening laboratory and risk assessment capabilities, (2) implementing a HACCP system for eggs, and (3) strengthening its foreign food safety program efforts. These strategies generally provided a clear description of USDA's approach for reaching its performance goals. For example, USDA described a strategy that seeks to improve its foreign food safety program review efforts by intensifying reviews of animal feeds, animal identification, and process control systems in countries exporting meat and poultry products to the United States. However, the strategies did not show how USDA plans to address and overcome the fundamental problem it faces in this area--the current food safety system is fragmented with as many as 12 different federal agencies administering over 35 laws regarding food safety. USDA's plan states that the creation of a single federal food safety agency, as previously recommended by us, extends beyond the legal scope of any one federal agency. We have maintained that until this fragmented system is replaced with a risk-based single food agency, the U.S. food safety system will continue to under perform. USDA pointed out that it does not have the authority to merge with other federal agencies and form a single food safety agency. (See app. I.) According to its performance report, USDA met or exceeded many of its fiscal year 2000 goals and made progress toward reducing food stamp fraud and error. The department, for example, reported exceeding its goal for payment accuracy rate in the delivery of Food Stamp Program benefits and stated that it would support continued improvements by seeking opportunities to simplify program rules--a recommendation made by us in a recent report on reducing payment errors. It also reported collecting about $219 million in overpayments to recipients in fiscal year 2000, which exceeded its original target of collecting about $194 million. In some instances, USDA fell short of meeting its goals for this outcome. For example, USDA did not meet its goal for increasing the percentage of debt owed by retailers who were delinquent on their food stamp payments that was referred to Treasury, and it narrowly missed its goal for the number of retailers sanctioned for not meeting regulatory requirements. In those instances when goals were not met, USDA generally provided specific explanations for not achieving them. For example, the department reported that it did not meet its goal for referring to the Treasury Department cases of food stamp retailers with delinquent debts for collection because it did not submit cases in a timely manner and because of shortcomings in the processing of such referrals. USDA did not base its fiscal year 2000 performance report assessments on actual performance data in some cases. For example, for two performance goals--maintain payment accuracy in the delivery of Food Stamp Program benefits and the number of states qualifying for enhanced funding based on high payment accuracy--the department reported progress from fiscal year 1999, and it stated that it would meet its fiscal year 2000 performance goals based on "early indications" and planned activities. USDA also recognized that actual data would be available 3 months after the performance report was issued, which represents an improvement in data reporting. Nevertheless, the absence of timely performance data makes it difficult for USDA and others to annually assess performance and determine if changes in strategies are needed. USDA's fiscal year 2002 departmental performance plan contained several strategies for reducing food stamp fraud and error. USDA stated that it intended to continue to improve the accuracy and consistency of its quality control system and support state efforts to improve food stamp benefit accuracy through technical assistance and by using the best practices for information-sharing. However, the departmental plan did not have specific strategies to demonstrate how USDA would achieve its strategic goals and objectives. In some instances, a discussion of goals, objectives, and strategies directly related to this key outcome were not included. For example, the plan did not include a discussion of how it would deal with retail stores that violate program requirements. A recent Food and Nutrition Service study estimated that stores each year illegally provided cash for benefits (trafficking of benefits) totaling about $660 million. USDA's departmental plan also did not specifically discuss the Food and Nutrition Service's targets or measures for reducing trafficking in food stamps, and it does not contain details on the strategies to be used to reduce fraud and error in the Food Stamp Program. The details of these strategies may be included in the Food and Nutrition Service's agency level performance plan for fiscal year 2002, which has not yet been prepared. Additionally, we have identified efforts to reduce fraud and error in the food stamp program as a major management challenge. (See app. I.) For the selected key outcomes, this section describes major improvements or remaining weaknesses in USDA's (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report, and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency's fiscal year 2000 report and fiscal year 2002 plan addresses concerns and recommendations by the Congress, GAO, USDA's OIG and others. USDA's fiscal year 2000 performance report presentation has remained largely unchanged compared with the prior year's report. Specifically, the report continued to be an agency-by-agency discussion of its progress without an overview presenting a picture of the department's overall performance. As discussed previously, the fiscal year 2000 performance report has limitations such as its reliance on narrative measures that track agency actions but that do not provide information about the impacts of the agency's performance. There are also areas where the data is limited and of questionable reliability--USDA has reported that the vast scale and complexity of its programs present major management challenges in terms of the availability of accurate, credible, and timely performance data. For example: (1) the Foreign Agricultural Service reported that it has limited resources for tracking issues related to the World Trade Organization and barriers in foreign markets leading to errors and limitations in data verification; (2) USDA's estimates of the populations that are participating in food stamp and other nutrition assistance programs are generally not available in time for preparing its annual performance reports; (3) USDA has relied on data about school food services that is collected informally and without standardized procedures because of opposition to the collection of this data; and (4) USDA reported that its data on agricultural producers' awareness of risk management alternatives had not been collected consistently from state to state. In addition, the fiscal year 2000 performance report varied from providing a detailed discussion of USDA's data verification and validation efforts, to little or no information about its data accuracy. In many cases, USDA did not provide information on the steps that were taken to verify and validate the data. For example, concerning the performance goal to eradicate a common animal disease, the report simply stated that staff members are responsible for ensuring the reliability and accuracy of the data. Also, UDSA did not report on the reliability of the information reported by the Cooperative State Research, Education, and Extension Service, which relies on the accomplishments and results reported by the universities receiving its research funds. USDA developed a new departmental plan for fiscal year 2002 that is significantly different than its 2001 plan. The fiscal year 2002 plan provided, for the first time, a departmentwide approach to performance management. This streamlined presentation consolidated the more than 1,700 agency specific performance goals and measures it presented in 2001 into 5 departmental strategic goals, 56 annual performance goals, and 79 measures for fiscal year 2002. The departmental strategic goals USDA selected were as follows: (1) expand economic and trade opportunities for U.S. agricultural producers; (2) promote health by providing access to safe, affordable, and nutritious food; (3) maintain and enhance the nation's natural resources and environment; (4) enhance the capacity of all rural residents, communities, and businesses to prosper; and (5) operate an efficient, effective, and discrimination-free organization. The new departmental plan is supported by agency-level annual performance plans that offer more detailed information on evolving strategies, priorities, and resource needs. We found USDA's new plan to be a work-in-progress, as discussed throughout this report. USDA did not consistently provide the detailed strategies that were needed for achieving its departmental goals. Of the 56 annual performance goals in the departmental plan, 33 goals do not contain overall performance targets against which to measure overall progress. For each of these 33 goals, USDA provided various performance indicators, some of which contain performance targets that are representative measures of progress. Also, there were goals that were substantially affected by external factors beyond the scope of USDA's activities. Examples include the goals to (1) grow the U.S share of the global agriculture market, even though USDA's programs have a limited effect on the total dollar value of U.S. exports, and (2) enhance the capacity of all rural residents, communities, and businesses to prosper, when the scope of USDA's rural assistance programs is not designed to provide for a comprehensive federal effort in this area. Moreover, in the Secretary's message transmitting the fiscal year 2002 plan, the Secretary stated that she had not thoroughly reviewed the new strategic plan, did not have a full leadership team in place, and recognized that more needed to be done. The Secretary also stated that once USDA's full leadership team is in place, it will be working to conduct a top-to-bottom review of the department's programs, and will develop new strategic and annual performance goals to carry out this administration's priorities. Additionally, in response to our prior GPRA reviews, USDA included two new sections in its 2002 performance plan--one that includes a discussion of data verification and validation by each performance goal and one that recognizes major management challenges identified by GAO. The discussion of USDA's data and its sources is a valuable addition to USDA's plan because it provides a more consistent picture of the data USDA uses, the steps USDA takes to verify its data, and the limitations that need to be taken into account. GAO has identified two governmentwide high-risk management challenges: strategic human capital management and information security. Regarding human capital management, USDA's plan contains a key outcome--to ensure USDA has a skilled, satisfied workforce and strong prospects for retention of its best employees. The plan recognized emerging skill gaps, high retirement eligibility rates, and the need for staff to shift to a greater use of technology as departmental strategic issues. However, USDA has identified only one human capital performance measure--an employee satisfaction survey--which would not measure the closing of skill gaps, the retention of critical employees, or changes related to the use of new technology. Furthermore, the extent of the discussion of human capital strategies in USDA's individual agency plans varies. For example, the plans of the Farm Service Agency and the Food Safety and Inspection Service did not discuss human capital issues, and the Food and Nutrition Service has not completed a plan. With respect to information security, we found that the Chief Information Officer's performance report did not explain its progress in implementing its August 1999 action plan for improving departmentwide information security, or time frames and milestones for doing so. In addition, USDA's performance plan did not have departmental goals and measures related to this important area. In commenting on a draft of this report, USDA officials stated that progress had been made in implementing their August 1999 action plan to strengthen information security and agreed that USDA's annual performance plan could be improved by including information security performance goals and measures. GAO has also identified 10 major management challenges facing USDA. USDA's performance report discussed the agency's progress in resolving many of its challenges, and its performance plan had (1) goals and measures that were directly related to seven of the challenges, (2) goals and measures that were indirectly applicable to two of the challenges, and (3) no goals and measures related to one of the challenges. Appendix I provides detailed information on how USDA addressed these challenges and high-risk areas as identified by both GAO and the agency's Inspector General. However, USDA did not recognize or address some of the management challenges identified by its own Inspector General because according to USDA officials, the Office of the Inspector General did not send a copy of its letter to the affected USDA agencies. USDA's fiscal year 2000 performance report and fiscal year 2002 performance plan have the potential for focusing the department's missions, but these efforts are compromised in a number of areas. USDA's goals and measures are too general to give insight into the actual achievements that USDA is striving to make. In particular, it is difficult to assess USDA's progress when it uses unrealistic goals to achieve strategic outcomes and when it uses untimely data that has not been consistently verified. In two particular areas--strategic human capital management and information security--the process of measuring USDA's performance could be improved by including goals and measures in USDA's annual performance plan. Finally, USDA missed the opportunity to develop strategies and plans to respond to the major management challenges identified by the OIG. To improve USDA's performance reporting and planning, we recommend that the Secretary of Agriculture (1) set priorities for improving the timeliness of the data that USDA is using for measuring its performance; (2) improve USDA's performance report by including more consistent discussions of data verification and validation; (3) better match the department's goals and outcomes with its capabilities for expanding and maintaining global market opportunities; (4) include performance goals and measures for strategic human capital management issues and information security issues in the departmental performance plan; (5) make reducing food stamp trafficking an annual performance goal in USDA's plan; and (6) address and include the Office of Inspector General's major management challenges in future performance plans. To facilitate our last recommendation, we also recommend that the Inspector General work with the Chief Financial Officer and USDA agency officials in identifying and including major management challenges in USDA's performance plans. We provided USDA with a draft of this report for its review and comment. USDA chose to meet with us to provide oral comments, and we met with the Acting Chief Financial Officer and other officials from the department on August 13, 2001, to discuss these comments. The Acting Chief Financial Officer said that the department generally agreed with the information presented in the draft report. USDA officials also provided the following comments. Regarding major management challenges, USDA agency officials questioned whether there is a requirement for USDA to report on major management challenges as part of its performance plan and to include related performance goals. Our review, as requested, included an assessment of USDA's progress in addressing its major management challenges. In addition, OMB Circular A-11 states that federal agencies should include a discussion of major management challenges in their annual performance plans and present performance goals for these challenges. USDA's OIG disagreed with our recommendation calling for the OIG to distribute future OIG letters on major management challenges to affected USDA agencies. The OIG commented that its audit reports already identify management challenges and that these are discussed with the affected agencies. The OIG also stated that its letter to congressional requesters identifying major management challenges was provided informally to the department and that the OIG is required by Public Law 106-531 to report on the most serious management challenges in USDA's annual report to the president and the Congress. We are well aware that the OIG identifies management challenges in audit reports and reports separately on these challenges. Nevertheless, as stated in our draft report, our recommendation is directed at facilitating the inclusion and discussion of the OIG identified major management challenges in USDA's annual performance plan. The OIG's reporting of the management challenges to congressional requesters in December 2000 appeared to us to be a document that could have served as a timely starting point for the major management challenge section of USDA's departmental annual performance plan. We continue to believe that the OIG should play a role in facilitating the major management challenge section of the departmental performance plan, and have modified our recommendation to directly call for the OIG to participate in the development of this section of USDA's plan. The Foreign Agricultural Service disagreed with our recommendation to better match the department's goals and outcomes with its capabilities for expanding global market opportunities. It stated that the measure it is using--global market share--is the ultimate performance measure for describing overall changes in international markets and that the Congress is interested in U.S. international market share. However, in discussing this concern, the Service itself acknowledged that market forces are the principal cause of changes in exports rather than its activities. Therefore, we continue to believe that it would be appropriate to use more realistic goals for performance that are more closely related to the outcomes that USDA activities can achieve. The Service's agency level performance plan contains some performance indicators that are more limited and better reflect the government's role in changing export values and market share. The Foreign Agricultural Service also expressed concern that if it were to make detailed information on its strategies available to the public, it could be used by foreign competitors to offset U.S. efforts. Because of the limited federal role in affecting international market share, we believe that more specific information on U.S. role and activities would not compromise U.S. efforts. USDA officials stated that that they had made progress in improving information security and strategic human capital management. Specifically, USDA officials said that progress had been made in implementing their August 1999 action plan to strengthen information security. However, USDA officials recognized that this information, along with information security goals and measures, was generally not included in the department's performance plan or report and that the process of measuring USDA's performance would be improved by including it. Also, concerning strategic human capital management, USDA's performance report and plan did not summarize key actions that USDA officials said have been taken on workforce planning, recruitment, and the retention of employees. USDA will have the opportunity to summarize its progress in these areas in its future performance reports and plans. Department officials also provided technical clarifications, which we made as appropriate. As agreed, our evaluation was generally based on a review of the fiscal year 2000 performance report and the fiscal year 2002 performance plan and the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of USDA's operations and programs, GAO identification of best practices concerning performance planning and reporting, and our observations on USDA's other GPRA-related efforts. We also discussed our review with agency officials in the Office of the Chief Financial Officer and with the USDA Office of Inspector General. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Governmental Affairs Committee as important mission areas for the agency and generally reflect the outcomes for key USDA programs or activities. The major management challenges confronting USDA, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by us in our January 2001 performance and accountability series and high-risk update or were identified by USDA's Office of Inspector General in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from our other work in assessing the validity, reliability, and timeliness of USDA's performance data. We conducted our review from April 2001 through August 2001 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Secretary of Agriculture; and the Director of the Office of Management and Budget. Copies will also be made available at to others on request. If you or your staff have any questions, please call me at (202) 512-9692. Key contributors to this report are listed in appendix II. The following table identifies the major management challenges confronting the U.S. Department of Agriculture (USDA), which includes the government-wide high-risk areas of strategic human capital management and information security. USDA has one performance report and a departmentwide plan with supporting plans from the department's individual agencies. The first column lists the challenges identified by our office and USDA's Office of Inspector General. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, USDA made in resolving its challenges. The third column discusses the extent to which USDA's fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the USDA's OIG identified. While USDA's fiscal year 2000 performance report addressed progress in resolving some of the 17 management challenges, the department did not have goals for the following: strategic human capital management, information security, Forest Service land exchange program, grant agreement administration, grant competitiveness, research funding accountability, and Rural Business Cooperative Service and therefore did not discuss progress in resolving these challenges. USDA's fiscal year 2002 performance plans provided some goals and measures or strategies for all but five of its management challenges. USDA did not have goals for the management challenges involving the Forest Service land exchange program, grant agreement administration, grant competitiveness, research funding accountability, and Rural Business Cooperative Services. For the remaining 12 major management challenges, its performance plan had (1) goals and measures that were directly related to 8 of the challenges, (2) goals and measures that were indirectly applicable to 3 of the challenges, or (3) had no goals and measures related to 1 of the challenges, but discussed strategies to address it. In commenting on a draft of this report, USDA stated that it made additional progress in resolving its management challenges that had not been reflected in its fiscal year 2000 performance report and fiscal year 2002 performance plan. Erin Barlow, Andrea Brown, Jacqueline Cook, Thomas Cook, Charles Cotton, Angela Davis, Andrew Finkel, Judy Hoovler, Erin Lansburgh, Carla Lewis, Sue Naiberk, Stephen Schwartz, Richard Shargots, Mark Shaw, Ray Smith, Alana Stanfield, Phillip Thomas, and Ronnie Wood.

The Department of Agriculture's (USDA) fiscal year 2000 performance report and fiscal year 2002 performance plan have the potential for focusing the department's missions, but these efforts are compromised in several areas. USDA's goals and measures are too general to give insight into what USDA is actually trying to achieve. It is difficult to assess USDA's progress when it uses unrealistic goals to achieve strategic outcomes and when it uses untimely data that has not been consistently verified. In two areas--strategic human capital management and information security--progress in measuring USDA's performance has been frustrated by the lack of goals and measures for identified issues. Finally, by not sharing information about the major management challenges identified by its own Inspector General, USDA's agencies miss the opportunity to develop strategies and plans to respond to these issues.

In July 2007, we reported on weaknesses in the Navy's business case for the Ford-class aircraft carrier and focused mainly on the lead ship, CVN 78. We noted that costs and labor hours were underestimated and critical technologies were immature. Today, all of this has come to pass in the form of cost growth, testing delays, and reduced capability--in other words, less for more. In August 2007, we also observed that in consequence of its optimistic business case, the Navy would likely face the choice of (1) keeping the ship's construction schedule intact while deferring key knowledge-building events--such as land-based tests of technologies--until later, or (2) slipping the ship's construction schedule to accommodate technology and other delays. Today, those choices have been made--the ship's construction schedule has been delayed slightly by a few months, while other events, like land-based tests for critical technologies, have slid by years. The result is a final acquisition phase in which construction and key test events are occurring concurrently, with no margin for error without giving something else up. In its simplest form, a business case requires a balance between the concept selected to satisfy warfighter needs and the resources-- technologies, design knowledge, funding, and time--needed to transform the concept into a product, in this case a ship. In a number of reports and assessments since 2007, we have consistently reported on concerns related to technology development, ship cost, construction issues, and overall ship capabilities. Absent a strong business case, the CVN 78 program deviated from its initial promises of cost and capability, which we discuss below. In August 2007, before the Navy awarded a contract to construct the lead ship, we reported on key risks in the program that would impair the Navy's ability to deliver CVN 78 at cost, on time, and with its planned capabilities (as seen in table 1 below). Specifically, we noted that the Navy's cost estimate of $10.5 billion and 2 million fewer labor hours made the unprecedented assumption that the CVN 78 would take fewer labor hours than its more mature predecessor--the CVN 77. The shipbuilder's estimate--22 percent higher in cost was more in line with actual historical experience. Moreover, key technologies, not part of the shipbuilder's estimates because they would be furnished by the government, were already behind and had absorbed much of their schedule margin. Congress expressed similar concerns about Ford-class carrier costs. The John Warner National Defense Authorization Act for Fiscal Year 2007 included a provision that established (1) a procurement cost cap for CVN 78 of $10.5 billion, plus adjustments for inflation and other factors, and (2) a procurement cost cap for subsequent Ford-class carriers of $8.1 billion each, plus adjustments for inflation and other factors. The legislation in effect required the Navy to seek statutory authority from Congress in the event it determined that adjustments to the cost cap were necessary, and the reason for the adjustments was not one of six factors permitted in the law. The risks we assessed in 2007 have been realized, compounded by additional construction and technical challenges. Several critical technologies, in particular, EMALS, AAG, and DBR, encountered problems in development, which resulted in delays to land-based testing. It was important for these technologies to be thoroughly tested on land so that problems could be discovered and fixes made before installing production systems on the ship. In an effort to meet required installation dates aboard CVN 78, the Navy elected to largely preserve the construction schedule and produce some of these systems prior to demonstrating their maturity in land-based testing. This strategy resulted in significant concurrency between developmental testing and construction, as shown in figure 1 below. The burden of completing technology development now falls during the most expensive phase of ship construction. I view this situation as latent concurrency in that the overlap between technology development, testing, and construction was not planned for or debated when the program was started. Rather, it emerged as a consequence of optimistic planning. Concurrency has been made more acute as the Navy has begun testing the key technologies that are already installed on the ship, even as land based testing continues. Moreover, the timeframes for post-delivery testing, i.e. the period when the ship would demonstrate many of its capabilities, are being compressed by ongoing system delays. This tight test schedule could result in deploying without fully tested systems if the Navy maintains the ship's ready-to-deploy date in 2020. The issues described above, along with material shortfalls, engineering challenges, and delays developing and installing critical systems, drove inefficient out-of-sequence work, which resulted in significant cost increases. This, in turn, required the Navy to seek approval from Congress to raise the legislative cost cap, which it attributed to construction cost overruns and economic inflation (as shown in figure 2 below). Along with costs, the Navy's estimates of the number of labor hours required to construct the ship have also increased (see table 2). Recalling that in 2007, the Navy's estimate was 2 million hours lower than the shipbuilder's, the current estimate is a big increase. On the other hand, it is more in line with a first-in-class ship like CVN 78; that is to say, it was predictable. To manage remaining program risks, the Navy deferred some construction work and installation of mission-related systems until after ship delivery. Although this strategy may provide a funding reserve in the near term, it still may not be sufficient to cover all potential cost risks. In particular, as we reported in November 2014, the schedule for completing testing of the equipment and systems aboard the ship had become increasingly compressed and continues to lag behind expectations. This is a particularly risky period for CVN 78 as the Navy will need to resolve technical deficiencies discovered through testing--for critical technologies or the ship--concurrent with latter stage ship construction activities, which is generally more complex than much of the work occurring in the earlier stages of construction. Risks to the ship's capability we identified in our August 2007 report have also been realized. We subsequently found in September 2013 and November 2014 that challenges with technology development are now affecting planned operational capability beyond the ship's delivery (as shown in table 3). Specifically, CVN 78 will not demonstrate its increased sortie generation rate due to low reliability levels of key aircraft launch and recovery systems before it is ready to deploy to the fleet. Further, required reductions in personnel remain at risk, as immature systems may require more manpower to operate and maintain than expected. Ultimately, these limitations signal a significant compromise to the initially promised capability. The Navy believes that, despite these pressures, it will still be able to achieve the current $12.9 billion congressional cost cap. While this remains to be seen, the Navy's approach, nevertheless, results in a more expensive, yet less complete and capable ship at delivery than initially planned. Even if the cost cap is met, it will not alter the ultimate cost of the ship. Additional costs will be borne later--outside of CVN 78's acquisition costs--to account for, for example, reliability shortfalls of key systems. In such cases, the Navy will need to take costly actions to maintain operational performance by adding maintenance personnel and spare parts. Reliability shortfalls, in turn, will drive ship life cycle cost increases related to manning, repairs, and parts sparing. Deferred systems and equipment will at some point be retrofitted back onto the ship. Although increases have already been made to the CVN 79's cost cap and tradeoffs made to the ship's scope, it still has an unrealistic business case. In 2013, the Navy requested congressional approval to increase CVN 79's cost cap from $8.1 billion to $11.5 billion, citing inflation as well as cost increases based on CVN 78's performance. Since the Ford-class program's formal system development start in 2004, CVN 79's planned delivery has been delayed by 4 years and the ship will be ready for deployment 15 months later than expected in 2013. The Navy recently awarded a construction contract for CVN 79 which it believes will allow the program to achieve the current $11.5 billion legislative cost cap. Similar to the lead ship, the business case for CVN 79 is not commensurate with the costs needed to produce an operational ship. By any measure, CVN 79 should cost less than CVN 78, as it will incorporate important lessons learned on construction sequencing and other efficiencies. While it may cost less than its predecessor, CVN 79 is likely to cost more than estimated. As we reported in November 2014, the Navy's strategy to achieve the cost cap: 1) relies on optimistic assumptions of construction efficiencies and cost savings; (2) shifts work--including installation of mission systems--needed to make the ship fully operational until after ship delivery; and (3) delivers the ship with the same baseline capability as CVN 78, with the costs of a number of planned mission system upgrades and modernizations postponed until future maintenance periods. Even with ambitious assumptions and planned improvements, the Navy's current estimate for the CVN 79 stands at $11.5 billion--already at the cost cap. For perspective, the Director of the Department of Defense's (DOD) Cost Assessment and Program Evaluation office projects that the Navy will exceed the congressional cost cap by about $235 million. The Congressional Budget Office estimates for CVN 79 are even higher; at a total cost of over $12.5 billion--which, if realized, would be over $1 billion above the current congressional cost cap. Similar to CVN 78, the Navy is assuming the shipbuilder will achieve efficiency gains that are unprecedented in aircraft carrier construction. While the shipbuilder has initiated significant revisions in its processes for building the ship that are expected to reduce labor hours, the Navy's cost estimate for CVN 79 is predicated on an over 9 million labor hour reduction compared to CVN 78. For perspective, this estimate is not only lower than the 42.7 million hours originally estimated for CVN 78, it is 10 percent lower than what was achieved on CVN 77, the last Nimitz-class carrier. Previous aircraft carrier constructions have reduced labor hours by 3.2 million hours at most. Further, the Navy estimates that it will save over $180 million by replacing the dual band radar in favor of an alternative radar system, which it expects will provide a better technological solution at a lower cost. Cost savings are assumed, in part, because the Navy expects the radar to work within the current design parameters of the ship's island. However, the Navy has not yet awarded a contract to develop the new radar solution. If design modifications are needed to the ship's island, CVN 79 costs will increase, offsetting the Navy's estimate of savings. Again for perspective, the Navy initially planned to install DBR on CVN 77 and it has taken the Navy over 10 years to develop the DBR, which is still not yet through testing. Finally, achieving the legislative cost cap of $11.5 billion is predicated on executing a two-phased delivery strategy for CVN 79, which will shift some construction work and installation of the warfare and communications systems to after ship delivery. By design, this strategy will result in a less capable and less complete ship at delivery--the end of the first phase--as shown in figure 3 below: According to the Navy, delaying procurement and installation of warfare and communications systems will prevent obsolescence before the ship's first deployment in 2027 and allow the Navy to introduce competition for the ship's systems and installation work after delivery. As we reported in November 2014, the Navy's two-phased approach transfers the costs of a number of known capability upgrades, including decoy launching systems, torpedo defense enhancements, and Joint Strike Fighter aircraft related modifications, previously in the CVN 79 baseline to other (non-CVN 79 shipbuilding) accounts, by deferring installation to future maintenance periods. While such revisions reduce the end cost of CVN 79 in the near term, they do not reduce the ultimate cost of the ship, as the costs for these upgrades will eventually need to be paid--just at a later point in the ship's life cycle. That CVN 78 will deliver at higher cost and less capability, while disconcerting, was predictable. Unfortunately, it is also unremarkable, as it is a typical outcome of the weapon system acquisition process. Along these lines, what does the CVN 78's experience say about the acquisition process and what lessons can be learned from it? In many ways, CVN 78 represents a familiar outcome in Navy shipbuilding programs. Across the shipbuilding portfolio, cost growth for recent lead ships has been on the order of 28 percent (see figure 4). Figure 4 above further illustrates the similarity between CVN 78 and other shipbuilding programs authorized to start construction around the same time. Lead ships with the highest percentages of cost growth, such as the Littoral Combat Ships and DDG 1000, were framed by steep programmatic challenges. Similar to the CVN 78, these programs have been structured around unexecutable business cases in which ship construction begins prior to demonstrating key knowledge, resulting in costly, time-consuming, and out-of-sequence work during construction and undesired capability tradeoffs. Such outcomes persist even though DOD and Congress have taken steps to address long-standing problems with DOD acquisitions. These reforms emphasize sound management practices--such as realistic estimating, thorough testing, and accurate reporting--and were implemented to enhance DOD's acquisition policy, which already provided a framework for managers to successfully develop and execute acquisition programs. Today these practices are well known. However, outcomes of the Ford-class program illustrate the limits of focusing on policy-and-practice related aspects of weapon system development without understanding incentives to sacrifice realism to win support for a program. Strong incentives encourage deviations from sound acquisition practices. In the commercial marketplace, investment in a new product represents an expense. Company funds must be expended and will not provide a return until the product is developed, produced, and sold. In DOD, new products represent a revenue, in the form of a budget line. A program's return on investment occurs as soon as the funding is initiated. The budget process results in funding major program commitments before knowledge is available to support such decisions. Competition with other programs vying for funding puts pressure on program sponsors to project unprecedented levels of performance (often by counting on unproven technologies) while promising low cost and short schedules. These incentives, coupled with a marketplace that is characterized by a single buyer (DOD), low volume and limited number of major sources, create a culture in weapon system acquisition that encourages undue optimism about program risks and costs. To the extent Congress funds such programs as requested, it sanctions--and thus rewards--optimism and unexecutable business cases. To be sure, this is not to suggest that the acquisition process is foiled by bad actors. Rather, program sponsors and other participants act rationally within the system to achieve goals they believe in. Competitive pressures for funding simply favor optimism in setting cost, schedule, technical, and other estimates. The Ford-class program illustrates the pitfalls of operating in this environment. Optimism has pervaded the program from the start. Initially, the program sought to introduce technology improvements gradually over a number of successive carriers. However, in 2002, DOD opted to forgo the program's evolutionary acquisition strategy, in favor of achieving revolutionary technological achievements on the lead ship. Expectations of a more capable ship were promised, with cost and schedule goals that were out of balance with the technical risks. Further, the dynamics of weapon system budgeting--and in particular, shipbuilding--resulted in significant commitments made well in advance of critical acquisition decisions, most notably, the authorization to start construction. Beginning in 2001, the Ford Class program began receiving advanced procurement funding to initiate design activities, procure long-lead materials, and prepare for construction, as shown in figure 5 below. By the time the Navy requested funding for construction of CVN 78 in 2007 it had already received $3.7 billion in advance procurement. It used some of these funds to build 13 percent of the ship's construction units. Yet, at that time the program had considerable unknowns--technologies were immature and cost estimates unreliable. Similarly, in 2013, Congress had already appropriated nearly $3.3 billion in funding for CVN 79 construction. This decision was made even though the Navy's understanding of the cost required to construct and deliver the lead ship was incomplete. A similar scenario exists today, as the Navy is requesting funding for advanced procurement of CVN 80, while also constructing CVN 78 and CVN 79. While these specifics relate to the Ford-class carrier, the principles apply to all major weapon system acquisitions. That is, commitments to provide funding in the form of budget requests, Congressional authorizations, and Congressional appropriations are made well in advance of major program commitments, such as the decision to approve the start of a program. At the time the funding commitments are made, less verifiable knowledge is available about a program's cost, schedule, and technical challenges. This creates a vacuum for optimism to fill. When the programmatic decision point arrives, money is already on the table, which creates pressure to make a "go" decision, regardless of the risks now known to be at hand. The environment of Navy shipbuilding is unique as it is characterized by a symbiotic relationship between buyer (Navy) and builder. This is particularly true in the case of aircraft carriers, where there is only one domestic entity capable of constructing, testing, and delivering nuclear- powered aircraft carriers. Consequently, the buyer has a strong interest in sustaining the shipbuilder despite shortfalls in performance. Under such a scenario, the government has a limited ability to negotiate favorable contract terms in light of construction challenges and virtually no ability to walk away from the investment once it is underway. The experiences of the Ford-class program are not unique--rather, they represent a typical acquisition outcome. The cost growth and other problems seen today were known to be likely in 2007--before a contract was signed to construct the lead ship. Yet CVN 78 was funded and approved despite a knowingly deficient business case; in fact, the ship has been funded for nearly 15 years. It is too simplistic to look at the program as a product of a broken acquisition process; rather it is indicative of a process that is in equilibrium. It has worked this way for decades with similar outcomes: weapon systems that are the best in the world, but cost significantly more, take longer, and perform less than advertised. The rules and policies are clear about what to do, but other incentives force compromises of good judgment. The persistence of undesirable outcomes such as cost growth and schedule delays suggests that these are consequences that participants in the process have been willing to accept. It is not broken in the sense that it is rational; that is, program sponsors must promise more for less in order to win funding approval. This naturally leads to an unexecutable business case. Once funded and approved, reality sets in and the program must then offer less for more. Where do we go from here? Under consideration this year are a number of acquisition reforms. While these aim to change the policies that govern weapon system acquisition, they do not sufficiently address the incentives that drive the behavior. As I described above, the acquisition culture in general rewards programs for moving forward with unrealistic business cases. Early on, it was clear that the Ford-class program faced significant risks due to the development, installation and integration of numerous technologies. Yet, these risks were taken on the unfounded hope that they were manageable and that risk mitigation plans were in place. The budget and schedule did not account for these risks. Funding approval-- authorizing programs and appropriating funds are some of the most powerful oversight tools Congress has. The reality is once funding starts, other tools of oversight are relatively weak--they are no match for the incentives to over-promise. Consequently, the key is to ensure that new programs exhibit desirable principles before they are approved and funded. There is little that can be done from an oversight standpoint on the CVN 78. In fact, there is little that can be done on the CVN 79, either. Regardless of how costs will be measured against cost caps, the full cost of the ships--as yet unknown--will ultimately be borne. For example, while the Joint Precision Approach and Landing System has been deferred from the first two ships, eventually it will have to be installed on them to accept the F-35 fighter. The next real oversight opportunity is on the CVN 80, which begins funding in fiscal year 2016. Going forward, there are two acquisition reform challenges I would like to put on the table. The first is what to do about funding. Today, DOD and Congress must approve and fund programs ahead of major decision points and key information. With money in hand, it is virtually impossible to disapprove going forward with the program. There are sound financial reasons for making sure money is available to execute programs before they are approved. But they are also a cause of oversold business cases. Second, in the numerous acquisition reform proposals made recently, there is much for DOD to do. But, Congress, too, has a role in demanding realistic business cases through the selection and timing of the programs it chooses to authorize and fund. What it does with funding sets the tone for what acquisition practices are acceptable. Mr. Chairman and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff has any questions about this statement, please contact Paul L. Francis at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Diana Moldafsky, Assistant Director; Charlie Shivers; Burns C. Eckert; Laura Greifner; Kelsey Hawley; Jenny Shinn; Ozzy Trevino; Abby Volk; and Alyssa Weir. Improve the realism of CVN 78's budget estimate. Improve Navy's cost surveillance capability. DOD Response and actions While the department agreed with our recommendations in concept, it has not fully taken action to implement them. The CVN 78 cost estimate continues to reflect undue optimism. Conduct a cost-benefit analysis on required CVN 78 DOD agreed with the need for a cost-benefit capabilities, namely reduced manning and the increased sortie generation rate prior to ship delivery. analysis, but did not plan to fully assess CVN 78 capabilities until the completion of operational testing after ship delivery. Update the CVN 78 test plan before ship delivery to allot sufficient time after ship delivery for land based testing to complete prior to shipboard testing. Adjust the CVN 78 planned post-delivery test schedule to ensure that system integration testing is completed before IOT&E. DOD agreed with our recommendation to update Defer the CVN 79 detail design and construction the CVN 78 test plan before delivery and has since updated the test and evaluation master plan (TEMP). However, it did not directly address our recommendation related to ensuring that sufficient time is allotted to complete land-based testing prior to beginning integrated testing. contract until land-based testing for critical systems was complete and update the CVN 79 cost estimate on the basis of actual costs and labor hours needed to construct CVN 78 during the recommended contract deferral period of CVN 79. DOD partially agreed with our recommendation to adjust the CVN 78 planned post-delivery schedule but current test plans still show significant overlap between integrated test events and operational testing. DOD disagreed with our recommendation to defer the award of the CVN 79's detail design and construction contract. However, shortly after we issued our report, the Navy postponed the contract award citing the need to continue contract negotiations. While DOD did not agree to defer the CVN 79 contract as recommended, it did agree to update the CVN 79 cost estimate on the basis of CVN 78's actual costs and labor hours. DOD has updated CVN 79's budget estimate which we note is based on optimistic assumptions. 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 Navy set ambitious goals for the Ford-class program, including an array of new technologies and design features that were intended to improve combat capability and create operational efficiencies, all while reducing acquisition and life-cycle costs. The lead ship, CVN 78, has experienced significant cost growth with a reduced capability expected at delivery. More cost growth is likely. While CVN 78 is close to delivery, examining its acquisition history may provide an opportunity to improve outcomes for the other ships in the class and illustrate the dynamics of defense acquisition. GAO has reported on the acquisition struggles facing the Ford-class, particularly in GAO-07-866 , GAO-13-396 , and GAO-15-22 . This statement discusses: (1) the Navy's initial vision for CVN 78 and where the ship stands today; (2) plans for follow-on ship cost and construction; and (3) Ford-class experiences as illustrative of acquisition decision making. This statement is largely based on the three reports as well as GAO's larger work on shipbuilding and acquisition best practices, and also incorporates updated audit work where appropriate. The Ford-class aircraft carrier's lead ship began construction with an unrealistic business case. A sound business case balances the necessary resources and knowledge needed to transform a chosen concept into a product. Yet in 2007, GAO found that CVN 78 costs were underestimated and critical technologies were immature--key risks that would impair delivering CVN 78 at cost, on-time, and with its planned capabilities. The ship and its business case were nonetheless approved. Over the past 8 years, the business case has predictably decayed in the form of cost growth, testing delays, and reduced capability--in essence, getting less for more. Today, CVN 78 is more than $2 billion over its initial budget. Land-based tests of key technologies have been deferred by years while the ship's construction schedule has largely held fast. The CVN 78 is unlikely to achieve promised aircraft launch and recovery rates as key systems are unreliable. The ship must complete its final, more complex, construction phase concurrent with key test events. While problems are likely to be encountered, there is no margin for the unexpected. Additional costs are likely. Similarly, the business case for CVN 79 is not realistic. The Navy recently awarded a construction contract for CVN 79 which it believes will allow the program to achieve the current $11.5 billion legislative cost cap. Clearly, CVN 79 should cost less than CVN 78, as it will incorporate lessons learned on construction sequencing and other efficiencies. While it may cost less than its predecessor, CVN 79 is likely to cost more than estimated. As GAO found in November 2014, the Navy's strategy to achieve the cost cap relies on optimistic assumptions of construction efficiencies and cost savings--including unprecedented reductions in labor hours, shifting work until after ship delivery, and delivering the ship with the same baseline capability as CVN 78 by postponing planned mission system upgrades and modernizations until future maintenance periods. Today, with CVN 78 over 92 percent complete as it reaches delivery in May 2016, and the CVN 79 on contract, the ability to exercise oversight and make course corrections is limited. Yet, it is not too late to examine the carrier's acquisition history to illustrate the dynamics of shipbuilding--and weapon system--acquisition and the challenges they pose to acquisition reform. The carrier's problems are by no means unique; rather, they are quite typical of weapon systems. Such outcomes persist despite acquisition reforms the Department of Defense and Congress have put forward--such as realistic estimating and "fly before buy." Competition with other programs for funding creates pressures to overpromise performance at unrealistic costs and schedules. These incentives are more powerful than policies to follow best acquisition practices and oversight tools. Moreover, the budget process provides incentives for programs to be funded before sufficient knowledge is available to make key decisions. Complementing these incentives is a marketplace characterized by a single buyer, low volume, and limited number of major sources. The decades-old culture of undue optimism when starting programs is not the consequence of a broken process, but rather of a process in equilibrium that rewards unrealistic business cases and, thus, devalues sound practices. GAO is not making any new recommendations in this statement but has made numerous recommendations to the Department of Defense in the past on Ford-class acquisition, including strengthening the program's business case before proceeding with acquisition decisions. While the Department has, at times, agreed with GAO's recommendations it has taken little to no action to implement them.

Commuter demand and congestion between New Jersey and New York City across the Hudson River is projected to increase as the limited passenger rail infrastructure continues to age, highlighting the need for improvements to the trans-Hudson commuter rail system into Manhattan. Planning agencies have forecasted that, fueled by population growth in regions west of the Hudson River and employment within Manhattan, demand for mass transit service crossing the Hudson River between New Jersey and nearby counties in New York and midtown Manhattan will grow by about 38 percent by 2030. This could result in more congestion and longer delays on existing roads, bridges, passenger rail, and other public transportation modes crossing the Hudson River. At the same time, the aging passenger rail infrastructure--comprising two single-track tunnels under the Hudson River leading to New York Penn Station--limits commuter rail capacity into Manhattan. The 100-year-old tunnels cannot meet the access and mobility demands of the future, given the projected growth in the region. In 1995, the three major local transit agencies--NJT, the Port Authority, and the Metropolitan Transportation Authority--jointly conducted a major investment study to consider ways to improve access between midtown Manhattan and the growing population west of the Hudson River. They evaluated more than 100 alternatives, including commuter railroad, bus, light rail, subway, automobile, and ferry. The study, completed in 2003, recommended three alternatives for advancement to the federal environment impact process. While these alternatives would have provided more train capacity and were expected to meet projected demand, they did not share all of the elements of the final ARC project. In the draft environmental impact statement, published in 2007, NJT identified the alternative that became the final ARC project. Project development and refinements continued until completion of the environmental review process and entry of the project into final design in 2009. Figure 1 shows the new tracks, tunnel, and station that the project would have built. In addition, the project would have added a yard in New Jersey for storing trains that are not in service during the middle of the day, five station entrances at the New York Penn Station Expansion, and three elevator entrances that met the Americans with Disabilities Act requirements. NJT applied for federal funding for a portion of ARC costs through FTA's New Starts program.agencies on a largely competitive basis primarily for the construction of new fixed-guideway transit systems and the expansion of existing fixed- guideway systems. Federal funding for the construction of New Starts projects is committed in a full funding grant agreement, which is a Under this program, funding is directed to public multiyear funding agreement between the federal government and a public agency. Although the ARC project was cancelled prior to obtaining a full funding grant agreement, FTA provided some federal funding for preliminary engineering, final design, and a portion of construction costs for the project. The construction funding was provided through an early system work agreement. Appendix I provides an overview of the New Starts process. While NJT sponsored the project and would have been the prime operator of services on the completed project, state and local funding for ARC would have come from the New Jersey Turnpike Authority and the Port Authority. As part of the federal planning process for transportation, the region's two metropolitan planning organizations--the North Jersey Transportation Planning Authority and the New York Metropolitan Transportation Council--adopted the project into their metropolitan transportation improvement plans, as required for federal funding. While the New Jersey governor had affirmed support for the ARC project in an April 6, 2010, letter to the Secretary of Transportation, on October 27, 2010, the governor announced the cancellation of the project, citing potential cost growth and the state's fiscal condition. At the time of cancellation, NJT had completed most of the requirements needed to obtain additional federal funding. In particular, NJT had completed an in- depth environmental review and received FTA's commitment of $601 million in New Starts funds to pay for initial construction activities. At the time of cancellation, NJT was negotiating the final cost estimate of the project with FTA in order to obtain the full funding grant agreement. This agreement would have provided the commitment for the full federal share of funds for the project. According to the studies we reviewed, the ARC project would have provided a significant increase in rail capacity for moving commuters between New Jersey and New York. NJT and other planning organization officials said that increases in capacity were a key mobility benefit of the project. The tunnel would have added two train tracks under the Hudson River, and as a result: The number of trans-Hudson peak hour trains (from 7:30 a.m. to 8:30 a.m.) would have more than doubled--from 23 to 48 trains per hour. The peak hour use of passenger capacity would have decreased from a near-capacity 95 percent to 60 percent at completion, providing additional capacity to accommodate future passenger growth. The benefits of other planned NJT rail expansions would have been enhanced. With this increase in capacity, projections made as part of the project's environmental study showed an anticipated increase in transit ridership as follows: Daily trips between New Jersey and New York Penn Station would have increased from about 174,000 without the project to about 254,000 (a 46 percent increase) with the project by 2030. Considering the effects on other transit facilities, the project would have generated about 32,500 new daily transit trips across the Hudson by 2030. The ARC project would have reduced the need for passengers to transfer between trains, meaning many riders could commute on only one train. Passenger transfers lengthen commuting times and avoiding transfers provides a benefit to riders. As a result of the ARC project, it was estimated that: Five existing NJT lines would have no longer required passengers to transfer trains to get to Manhattan. Daily passenger transfers would have declined from about 32,100 without the project to 1,000 with the project, a 97 percent reduction, as estimated in the environmental study. Riders travelling between New Jersey and Manhattan would have experienced an average of 23 minutes of travel time savings per trip. By building a second rail tunnel between New Jersey and Manhattan, the ARC project would have increased the overall reliability of rail service and added flexibility during service disruptions. A disruption of service in the existing NJT tunnel for any reason can result in major delays. Currently, one 15-minute train disruption in the existing tunnel can delay as many as 15 other NJT and Amtrak trains. The ARC project would have provided: Flexibility to reroute trains from one tunnel to the other, if necessary. Continuous weekend service as new tunnels could remain open during tunnel maintenance. (Currently, with only one tunnel, traffic must be limited to perform necessary maintenance.) Better reliability, allowing for faster transit. Average scheduled time from Newark, New Jersey, to Manhattan would decrease by 5 minutes during peak times and 3.5 minutes off-peak. Even with the added trans-Hudson commuters, the environmental study found that the new station would have reduced crowding at the adjacent New York Penn Station: Average passenger egress time from New York Penn Station would have decreased from 80 to 60 seconds (a 25 percent decrease). The new station would have resulted in a projected decrease in peak hour ridership at New York Penn Station of 37 percent--from about 27,800 passengers without the project to 17,200 with the project in 2030--thus alleviating crowding. Additionally, the environmental study estimated that, in general, the increased rail capacity across the Hudson River would have reduced the amount of travel by automobile that would otherwise occur. Port Authority officials told us that this increased rail capacity would help ease road congestion for trans-Hudson commutes. Specifically, the study projected that by 2030: Daily trans-Hudson automobile trips would be reduced by about 22,100 trips, or 4.9 percent, compared to the number of automobile trips without the project. Daily automobile vehicle miles traveled would have been reduced by about 590,000 miles compared to vehicle miles traveled without the project. Daily automobile vehicle hours traveled would have been reduced by about 22,000 hours compared to vehicle hours traveled without the project. According to the environmental study, mobility may further deteriorate without the ARC project. The New York City region faces serious mobility issues and, as we have mentioned previously in this report, travel demand is projected to increase significantly. Environmental study forecasts estimated that trans-Hudson transit travel demand would rise from about 550,000 riders in 2005 to about 760,000 in 2030, an increase of about 38 percent. Without the tunnel, the environmental study projected that demand would not be met, and congestion and delays would increase. All the major trans-Hudson crossings--NJT, the Port Authority Trans-Hudson (PATH), and vehicular tunnels and bridges--are at or near capacity. According to the environmental study, the increased demand would stress the entire transportation network, including roadway, bus, ferry, and commuter rail systems. However, it is difficult to precisely determine the long-term effects of not building the tunnel because various other agencies are building, planning, or exploring the possibility of transportation improvements that could affect overall mobility in the region. Local transportation officials cited a number of projects that could affect congestion and commutes in the region, although some are at the conceptual phase, and may or may not be built. Possible projects include the extension of a subway line from New York City to New Jersey, Amtrak's proposal to add a train line from New Jersey into New York City, bridge and transit tunnel improvements, a new bus terminal, and improvements to help freight flows into New York. Thus, the overall effect of canceling the ARC project must be understood in the regional context, and the effect is dependent on what transpires with these other projects. Studies estimated the ARC project would have generated economic activity in the region that would have affected jobs and personal income, business activity, and home values, among other things. Most of the economic effects were expected during the building phase of the project. The studies we reviewed used regional economic models to measure the economic effects. However, the results of these models depend on larger economic conditions, such as the level of unemployment. The results cannot be regarded as certain in all economic conditions. The studies addressed several aspects of economic activity as follows: Jobs and personal income. The environmental study estimated that during construction the ARC project would have provided about 59,900 jobs directly onsite and total additional employment in the region of about 98,300 jobs. The environmental study also suggested that over the longer term, the rail line would have required an estimated 410 jobs directly in transportation. Another study estimated that the project would generate about 5,700 construction- related jobs each year during the 9-year construction.years after completion of the project, the same study estimated the region would gain 44,000 new jobs as a result of improved access, which would make the region more competitive compared to other In addition, 10 The same study estimated that 10 years after completion, regions.the project would have added almost $4 billion in personal income to the region, in 2006 dollars. Business activity. The ARC environmental study estimated the project would have produced an additional $9 billion in business activity during construction and $120 million per year in business activity over the long term. Home values. Another study estimated that houses in New Jersey communities served by the ARC project would see an average increase in home value of $19,000, or 4.2 percent, resulting from more efficient local travel and improved access to high paying jobs in New York City. Tax revenues. Studies also indicated that increased tax revenues would have resulted from the increases in economic activity from the ARC project. The environmental study estimated that during construction, $1.5 billion in federal, state, and local taxes would have been generated, as well as an additional $16 million annually after the project was completed. Another study estimated that the project would result in an additional $375 million each year in property taxes generated by local governments. Ibid. growth may simply shift to another part of the region or nation. Third, the project's economic impact also depends on how it was financed. Deficit financing--borrowing--provides an increase in the total amount of spending, which will have economic effects. In contrast, financing the project through taxes means that existing government and household spending to some extent is simply directed a certain way, rather than increasing the total amount of such spending. Analyzing the impact of the project in the context of these variables--the unemployment rate when the project is being built and project financing--was beyond the scope of the studies we reviewed. The net impact on housing prices is also difficult to assess. First, the analyses--done several years ago--may not fully capture the effects of recent declines in the housing market. Second, impacts on the housing market throughout the metropolitan area would, to some extent, reflect population shifts--some house prices may go up as a consequence of improved access to transit, while prices in other less desirable locations may go down. However, shifting the location of households and business activity does not necessarily expand the overall economy. Also, benefits to homeowners and commuters from the project would significantly overlap, since they are to some extent the same people; that is, the change in a homeowner's real estate value is the result of the improvement in travel time. Finally, even though the project was cancelled, all of the anticipated economic activity was not necessarily lost. For example, according to Port Authority officials, the Port Authority redirected funds it had allocated to the ARC project to other projects in the region, which could increase employment and economic activity tied to those projects. Likewise, funds that New Jersey planned to allocate to the ARC project were reallocated to the state's highway trust fund, which would then support economic activity related to highway projects. However, these highway projects would not necessarily be in the New York City region. The ARC environmental study estimated the project would have created limited, but mostly positive environmental effects. (See fig. 2.) The primary positive effect would have been a long-term reduction in air pollution, although it is difficult to predict how much this reduction in pollutants would affect the entire New York City region. Air quality effects are of particular relevance in the development of transit projects. FTA, pursuant to law, includes whether a project is in an area that has not attained air quality standards required by the Clean Air Act as a factor in selecting projects for the New Starts program. According to the Environmental Protection Agency, the entire New York City region is out of compliance with certain ambient air quality standards that are designed to protect public health. The project would reduce automobile trips and thereby decrease emissions that contribute to existing air quality problems in the region and related public health problems. According to the Environmental Protection Agency, adverse health effects associated with air pollutants include increased respiratory symptoms, hospitalization for heart or lung disease, and premature death. Local transportation agency officials told us that air quality factors were important when considering the potential environmental effects of the ARC project. Over the long term, air quality would have been positively affected due to an estimated overall daily decrease of about 590,000 in vehicle miles traveled in the region and about 22,100 fewer trans-Hudson vehicle trips. While longterm air quality effects were generally positive in nature, the results of these changes would be dispersed over the entire metropolitan area, and were too difficult to estimate for the New York region, as noted in the environmental study. According to the environmental study, other adverse environmental effects would have been short term and mitigated. Among the environmental effects were negative effects on air quality, mainly related to dust created by excavation and construction and exhaust emissions from equipment, noise, potential storm water runoff, vibration, potential soil erosion, and potential disturbance of various contaminated sites. FTA determined that these short-term negative effects were adequately addressed by mitigation plans. In 2003, the first cost estimates for the concept of a new commuter rail tunnel between New Jersey and New York--developed by NJT and other local agencies in the major investment study--ranged from $2.9 billion to $3.6 billion (in year 2000 dollars). These estimates were for a project that was largely conceptual and did not rely on significant engineering design work. Further, not all project costs and elements were included in these estimates. In 2006, after the sponsoring agencies selected a locally preferred alternative, FTA accepted $7.4 billion as the first cost estimate for the project. This estimate included an expanded New York Penn Station as well as construction, engineering, oversight, and management costs; operational systems; rolling stock; real estate; startup cost; and environmental mitigation. ARC project cost estimates increased over time as shown in table 1. In general, changes in cost estimates throughout the process of planning and designing a transportation project are normal and may happen for a number of reasons.paper to final design and construction, a more accurate understanding of what a project entails may evolve. The change in cost estimates may reflect a more accurate understanding of what actually constitutes the First, as a project progresses from a concept on project. For example, according to Port Authority officials, early in the project they learned that there were no existing surveys of New York Penn Station, and they had to survey the station before detailed designs could be developed. As shown in figure 3, cost estimates are more uncertain at the beginning of a project (the range is wide), because less is known about its detailed design and construction requirements, and therefore the opportunity for change is greater. Second, costs can appear to change if they are not expressed in a consistent manner, that is, in constant year dollars (to eliminate any inflationary effects) versus year of expenditure dollars (that may mask any changes in real terms because of inflation). Third, project cost estimates are sensitive to factors such as changes to the scope of the project. In some cases, a sponsor may reduce the scope or add more features to the project as the design progresses. Uncertainty of the costs is reduced, as the project scope is better defined, but costs also may increase. Fourth, cost estimates can change as risks are assessed and reassessed throughout project development, resulting in the amount FTA requires project sponsors to set aside for project contingency to increase or decrease. For example, FTA officials said risk factors could include changes in real estate costs, new information involving surface or subsurface ground conditions and materials, or the degree of competition among contractors. According to FTA officials, risks like these can affect the cost of a project, and sponsors may never adequately address all of them, but at a minimum both the sponsor and FTA must be aware of what those risks are. The ARC project cost estimates increased from the $7.4 billion estimate in 2006 for a number of reasons: In 2008, FTA's cost estimates ranged from $9.5 billion to $12.4 billion, based on potential scenarios in its 2008 Risk Assessment, which not only assumed different levels of risk but also included $1.7 billion set aside for contingency. After discussions, FTA and NJT agreed upon a baseline cost estimate of $8.7 billion in 2009. FTA's 2010 Risk Assessment contained the next estimated cost--as high as $13.7 billion--as the engineers developed a more accurate understanding of what the project entailed. However, NJT did not see costs rising to this level and projected a lower expected cost range, including a maximum $10 billion final cost. After considering comments from NJT, FTA revised the cost range to $9.8 billion to $12.4 billion. This estimate included a more refined cost estimate of potentially higher construction and other work costs. In addition, the contingency amount was increased due to reassessment of risks related to delays in awarding project contracts. Federal, state, and local sources would have funded the ARC project, as shown in table 2. As of April 2010, about half the estimated cost of about $8.7 billion would have come from federal sources with the remainder divided at the local and state levels between the Port Authority and the New Jersey Turnpike Authority. In addition to New Starts funds, New Jersey was planning to use certain federal highway funds that may be used for transit capital purposes. New Jersey planned to use part of its federal Congestion Mitigation and Air Quality Improvement and National Highway System funding for the ARC project. State and local funds included $3 billion from the Port Authority, which formally approved this funding commitment. The state of New Jersey planned to add $1.25 billion that was to have come from increased tolls on the New Jersey Turnpike. In August 2009, FTA entered into an early system work agreement with NJT. This agreement, which FTA and NJT amended in 2010, made available about $910.3 million for certain project activities, such as tunnel construction contracts, property and easement acquisitions in New York, professional services related to the project's final design, construction permits, insurance, and a contingency reserve.expended about $271 million of the $910.3 million. When the project was cancelled, the Department of Transportation claimed that the $271 million in expended federal funds should be recovered by the federal government, and New Jersey disputed this claim. On September 30, As of 2010, NJT 2011, the Department of Transportation and New Jersey agreed that New Jersey would return $95 million, which included $51 million in New Starts funds and $44 million in American Recovery and Reinvestment Act funds. In addition, New Jersey agreed to spend about $128 million in Congestion Mitigation and Air Quality Improvement funds on transit projects approved by the Department of Transportation. Because the project was terminated before FTA and NJT entered into a full funding grant agreement, there was no final commitment by all the parties to fully fund the project. The general project agreement, which was a document prepared as part of the New Starts process and signed by NJT and the Port Authority in 2009, addressed potential cost growth. According to the agreement, if costs exceeded $8.766 billion (or if less than $3 billion was provided by FTA), both parties agreed to work together to obtain additional funding sources. According to Port Authority officials, although both parties signed the agreement, there was no commitment of assistance from the Port Authority in the event that the project experienced cost increases. Port Authority officials told us that the agency's existing $3 billion commitment was the maximum the agency could provide to the project, given the constraints of their overall capital program. In the weeks preceding the project's cancellation, the Secretary of Transportation and the governor of New Jersey held discussions on additional funding sources for the ARC project or a reduction in project scope. The additional funding options discussed included increased funding by the federal government, New Jersey, and the Port Authority; a federal railroad loan; or a public-private Because the project was terminated before a partnership contribution.full funding grant agreement was entered into between FTA and NJT, there was no final agreement by all the parties on the issue of responsibility for ARC cost growth. The Department of Transportation reviewed a draft of this report and provided technical comments, which we incorporated in the report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of Transportation, and the Administrator of the Federal Transit Administration. 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 or would like to discuss this work, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix II. The Federal Transit Administration (FTA) provided federal funding for a portion of the Access to the Region's Core costs through its New Starts program. Under this program, funding is directed to public agencies on a largely competitive basis primarily for the construction of new fixed- guideway transit systems and the expansion of existing fixed-guideway systems. Federal funding for construction of New Starts projects is committed in a document that is called a full funding grant agreement--a multi-year agreement between the federal government and a public agency that is subject to the availability of appropriations. The agreement establishes the terms and conditions for federal financial participation, including the maximum amount of New Starts funding being committed. To obtain this grant agreement, a project must be approved by FTA for final design and construction and have gone through a series of steps that make up the New Starts approval process. Among the phases of the New Starts planning and development process are: systems planning, alternatives analysis, preliminary engineering, and final design. Systems planning. Systems planning involves the continuing regional transportation planning process carried out by metropolitan planning organizations in urban areas throughout the United States. This process produces long-range transportation plans and shorter-range transportation improvement programs, along with environmental and other analyses. Alternatives analysis. The analysis of alternatives examines the benefits and costs of different options, such as light rail or bus rapid transit, in a specific transportation corridor or in a regional sub-area. It concludes with the selection of a locally preferred alternative and adoption of that alternative into a fiscally constrained long-range transportation plan. The project sponsor submits the proposed project to FTA for evaluation so as to gain approval to enter preliminary engineering, the next phase of development. FTA evaluation does not include a full cost-benefit analysis, but does consider cost- effectiveness and other benefits of the proposed project. Preliminary engineering. Preliminary engineering involves the project sponsor refining the project by examining the costs, benefits, and impacts of different design alternatives, and completing an analysis of environmental impacts as required by the National Environmental Policy Act of 1969. Once preliminary engineering is complete, FTA evaluates and rates the project to determine whether it can be approved into final design. Final design. In the project's final design phase, the project sponsor prepares final construction plans and cost estimates, and, if needed, includes right-of-way acquisition and relocation of utilities. After final design is complete, FTA may approve the project for a full funding grant agreement, at which point the project may move into the construction phase. In some cases, FTA may obligate some of the funding expected to be provided in the full funding grant agreement through an early system work agreement. Although not a guarantee of full funding, an early system work agreement provides funding so that work can begin before full funding is awarded. In addition to the contact named above, Teresa Spisak (Assistant Director), Robert Ciszewski, Alexander Lawrence, David Hooper, Hannah Laufe, Joshua Ormond, Amy Rosewarne, and Max Sawicky made key contributions to this report.

Studies have estimated that transit travel demand between New Jersey and Manhattan will increase by 38 percent by 2030. The Access to the Region's Core commuter rail project was designed to help meet that rising demand. In October 2010, the governor of New Jersey, citing potential cost growth and the state's fiscal condition, withdrew state support and cancelled the project. The New Jersey Transit (NJT) was the lead agency for the project, supported by the Port Authority of New York and New Jersey (Port Authority). The project was to be partially funded under the Federal Transit Administration's (FTA) New Starts program. GAO was asked to examine (1) what would have been the mobility, economic, and environmental benefits of the project according to major planning studies; (2) the project cost estimates over time; and (3) how, if at all, documents prepared as part of the New Starts process addressed potential cost growth for the project. GAO reviewed the literature and major project planning studies, FTA reports, and economic and cost estimates by NJT and other planning organizations. GAO interviewed officials from FTA, state and local transit agencies, and local planning organizations. GAO is making no recommendations in this report. The Department of Transportation provided technical comments, which GAO incorporated in the report. Studies estimated that the Access to the Region's Core commuter rail project would have provided mobility benefits, but other benefits would either have been limited or are difficult to measure. According to various studies: The project would have helped meet the projected increase in travel demand and improved mobility by doubling the number of daily peak period trains, and significantly increasing daily trips between New Jersey and Manhattan--from about 174,000 without the project to 254,000 with the project by 2030--while reducing transfers and station crowding and improving reliability of service. The project potentially would have generated economic activity in the region in the form of jobs and income, business activity, and increased home values, but many economic effects were hard to predict with certainty. For example, the extent to which the project would shift the location of economic activity, versus providing additional net economic activity, is uncertain. The project was estimated to have created limited but mostly positive environmental effects--in particular, improved air quality--and included measures to mitigate negative effects such as noise and storm water runoff. Over time, the cost estimates for the project increased from an initial estimate of $7.4 billion in 2006. In 2008 and 2010, FTA performed risk assessments and revised the cost estimate. FTA and NJT agreed upon a baseline cost estimate of $8.7 billion in 2009. After considering comments from NJT, which projected lower costs than FTA, FTA revised its estimate and issued a cost estimate of $9.8 billion to $12.4 billion in October 2010. As of April 2010, federal sources were expected to fund about half the cost, with the remainder divided between New Jersey Turnpike funds and the Port Authority. Because the project was terminated before FTA and NJT entered into a full funding grant agreement, there was no final agreement by all the parties on the issue of responsibility for project cost growth. While the Secretary of Transportation and the governor of New Jersey held discussions on additional funding options, planning documents did not address the source of funding of potential cost growth for the project.

To obtain local views on the usefulness of federal assistance, we conducted structured interviews with 37 members of local law enforcement agencies that participated in the principal federal anti-violent crime task force for metropolitan Los Angeles. We interviewed 3 levels of employees within the local law enforcement agencies that participated in the task force: 24 participating line officers, 8 supervisory officers, and 5 agency heads or agency representatives. For reporting purposes, we combined the responses of the 8 supervisory officers and the 5 agency heads or representatives into 1 category of 13 responses, which we refer to in this report as responses from local officials. We also conducted structured interviews with representatives of nine local law enforcement agencies that did not participate in the task force to obtain their views on federal anti-gang assistance. In addition, federal and local law enforcement agencies provided statistics on the results of task force efforts. A detailed description of our objectives, scope, and methodology is contained in appendix I. We performed our work in Washington, D.C., and Los Angeles, CA, from March 1995 through April 1996 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Attorney General. Responsible Department of Justice officials provided comments, which are discussed at the end of this letter. "Our next step in the fight against crime is to take on gangs the way we once took on the Mob. I am directing the FBI and other investigative agencies to target gangs that involve juveniles in violent crime and to seek authority to prosecute, as adults, teenagers who maim and kill like adults." "Not too long ago, the Federal Government believed that street crime was not its business, but today, we recognize that violent gang crime is a national problem and one that we must do our share to address." In this regard, Title XV of the Violent Crime Control and Law Enforcement Act of 1994, P.L. 103-322 (1994), strengthened federal laws dealing with criminal street gangs. Also, Congress has funded federal efforts to assist state and local law enforcement in fighting violent crime. According to DOJ, the nationwide growth in violent crime can be tied closely to the development of gangs. Although definitive statistics were not available, law enforcement professionals believed that gang violence was a factor--and perhaps the primary factor--in the increase in violent crime during the past decade. DOJ's 1995 report on its anti-violent crime initiative emphasized that violent gang members threatened the safety and stability of neighborhoods, inflicted fear and bodily harm on others through the commission of crime, and robbed residents of the ability to enjoy their streets and homes. Many jurisdictions had focused their efforts on dismantling violent criminal gangs. The Los Angeles District Attorney's Office estimated that in May 1992 there were 1,000 gangs with 150,000 members in Los Angeles County. The District Attorney also reported in 1992 that gangs had been responsible for virtually all growth in the number of homicides since 1984, and that half of all gang members participate in violence. In addition, Los Angeles-based gangs have migrated to other communities around the country, according to studies sponsored by the National Institutes of Justice and the National Drug Intelligence Center. The LA Task Force grew out of the Los Angeles riots of 1992 as federal and local law enforcement combined resources to address gang violence. According to the FBI and other sources, much of the damage caused in the riots could be attributed to acts instigated by specific gangs. Recognizing the seriousness of the problem, the FBI made the development of a joint federal, state, and local effort to fight gang violence a major emphasis of its anti-violent crime strategy for the Central District of California, which includes Los Angeles. This strategy, which was developed primarily by the FBI agent in charge of the LA Task Force, emphasized targeting violent gangs in neighborhoods with high rates of violent crime. The LA Task Force was formalized in October 1992 by written agreement between the FBI and participating local law enforcement agencies covering, among other things, roles and responsibilities. An FBI representative was to assume the role of program manager for all task force operations and was to receive input from leaders of the participating agencies. The FBI was to provide necessary resources for the task force, including vehicles, when requested and if possible. The original agreement included the FBI; the Bureau of Alcohol, Tobacco and Firearms (ATF); the Immigration and Naturalization Service; the Compton, Inglewood, Long Beach, and Los Angeles Police Departments; and the Los Angeles County Sheriff's Department. The original mission of the LA Task Force was to identify and prosecute those individuals responsible for committing violent crimes during the 1992 riots. There was particular emphasis on perpetrators associated with violence-prone street gangs, especially gang leaders and core members. After completing its efforts related to the riots, the LA Task Force's mission was broadened to include the identification and prosecution of the most criminally active and violent individuals and enterprises in the Los Angeles metropolitan area, but the emphasis on gang-related violence was maintained. The total authorized fiscal year 1996 budget for the LA Task Force was almost $394,000. This did not include undisclosed confidential expenditures for specific investigations. According to the various federal and local law enforcement personnel in the Los Angeles area whom we interviewed, federal law enforcement assistance targeted directly at gangs in the area consisted primarily of the use of federal laws and authority not otherwise available to local law enforcement agencies, funds, equipment, and personnel. Such assistance was provided principally through task forces of federal and local law enforcement officers--mainly the FBI-led LA Task Force. This task force consisted of several squads, each of which targeted a specific crime problem, such as fugitives, or a specific crime, such as bank robbery. Within their areas, most squads targeted gangs that committed violent crimes, and each squad usually focused on a different gang. Five of the 47 law enforcement agencies we identified in the Los Angeles metropolitan area participated in the LA Task Force. Assistance provided through the LA Task Force included the use of federal laws and authority (including prosecutive, wiretap, and witness security assistance); overtime pay; office space; various types of equipment; personnel; and money for undercover drug/firearms purchases and informants. For example, according to DOJ and FBI officials, FBI expenses approved (in September 1995) for fiscal year 1996 in support of state/local officers participating on the LA Task Force included the following. Rental and maintenance expenses for 36 automobiles at a total cost of $298,350. Rental expenses for 120 pagers at total cost of $8,740. Rental expenses for 48 cellular phones and associated airtime at a total cost of $77,760. Expenses of $9,052 for the operation of covert telephone lines and the maintenance of various task force equipment. In addition, the FBI reimbursed about $80,000 to state/local agencies in the Los Angeles area to provide for the payment of overtime to officers participating on the LA Task Force. The FBI agent in charge of the task force said that nonparticipating agencies generally did not receive the amount and types of FBI assistance available to the five agencies formally participating in the task force. However, according to other FBI officials, training, forensic services, fugitive apprehension, and various other specialized types of assistance could be made available to any local law enforcement agency through less formal, "as needed" arrangements. Besides the assistance provided directly through the task force, 7 of the 13 local law enforcement officials we interviewed said their agencies received other federal law enforcement assistance, such as training. Six of the seven officials indicated that obtaining such assistance was facilitated directly by their agency's participation in the task force. As previously noted, 5 of the 47 local law enforcement agencies in the Los Angeles metropolitan area that we identified participated in the LA Task Force. The FBI agent-in-charge of the LA Task Force stated that given its resource constraints, the FBI, in the wake of the Los Angeles riots of 1992, tried to target those localities that had the greatest gang problems and where it believed its resources could have the most impact. According to the agent-in-charge, the five participating agencies were selected on this basis. The majority of local law enforcement officials we contacted believed that the FBI had selected the appropriate targets and expressed no concerns about not having been invited, or being able, to participate. We contacted representatives from nine agencies in the Central District whose jurisdictions had relatively high rates of violent crime but were not participating in the task force. Seven of the nine agencies' representatives stated that either their gang problems did not warrant federal task force involvement or that their agencies did not have the resources to participate in a task force even if they would have been invited, or had wanted, to participate. The remaining two agencies' representatives indicated that they had gang problems and expressed interest in participating in the task force, given the opportunity. Also, seven of the nine representatives expressed the belief that if their agencies needed federal assistance on a gang problem, it would be available from the local FBI office on an as-needed basis. The remaining two agency representatives had no opinion. Even those local agencies that were involved in the LA Task Force could not always participate fully because of resource constraints. For example, one local law enforcement agency said it had to reduce the personnel committed to the task force from 60 officers to 15 officers. A representative of this agency stated that this reduction represented tight budgetary conditions in the agency, not dissatisfaction with task force results, and that many of these officers had been reassigned to community policing efforts, which were a higher priority for the agency. Another local law enforcement agency intended to completely withdraw from the LA Task Force due to budget restrictions, but the FBI persuaded the agency to continue because the agency's participation was critical in completing an anti-gang effort. In addition to the FBI-led LA Task Force, ATF, according to agency officials, provided direct assistance, such as personnel and equipment, to local law enforcement agencies combating gangs, using federal firearms laws and other laws against gang members. ATF's efforts, according to the officials, were smaller than the FBI's and less formal in that they did not always involve formal task forces. In this regard, they said that ATF-led task forces, in contrast to the FBI's LA Task Force, usually targeted a specific local gang problem and consisted of one or two ATF agents working with local police. Fifteen of the 18 local line officers we interviewed who expressed an opinion felt that the LA Task Force met their overall needs to a great extent. We questioned them about the usefulness of specific categories of federal assistance provided through the task force. About three-fourths of the line officers indicated that the assistance was very useful in 8 of 11 categories of assistance. (See app. II for the line officers' perceptions of the usefulness of the specific categories of assistance.) Of all the types of assistance received through the task force, the line officers were most satisfied with wiretap assistance, money received to pay informants, and funding for drug or gun purchases in undercover operations. The 16 who received wiretap assistance said they found it to be very useful. They cited the value of information gained through wiretaps and the difficulty of doing them at the state level. Some line officers stated that their investigations could not have been completed without wiretaps. The line officers we interviewed expressed some concerns about the personnel assistance and equipment they received, as well as about federal prosecution of targeted gang members, although more than half believed that such assistance was very useful. In regard to personnel assistance, 10 of the 23 line officers who received such assistance believed that the number of FBI agents assigned to their squads was insufficient, and 5 believed that turnover in FBI agents assigned to their squads hindered task force operations. For example, one line officer reported that some FBI agents were assigned to his squad for only 6 months, which was not long enough for an agent to gain an informant's trust and work effectively with him. Eight line officers also said FBI agents' lack of street experience hindered task force operations. Four line officers expressed concern that some of the FBI agents who participated in the task force were not interested in working gang cases. When we asked Los Angeles FBI officials about task force agents' interest in anti-violent crime work, they said the FBI tried to assign agents to areas that interest them, but it was not always possible to give them their first choice. They acknowledged that new agents may not always be suited to violent crime work and that the office was attempting to recruit agents who were interested in gang work from other FBI offices. The FBI officials noted, however, that it is important for new agents to gain some task force experience so that they can effectively replace experienced task force agents who "burn out." The officials also told us that although new agents are limited in the tasks they can perform, they can contribute to task force operations by assisting in arrests or completing paperwork. Although, overall, line officers believed the equipment they received through the task force was very useful, several felt that some of the equipment they received did not fully meet their needs, either in terms of quantity or quality. For example, they believed that cellular phones--which were critical to their work because they provided a constant and reliable means of communication with informants and other task force members--were not available in sufficient quantity. In this regard, one local officer noted that task force members were on call 24 hours a day and that cellular phones allowed informants to call them at home during off hours without requiring task force members to give informants their home phone numbers, which might compromise the officers' personal safety. Another line officer told us that the lack of a cellular phone caused him to miss an opportunity to apprehend a murder suspect. Some line officers said they had either bought their own cellular phones or that phone costs often exceeded the FBI's reimbursable limit. FBI officials acknowledged that the lack of cellular phones was a serious safety issue, but they said that the FBI lacked the funds to equip every task force member with a cellular phone. One official stated that the FBI Los Angeles Office was following FBI guidelines, which called for providing one cellular phone for every three FBI agents and task force members. In fiscal year 1996, the Los Angeles Office was funding 48 cellular phones for use by 143 task force members--a ratio of 1 phone for every 3 members. The official believed one phone for every two task force members would be a better ratio, but that, either way, more phones would be needed in the future due to an expected increase in the number of task force members. Eleven of 19 line officers who worked with the U.S. Attorney's Office to prosecute gang cases in federal court said that federal prosecution was very useful. Five said that federal prosecution was important to them because federal sentences are much longer in actual time served than state sentences. However, some line officers were critical of the length of time the U.S. Attorney's Office took to prosecute cases, the amount of evidence they required, and the high district prosecutive thresholds. In response, the Violent Crime Coordinator for the U.S. Attorney's Office in the Central District of California commented in September 1995 that local law enforcement officers were more familiar with the state prosecutive system, and in contrast federal prosecutions may seem overly slow and require excessive evidence. He said that federal cases often required more preparation time and better evidence to meet federal court standards. Regarding the prosecutive thresholds, he said that the standards for accepting violent crime cases in Central California for federal prosecution generally had become less stringent during the last year and a half and that the U.S. Attorney's Office was accepting more cases for prosecution. Six of the 13 law enforcement officials we interviewed from agencies that participated in the LA Task Force said that joint federal and local task forces led to better relations and increased cooperation and coordination among law enforcement agencies in general. Eleven of the 13 officials we interviewed said that they had good relationships with the FBI. Many said that current relations with the FBI were the best they had ever been, partly as a result of the LA Task Force. With regard to the previously noted direct assistance provided local law enforcement officials by ATF, the officials we interviewed who worked with ATF were generally satisfied with the assistance they received. Eight of the 13 local law enforcement officials we interviewed generally believed that LA Task Force efforts had reduced gang violence, while 5 believed it was too early to measure the impact. Of the eight who said LA Task Force efforts had reduced gang violence, six believed that task force efforts had had a significant or great impact on gang violence. One official said that his agency could not have achieved the same results without the assistance of the LA Task Force. Local law enforcement line officers who participated in the LA Task Force were also quite positive about current or future task force impact on gang violence. Sixteen of the 22 line officers who expressed an opinion spoke positively about current or future task force impact. Twelve of them believed that LA Task Force efforts had reduced violent gang crime to a great or very great extent. Six others said it was too early in their investigations to say what impact task force efforts would have on violent gang crime, but three of them expected positive results. The 21 local line officers who expressed an opinion stated that their agencies could not obtain similar results without using federal task forces. Twenty-two officers mentioned long-term investigation as an element differentiating the federal task force approach to violent crime from local law enforcement's approach. Several line officers indicated that long-term investigations permitted local law enforcement to deal more effectively with violent criminal gangs. Federal and local officials also provided us with statistics on the results of task force efforts. These statistics focused on arrests, indictments, and convictions that officials attributed to the LA Task Force's efforts. FBI statistics showed that from February 1992 through September 1995, the LA Task Force was responsible for 2,086 arrests (918 of which were for violent crimes), 239 federal indictments (161 involving violent crime), and 156 convictions (116 involving violent crimes such as bank robbery). According to FBI statistics, the LA Task Force was also responsible for 119 state convictions, 25 of which involved narcotics violations such as the sale and transportation of cocaine and 94 of which involved violent crimes, such as robbery, murder, and assault with a deadly weapon. Overall, three-fourths of the federal and state convictions were on violent crime charges. The FBI also credited the LA Task Force with drug and firearm seizures and the recovery of assets. Some federal and local officials also credited the LA Task Force with reducing the crime rates in certain neighborhoods. Others credited the LA Task Force with making it safe for children to play outdoors again. We also obtained examples of specific federal anti-gang investigations targeting Los Angeles-based gangs, including five LA Task Force investigations and one ATF investigation. The examples indicated that the LA Task Force had an impact on gangs in Los Angeles and in other communities to which Los Angeles-based gangs had migrated. The examples are described in appendix III. We requested comments on a draft of this report from the Attorney General. A representative of DOJ's Office of the Assistant Attorney General for Administration informed us at a meeting on July 24, 1996, that comments were requested from the Department's various headquarters and field office units with responsibility for its operations combating violent crime as described in this report. The representative and officials from DOJ's Criminal Division, the Executive Office of U.S. Attorneys, and the FBI said that the general consensus of the officials representing those units was that the report, by and large, accurately represented these operations. However, the officials provided additional information concerning DOJ's monetary commitment to support the LA Task Force during fiscal year 1996. We incorporated the information in this report, where appropriate. We are sending copies of this report to the chairmen and ranking minority members of the Senate Committee on the Judiciary and the Permanent Subcommittee on Investigations, Committee on Governmental Affairs; the chairman and ranking member of the House Committee on the Judiciary; the Secretary of the Treasury; the Director of ATF; the Director of the FBI; the Administrator of the Drug Enforcement Administration; and the heads of the local law enforcement agencies that participated in our study. We also will make copies available to others upon request. The major contributors to this report are listed in appendix IV. If you have any questions concerning this report, please call me on (202) 512-8777. The objective of this self-initiated review was to examine the Department of Justice's (DOJ) anti-violent crime initiative in the Central Judicial District of California, which covers the Los Angeles area, as it pertained to gang violence. We focused our review on the Los Angeles area because it was one of the areas that had the most gangs and gang members in the country. We focused on the Los Angeles Metropolitan Task Force on Violent Crime (LA Task Force) because it was the primary federal anti-gang effort in the Los Angeles area. Specifically, we wanted to determine and describe how and what federal law enforcement assistance was provided to local law enforcement in the Los Angeles area to fight gang violence, how useful Los Angeles area local law enforcement believed federal assistance was in fighting gang violence, and what results Los Angeles area local law enforcement officials believed were achieved from joint efforts to fight gang violence. Our scope was limited to law enforcement assistance and did not address social programs aimed at preventing or reducing gang violence. To obtain general information on anti-violent crime efforts, we interviewed officials from DOJ headquarters offices, including the Criminal Division, Executive Office of the U.S. Attorneys, and the Federal Bureau of Investigation (FBI). We also interviewed representatives from the Department of the Treasury and the Bureau of Alcohol, Tobacco and Firearms (ATF) headquarters offices. We reviewed DOJ and ATF policy statements on violent crime, including the Attorney General's National Anti-Violent Crime Strategy and DOJ's Report on First-Year Accomplishments: Anti-Violent Crime Initiative. We met with representatives from the Office of the U.S. Attorney for the Central District of California and the Los Angeles District Attorney's Office to discuss federal and local investigative and prosecutive strategies for fighting gang violence. We discussed how federal investigative efforts were coordinated with local efforts, how prosecutive decisions were made on gang cases, and the differences between state and federal approaches to prosecuting gang cases. We also reviewed the Central District's strategy for fighting violent crime, as directed by the Attorney General's National Anti-Violent Crime Strategy. In addition, we interviewed the U.S. Attorney's designated Violent Crime Coordinator to determine how state and local law enforcement agencies participated in the development of the strategies and to discuss the Office's policy for accepting task force cases for prosecution. To understand how and what federal law enforcement assistance was provided to local law enforcement agencies in Los Angeles to fight gang violence and what results were obtained from joint federal and local efforts, we interviewed representatives from the FBI, the Drug Enforcement Administration, the Immigration and Naturalization Service, and ATF who oversaw federal task force efforts. Our review, however, focused primarily on the anti-gang efforts of the FBI, and to a lesser extent ATF, since federal law enforcement assistance for gang enforcement in Los Angeles at the time of our review came mainly through the FBI-led LA Task Force. We also reviewed data from the FBI and U.S. Attorney's Office on LA Task Force operations during fiscal years 1992 through 1995, including the number of state and federal arrests, indictments, and prosecutions that resulted from task force operations. We did not independently verify these statistics and cannot attest to their validity. To obtain views of local law enforcement personnel on the usefulness of federal law enforcement assistance in fighting gang violence, we conducted structured interviews with 37 members of the 5 local law enforcement agencies that participated in the LA Task Force. Because local law enforcement personnel's perceptions on the usefulness of federal assistance varied according to their position and relationship with the federal agencies, we interviewed 3 levels of employees within the local agencies that participated in the task force: 24 participating line officers, 8 supervisory officers, and 5 agency heads or agency representatives. For reporting purposes we combined the responses of the 8 supervisory officers and the 5 agency representatives into 1 category of 13 responses, which we referred to as responses from local officials. We identified a universe of 44 officers who participated in the LA Task Force at the time of our review. In doing so, we counted only those local task force members whose squads specifically targeted violent gangs. Although the squads that we excluded also investigated violent gang members, gangs were not the primary focus of their investigations. According to FBI officials, approximately 60 local law enforcement officers were participating in the LA Task Force at the time of our review. From the universe, we judgmentally selected 24 line officers. To do so, we interviewed all participating officers from three of the five police agencies: the Compton Police Department, the Inglewood Police Department, and the Long Beach Police Department. For the Los Angeles Police Department and the Los Angeles County Sheriff's Department, the two local agencies that dedicated the most personnel to the task force, our selection of officers was based on several factors, including geographic areas of interest, the gangs they targeted, and the officers' availability. We also reviewed local law enforcement records on crime rates and task force costs, procedures, and accomplishments during fiscal years 1992 through 1995. We did not independently verify these statistics and cannot attest to their validity. We identified nine local law enforcement agencies in the Central District of California--eight of whose jurisdictions had relatively high rates of violent crime--that did not participate on a federal task force. We conducted structured interviews with agency representatives to determine (1) what types of federal assistance, if any, they requested and received from the federal investigative agencies; (2) how satisfied they were with that assistance; and (3) why their agencies did not participate on a federal task force. We conducted structured interviews with 24 local law enforcement line officers who participated in the LA Task Force. We interviewed at least two officers from each of the five local agencies participating in the task force, except the Inglewood Police Department, which had only one officer on the task force. As shown in table II.1, most officers were quite positive about the assistance they received from the LA Task Force. Table II.1: Summary of Local Los Angeles Area Law Enforcement Officers' Views of Federal Assistance Assistance received? If yes, how useful was the assistance? Includes coordination and cooperation on criminal investigations between federal and local agencies and/or between local agencies. FBI and ATF officials provided us with information on several federal anti-gang efforts. The following briefly describes five LA Task Force efforts and one ATF investigation. Some of these efforts targeted specific factions or "sets" within a gang or were part of larger investigations directed at a gang over time. This operation was part of a long-term investigation of a Los Angeles gang that figured significantly in the 1992 riots. The FBI began investigating the gang in 1989 and established a joint investigation with a local law enforcement agency in 1992, after the riots. After over 2 years of joint investigation, the FBI and the local agency initiated a widely publicized 1-day anti-gang operation involving about 800 FBI agents and local law enforcement officers, covering a 30-by-30-block neighborhood in South Central Los Angeles. According to the local agency, the gang faction targeted in the effort accounted for less than 1 percent of the community population but was responsible for over 80 percent of the community's violent crime. The 1-day operation resulted in four federal indictments on charges such as felon in possession of a firearm and possession with intent to distribute. Task force members also seized 67 firearms, about 2,000 rounds of ammunition, and 2 kilos of methamphetamine. Local law enforcement officials also credited the operation with reducing violent crime in the targeted area by 57 percent in the 2 months following the effort. According to police statistics, violent crime (including robbery, attempted murder, rape, kidnapping, aggravated assault, and assault with a deadly weapon) dropped from 262 crimes in the same 2-month period of the preceding year down to 112 crimes. The operation received widespread media attention, with some community residents quoted as being pleased with the Task Force's efforts and others as being upset with them. FBI officials believed that these efforts were successful, citing, as an example, that gang members went into seclusion after the operation. The officials justified the large amount of personnel resources expended as necessary to ensure officer safety, protect evidence, and apprehend suspects. The local agency that took part in the operation felt that the results of the effort, in terms of the reduction of violent crime, were more significant than what could have been achieved by a local anti-gang squad in 6 months for the same amount of money. One LA Task Force investigation involving gang migration received the 1994 Attorney General's award for excellence. The investigation involved a gang member who used his Hollywood music studio to facilitate an interstate drug trafficking network. Working with the Denver, CO, FBI office, the LA Task Force was able to wiretap the gang member's home, business, and cellular phone. Through the wiretaps, the task force learned that the drug trafficking network extended to Milwaukee, WI; Cleveland, OH; Knoxville, TN; Atlanta, GA; Birmingham, AL; Denver; and Seattle, WA. The drug trafficking network was able to make substantial profits by selling its drugs in other cities. For example, rock cocaine that would sell for $20 to $25 in Los Angeles could be sold for $100 in Birmingham. An ounce of cocaine that would sell for $500 in Los Angeles would sell for $1,000 in Birmingham. The LA Task Force's efforts led to the arrest of the ring's associates in the cities in which they operated. Two of the gang's ring leaders and at least four other gang members have been convicted of conspiracy to distribute drugs and of possession and distribution. All are awaiting sentencing. The ring leaders are likely to receive 20-year sentences, while the other four gang members face sentences ranging from 14 to 30 years. This investigation was one of several task force efforts directed against one of Los Angeles' most notorious and violent street gangs. In this effort, the LA Task Force squad apprehended 2 gang members who led a ring responsible for more than 175 "takeover" bank robberies in the Los Angeles area. The two gang members used juvenile gang members to commit the robberies, supplied them with weapons and plans for carrying out the heists, and kept the bulk of the money for themselves. By showing that the two gang leaders had directed and organized the robberies, the U.S. Attorney's Office was able to successfully prosecute both ring leaders on federal charges of carjacking, armed bank robbery, and conspiracy to commit armed bank robbery. Both members pled guilty to the charges; one received a 25-year sentence, and the other received a 30-year sentence. FBI officials told us this was an "enormously successful" case because it showed gang members that the federal government was serious about prosecuting gang cases. The number of takeover bank robberies in the Central District was increasing until these gang members were arrested in June 1993; over the next few years, the number of such robberies decreased approximately 57 percent. According to an FBI official, the apprehension of these two gang members was a major factor in the decrease in takeover bank robberies in the Los Angeles area. The fourth effort we reviewed focused on a prison-based gang that also had control over gang activities in local communities. This effort represented a combined federal/local effort to prevent a gang from consolidating and gaining more control over street narcotics sales in the Hispanic community. The effort reflects the federal task force's proactive approach to gangs, that is, investigating a gang overall to help prevent crime from spreading rather than reacting to the crimes of individual gang members on a case-by-case basis. This effort not only led to federal indictments against 22 defendants but also, according to both FBI and local officials, led to the prevention of over 40 homicides. The U.S. Attorney is pursuing further indictments on the basis of organized criminal activity as well as individual criminal acts. Another investigation by the LA Task Force involved migration by gang members from Long Beach, near Los Angeles, to Spokane, WA. According to a task force member, Long Beach, Compton, and Los Angeles gangs had spread to Spokane, where they faced little or no competition and could make tremendous amounts of money from drug trafficking. When a detective with the Spokane Police Department saw an influx of gang members into Spokane, he accessed the Gang Reporting Evaluation and Tracking (GREAT) database and discovered that many of the gang members were from Long Beach. He contacted the Long Beach Police Department and was referred to the LA Task Force. Task force members arrived in Spokane within 3 or 4 days after being contacted. According to the Spokane Police Department detective, the LA Task Force's assistance was invaluable. Task force members were very familiar with gang members from Long Beach and were able to provide information on these gang members, including photographs. An LA Task Force member said that task force efforts helped to indict 9 gang members in Spokane on federal charges, while the Spokane Police Department detective said 40 or more indictments were obtained on 7 to 9 gang members, with most indictments being handled at the state level. According to another Spokane law enforcement officer, gang members were given sentences of up to 20 years. According to the Spokane Police Department detective, after the federal indictments, many of the Long Beach gang members fled and gang activity in Spokane dramatically decreased. However, gang activity has gradually increased since then as the LA Task Force squad targeting the Long Beach gang was temporarily discontinued and as gang members adjusted their strategies. An LA Task Force member reported that since termination of the task force squad, the Long Beach gang was suspected of once again sending major amounts of cocaine to Spokane. In another effort, ATF agents worked with local police to target one of the most violent and criminally active street gangs in Los Angeles. This gang distributed phencyclidine (PCP) in California and other states. ATF initiated the investigation by making drug buys from lower level gang members. ATF was able to gain the cooperation of those who had sold them drugs and others charged with firearms violations in targeting higher level gang members. Ultimately, ATF was able to target not only the gang but also the organization that manufactured the PCP. During the 3-year investigation, law enforcement personnel seized 44 firearms, $120 million (street value) worth of PCP, the largest PCP lab site ever seized by law enforcement in the United States, and other assets. Charges against eight defendants, who were gang members or affiliates, included running a continuing criminal enterprise, conspiracy to manufacture a controlled substance, aiding and abetting the manufacture of PCP, and distribution/ possession of a controlled substance. The defendants pled guilty or went to trial and were convicted. Sentences ranged from 17-1/2 to 45 years. Two of three defendants who had not yet been sentenced were scheduled for sentencing in April 1996 and were expected to receive life sentences. Richard R. Griswold, Project Manager Barbara A. Guffy, Site Senior James R. Russell, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO reviewed how the Federal Bureau of Investigation (FBI) and other federal agencies worked with local law enforcement agencies to target gangs in the Los Angeles metropolitan area. GAO found that: (1) FBI provided assistance to local law enforcement in the Los Angeles area through the Los Angeles Metropolitan Task Force on Violent Crime; (2) federal assistance provided through the task force included the use of federal laws and authority not otherwise available to local law enforcement, personnel, overtime pay, office space, various types of equipment, and funding for law enforcement activities; (3) local law enforcement officials believed that the task force enhanced their ability to conduct long-term, proactive investigations into entire gangs rather than short-term, reactive investigations; (4) local law enforcement officers believed that, overall, federal assistance helped to reduce gang violence; and (5) local law enforcement officers believed that the number of FBI agents assigned to the task force was insufficient, agent turnover hindered operations, and a lack of cellular telephones hindered operations.

Each year, we issue well over 1,000 audit and evaluation products to assist the Congress in its decision making and oversight responsibilities. As one indicator of the degree to which the Congress relies on us for information and analysis, GAO officials were called to testify 151 times before committees of the Congress in fiscal year 2001. Our audit and evaluation products issued in fiscal year 2001 contained over 1,560 new recommendations targeting improvements in the economy, efficiency, and effectiveness of federal operations and programs that could yield significant financial and other benefits in the future. History tells us that many of these recommendations will contribute to important improvements. At the end of fiscal year 2001, 79 percent of the recommendations we made 4 years ago had been implemented. We use a 4-year interval because our historical data show that agencies often need this length of time to complete action on our recommendations. 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Argentina President Carlos Menem came into office in 1989 with the broad goal of restructuring the economy and reducing both annual fiscal deficits and the external public debt. The public sector was extensive at that time and most public enterprises were money losers. Publicly owned enterprises had historically been one of the primary sources of chronic budget deficits in Argentina. In the 1980s, the national government owned the 17 companies that produced minerals, petroleum, natural gas, and refined fuels, as well as those that were involved in the provision of public utility services, including telecommunications. The government also owned approximately 40 military-related enterprises, which ranged from weapons to timber, petrochemicals, strategic minerals, and construction. It also owned 100 smaller enterprises, including radio and television stations, hotels, and several airlines; and owned and operated the national railroad, which included freight and passenger services. Privatization was an important part of the broader goal of restructuring the economy, but it also enabled the government to reduce what had become an unmanageable level of external public debt. The government used the sale of state enterprises to generate cash as well as to conduct what are called debt-equity swaps. In a debt-equity swap, bank debt is replaced with an equity investment. For example, stock in an entity that is being privatized is exchanged for external public debt owed to a foreign creditor bank. This type of transaction enabled the government to retire its external debt directly. Based on our calculations, the cumulative proceeds from privatization from 1990 through 1994, including cash and debt reduction, equaled approximately 9 percent of Argentina's economy, or average annual gross domestic product (GDP), during this period. This exceeded the level of cumulative proceeds realized by Mexico from 1989 through 1992, which was 6.3 percent of Mexico's average annual GDP. However, New Zealand remains the country in our study with the highest level of cumulative sales proceeds as a percent of average annual GDP--at 14.1 percent from 1987 through 1991. Table 1 provides additional comparative detail on all of the countries in our study. We obtained our information on the privatization process in Argentina through interviews with government officials directly involved with privatization in Argentina, and through the use of academic and economic literature and official government material. We conducted this work in Washington, D.C., from January through March 1996 in accordance with generally accepted government auditing standards. World Bank experts on privatization and a privatization expert in Argentina reviewed this document, and we have incorporated their comments where appropriate. We did not verify the accuracy of all of the information provided to us nor did we evaluate the relative success of the privatization program in achieving national goals. Four of the five countries we studied in our earlier report have parliamentary systems of government, but Argentina, like the United States, has a presidential system, with an executive branch, a judiciary, and a bicameral legislature. In Argentina, the executive branch had primary control over the privatization process, while the congress maintained an oversight role. Two laws were passed in 1989 which facilitated privatization: the State Reform Law and the Emergency Law. According to the World Bank, the State Reform Law gave the executive branch sweeping powers to reform the state. The State Reform Law established objectives and procedures for privatization, and the Emergency Law suspended subsidies and removed barriers to foreign investment. We were told that the State Reform Law specified which enterprises were subject to privatization: Additional privatizations required congressional approval. The State Reform Law also created a bicameral legislative oversight commission on reform and privatization, which was composed of members from the majority and opposition parties. The Argentine privatization process was less centralized and more flexible than in the other countries we studied. Separate unique privatization committees were created for each privatization, and the planning and implementation of the privatizations occurred primarily within the committees. A subsecretariat for privatization was formed within the Ministry of the Economy and Public Works and Services several years after the Menem privatization initiatives began, but an expert on privatization in Argentina stated that the unit was created primarily to gather and disseminate information about privatization and to keep foreign investors informed about the status of the privatization initiatives. Most of the state-owned companies in Argentina were located within the Ministry of the Economy and Public Works and Services or the Ministry of Defense, and the Ministers of these units were responsible for appointing the members of the committees within their respective ministries. The committees generally included representatives of the entity being privatized and staff from within either the Ministry of the Economy and Public Works and Services or the Ministry of Defense. The work of the committees was reviewed by the office of the auditor general, and the committees relied extensively on the expertise of consultants, private sector industry experts, and legal advisors to assist them with the sale preparations and transactions. The Argentine government implemented its privatization program quickly--in 3 years, it privatized almost all of its state-owned enterprises. It began with large, complex entities, such as the telecommunications company and the state airline. We were told that the less rigid structure of the privatization process in Argentina facilitated this speed. The Menem government used the successful completion of privatizations to develop credibility for its far reaching program of economic change. The World Bank has reported that from 1990 through 1993, Argentina sold 34 enterprises and awarded concessions for 19 services. In Argentina, the government was required to estimate the worth of an entity prior to sale as well as determine what level of improvements and investment should be required from the purchaser once it acquired the entity. The government used this information to establish a minimum bid. In most cases, the purchasers of all newly privatized firms were also required to invest a certain amount in the entity in addition to the purchase price, and each sale had to include specifications related to investment and improvements. We were told by a privatization expert in Argentina that the government used a variety of valuation techniques, including, in some cases, net present value analysis. We were also told that the government used a market based discount rate for calculating the net present value of the entity. The government generally retained the entities' liabilities, including debt, but did not attempt to improve the entities' efficiency in advance of their sale. The market price of an entity is reduced by the liabilities that come with it; the price may be reduced further by the risk premium associated with any contingencies. The Argentine government absorbed most of the known liabilities but let the market make decisions regarding the future efficiency of the firm. We were told by government officials that entities in poor condition offered the private sector an opportunity for improvement and profit, similar to "fixer-uppers," where profits awaited those who could achieve efficiency improvements. Argentine government officials stated that the efficiency of the privatized firms has significantly improved. For example, we were told that freight productivity has increased and a greater annual volume is now shipped with fewer employees. According to a former government official, telephone lines of the former state telecommunications company have increased and waiting periods for repairs have decreased. The government generally broke up state monopolies and sold the components separately in order to promote competition. Public enterprise assets, such as telephone networks, gas transmission systems, and electricity generation plants, were either sold or awarded through concessions to private sector bidders. The new owners were then required to create private sector corporations to control the assets of the privatized entities. In our earlier study, the countries we examined generally either privatized entities that were already in a corporate form or converted agencies into a corporate form prior to privatization. Sometimes they did this in order to increase the efficiency of the entity and help establish a track record for the entity as a commercial enterprise. In other cases, the governments used this as an opportunity to clean up the entity's outstanding obligations prior to sale and thus facilitate the sale process. In Argentina, incorporation did not involve an operational restructuring of the entity; rather, it was a legal proceeding to allow the new owner to acquire the assets of the former government enterprise. Public sector employment was reduced significantly as part of the privatization process, but the government also provided generous severance packages, and a World Bank study and government officials have reported that many of the separations were voluntary. The Argentine government reported that, from 1990 through 1994, the number of employees working for public enterprises was reduced from about 348,000 to about 67,000, an 81 percent drop. Of this reduction, 40.8 percent was reportedly due to voluntary or compulsory separation, 41.5 percent to transfers to other levels of government or private firms, and 17.7 percent to normal attrition. Even though public sector employment was significantly reduced, World Bank reports indicate that the Argentine government met with limited resistance from labor during this period of restructuring. The World Bank stated that factors such as low public sector wages, the large number of employees holding more than one job, and generous severance benefits, may explain this limited opposition. The Argentine government privatized public enterprises primarily through divestiture and the awarding of concessions. A concession, or franchise, provides a private sector company with the exclusive right to provide services in a geographic area. A key issue in the Argentina privatization process was whether to sell or to award a concession. A privatization expert told us that there were no explicit criteria for awarding a concession as opposed to selling an entity but that there were implicit criteria. If an asset was considered strategically important to the nation, the government would not sell it. This has often meant that natural monopolies, or entities that have a strongly monopolistic infrastructure, have not been sold. The government awarded concession rights in the following areas: freight and passenger rail, ports, tollroads, water supply, and sanitation services. In preparation to offer concessions for the railroads, the government separated rail into three components: freight, intercity passenger rail, and urban passenger rail, which included the Buenos Aires Metro. Intercity passenger services were then either transferred to provincial governments or closed. The government awarded 10-year concessions (20 years for the Buenos Aires Metro) for the urban passenger lines and 30-year concessions for freight services. The terms of the passenger concession agreement defined the tariffs to be charged, service levels and quality to be provided, and the capital improvements to be carried out. The winning bids were chosen based on the minimum cost to the government for the combined operating support and capital program costs. By contrast, freight concessions were awarded to the highest bidder, including an allowance for proposed capital investment and the number of existing employees to be hired by the concessionaire. Most sales involved open, competitive bidding, for the controlling interest in the entity. The government generally retained a noncontrolling portion of the shares, typically about 39 percent, to be sold later in a public offering. It did this to ensure that it would share the benefits if the price of the entity's stock rose once the entity was established in the private sector. This procedure has similarities to the use of the "clawback" in New Zealand and the United Kingdom. (Clawbacks are stipulations, that under certain conditions, require the buyers to return a share of profits--or losses--to the government.) The government also retained a portion of the shares for purchase by the employees that were transferring from the public enterprise to the new private entity. The employee share was generally close to 10 percent, although some privatizations reserved as little as 2.5 percent for employees. Worker-shareholders also had the right to elect a representative to the company's board of directors. The number of shares that each employee could purchase was determined by factors such as the employee's years of employment and salary level. Upon retirement, death, or employment termination, an employee's shares were sold back to the company. There are few restrictions on foreign investors in Argentina. According to the Organization for Economic Cooperation and Development (OECD), foreign investors have full access to the local capital market. The World Bank and the OECD also have reported that there is a concentration of asset ownership in Argentina and that most of the public enterprises were sold to financial consortia, which were composed of several Argentine companies allied with international groups. Although the Argentine government generally tried to foster competition through the privatization process, it has experienced some problems promoting competition. One example of a problematic privatization involved the sale of Aerolineas Argentinas, the state-owned airline. When the airline was offered for sale in 1990, the only qualified bidder was a consortium that included the only other airline in the country. According to the World Bank, instead of disallowing the bid, the government allowed the sale to occur. Service was poor and losses continued, and in 1993, the government bought back approximately 30 percent of the airline's shares. As a result of this sale, the government now makes a greater effort to ensure that there is more than one bidder and that a regulatory framework is in place prior to the sale. The government ultimately sold the shares of Aerolineas Argentinas back to the private sector. The government has had difficulty establishing a regulatory regime, as illustrated by the privatization of the former state telecommunications company, the first company to be privatized in Argentina. In some instances, the government preserved the monopolistic structure of the entity being sold to facilitate the attraction of private capital. A 1995 World Bank report stated that the government in Argentina split the telecommunications market into two regional monopolies to increase the competitiveness of the industry, but we were told that the government also used the monopoly rights to increase the proceeds from the sale. Although a regulatory agency had been established to monitor the telecommunications industry, the government did not, according to the World Bank, develop clear regulatory processes prior to the sale. The government subsequently brought the regulatory agency under closer scrutiny and formed a plan for improving its regulatory framework. There have been improvements in the agency's performance, but a 1993 World Bank report stated that the regulatory capacities in Argentina may take many years to develop. We were told by government officials, however, now that the government has experience with both regulated monopolies and with competition, that the government strongly prefers the latter. The speed and variable manner in which Argentina privatized may help to explain why the country's regulatory capacities are not more developed. A privatization expert told us that Argentina's decentralized privatization process allowed the government to privatize quickly and to formulate solutions for problems as they arose. While this speed and lack of a rigid structure may have had a positive effect on the ability of the government to sell enterprises and award concessions, we were told that these factors may have had a negative effect on the government's ability to create an adequate regulatory system within a relevant time frame. We were told by a government official in Argentina that the government is required to use the proceeds from privatization to finance the social security system or to buy down existing debt. According to OECD, by the end of 1992, debt-equity swaps enabled the government to retire over $11 billion in external public debt, which represented approximately 5 percent of GDP in 1992. According to the World Bank, the government also received about $8.5 billion in cash during this period. Although it is difficult to determine the amount of net proceeds that Argentina realized from its privatization program, the World Bank and OECD have stated that increased tax revenues from the new corporations, as well as the savings from the discontinuation of subsidies to money losing enterprises, were more important to the economy than the privatization proceeds. In our previous report, we noted that in the United States--as in other nations--divestiture raises the issues of how best to evaluate a proposal to sell, who should manage the valuation and sale processes, how to estimate future proceeds, how the sale should be structured, and how the proceeds should be treated in the budget. Although the experiences in the governments we examined suggested that often no single answer is widely applicable to all governments in all situations, we found that the information these governments provided may help the United States smooth the transfer of viable operations from the public to the private sector. With respect to the privatization process, we noted that a centralized approach was common and offered a number of advantages. We suggested that the Congress assign responsibility for all divestitures to a central agency in the United States as a means of developing a consistent management process. With respect to treatment of the proceeds in the budget, we found widespread use of budget rules designed to prevent the use of one-time proceeds to finance ongoing spending. We also said that budget rules should not dominate the divestiture decision; the decision to privatize should be made on other grounds. Although the Argentine government had--as did the other governments we studied--certain unique approaches to privatization, it also displayed a number of the common elements we identified in our earlier report. For example, the goals for privatization, which included reducing debt and restructuring the economy, were very important in determining the speed and scope of the privatization program and, like the other governments we studied, the Argentine government generally used the proceeds from privatization to reduce debt and thus interest costs. Unlike the other governments in our earlier report, Argentina did not centralize the privatization process. Instead, the government created separate unique privatization committees for each privatization and allowed the process to remain somewhat flexible. This allowed the government to privatize quickly but may have hindered its ability to establish a regulatory framework at the same pace with which it privatized the state-owned industries. We are sending copies of this report to the President of the Senate, the Speaker of the House of Representatives, and the Chairmen and Ranking Members of the House and Senate Budget Committees. We are also sending copies to the Director of the Congressional Budget Office, the Secretary of the Treasury, and the Director of the Office of Management and Budget. Copies will be made available to others upon request. Please contact me at (202) 512-9142 if you or your staff have any questions. Barbara Bovbjerg, Assistant Director, and Hannah Laufe, Senior Evaluator, were major contributors to this report. Susan J. Irving Associate Director, Budget Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO examined privatization in Argentina, focusing on how Argentina: (1) values and prepares assets for sale; and (2) uses sales proceeds. GAO noted that: (1) Argentina's privatization process is less centrally controlled than other countries and uses special privatization committees to foster its sales process; (2) the Argentine government generally retains the liabilities and obligations of the entities being privatized in order to enhance their sale price and ensure their sale; (3) the Argentine government believes that the private sector does a better job of investing in and improving enterprises; (4) although the government dissolved some industries to foster more competition, many are still monopolies and require some regulatory framework; (5) when the Argentine government values the assets of an entity, it determines the level of improvement and investment that the purchaser will need to make; and (6) the proceeds from Argentina's privatization are used to finance its social security system and existing debt.

Our reviews of the SBIR program between 1985 and 1999 found numerous examples of program successes such as the following: Funding high-quality research. Throughout the life of the program, awards have been based on technical merit and are generally of good quality. Encouraging widespread competition. The SBIR program successfully attracts many qualified companies, has had a high level of competition, consistently has had a high number of first-time participants, and attracts hundreds of new companies annually. Providing effective outreach. SBIR agencies consistently reach out to foster participation by women-owned or socially and economically disadvantaged small businesses by participating in regional small business conferences and workshops targeting these types of small businesses. Increasing successful commercialization. At various points in the life of the program we have reported that SBIR has succeeded in increasing private sector commercialization of innovations. Helping to serve mission needs. SBIR has helped serve agencies' missions and R&D needs, although we found that agencies differ in the emphasis they place on funding research to support their mission versus more generalized research. Our reviews of the SBIR program during that time have also identified a number of areas of weakness that, over time, have been either fully or partially addressed by the Congress in reauthorizing the program or by the agencies themselves. For example, Duplicate funding. In 1995, we identified duplicate funding for similar, or even identical, research projects by more than one agency. A few companies received funding for the same proposals two, three, and even five times before agencies became aware of the duplication. Contributing factors included the fraudulent evasion of disclosure by companies applying for awards, the lack of a consistent definition for key terms such as "similar research," and the lack of interagency sharing of data on awards. To address these concerns, we recommended that SBA take three actions: (1) determine if the certification form needed to be improved and make any necessary revisions, (2) develop definitions and guidelines for what constitutes "duplicative" research, and (3) provide interagency access to current information regarding SBIR awards In response to our recommendations, SBA strengthened the language agencies use in their application packages to clearly warn applicants about the illegality of entering into multiple agreements for essentially the same effort. In addition, SBA planned to develop Internet capabilities to provide SBIR data access for all of the agencies. Inconsistent interpretations of extramural research budgets. In 1998, we found that while agency officials adhered to SBIR's program and statutory funding requirements, they used differing interpretations of how to calculate their "extramural research budgets." As a result, some agencies were inappropriately including or excluding some types of expenses. We recommended that SBA provide additional guidance on how participating agencies were to calculate their extramural research budgets. The Congress addressed this program weakness in 2000, when it required that the agencies report annually to SBA on the methods used to calculate their extramural research budgets. Geographical concentration of awards. In 1999, in response to congressional concerns about the geographical concentration of SBIR awards, we reported that companies in a small number of states, especially California and Massachusetts, had submitted the most proposals and won the majority of awards. The distribution of awards generally followed the pattern of distribution of non-SBIR expenditures for R&D, venture capital investments, and academic research funds. We reported that some agencies had undertaken efforts to broaden the geographic distribution of awards. In the 2000 reauthorization of the program, the Congress directed the SBA Administrator to establish the Federal and State Technology (FAST) Partnership Program to help strengthen the technological competitiveness of small businesses, especially in those states that receive fewer SBIR grants. The FAST Program was not reauthorized when it expired in 2005. In 2006 when we looked at the geographical concentration of awards made by DOD and NIH, we found that while a firm in every state received at least one SBIR award from both agencies, SBIR awards continued to be concentrated in a handful of states and about one third of awards had been made to firms in California and Massachusetts. Clarification on commercialization and other SBIR goals. Finally, in 2000, the Congress directed the SBA Administrator to require companies applying for a phase II award to include a commercialization plan with their SBIR proposals. This addressed our continuing concern that clarification was needed on the relative emphasis that agencies should give to a company's commercialization record and SBIR's other goals when evaluating proposals. In addition, in 2001, SBA initiated efforts to develop standard criteria for measuring commercial and other outcomes of the SBIR program and incorporate these criteria into its Tech-Net database. In fiscal year 2002, SBA further enhanced the reporting system to include commercialization results that would help establish an initial baseline rate of commercialization. In addition, small business firms participating in the SBIR program are required to provide information annually on sales and investments associated with their SBIR projects. Many of the solutions cited above to improve and strengthen the SBIR program relied to some extent on the collection of data or the establishment of a government-use database, so that SBA and participating agencies could share information and enhance their efforts to monitor and evaluate the program. However, in 2006, we reported that SBA was 5 years behind schedule in complying with the congressional mandate to develop a government database that could facilitate agencies' monitoring and evaluation of the program. We also reported that the information SBA was collecting for the database was incomplete and inconsistent, thereby limiting its usefulness for program evaluations. Specifically, we identified the following concerns with SBA's data-gathering efforts: SBA had not met its obligation to implement a restricted government-use database that would allow SBIR program evaluation as directed by the 2000 SBIR reauthorization act. As outlined in the legislation, SBA, in consultation with federal agencies participating in the SBIR program, was to develop a secure database by June 2001 and maintain it for program evaluation purposes by the federal government and certain other entities. SBA planned to meet this requirement by expanding the existing Tech-Net database to include a restricted government-use section that would be accessible only to government agencies and other authorized users. In constructing the government-use section of the database, SBA planned to supplement data already gathered for the public-use section of the Tech- Net database with information from SBIR recipients and from participating agencies on commercialization outcomes for phase II SBIR awards. However, according to SBA officials, the agency was unable to meet the statutory requirement, primarily because of increased security and other information technology project requirements, agency management changes, and budgetary constraints. When we reported on this lack of compliance with the database mandate, SBA told us that it anticipated having the government-use section of the Tech-Net database operational early in fiscal year 2007. However, according to an SBA official, the database became operational in October 2008, and agencies have begun to provide data on their SBIR programs using the Internet. While federal agencies participating in the SBIR program submitted a wide range of descriptive award information to SBA annually, these agencies did not consistently provide all of the required data elements. As outlined in SBA's policy directive, each year, SBIR participating agencies are required to collect and maintain information from recipients and provide it to SBA so that it can be included in the Tech-Net database. Specifically, the policy directive established over 40 data elements for participating agencies to report for each SBIR award they make; a number of these elements are required. These data include award-specific information, such as the date and amount of the award, an abstract of the project funded by the award, and a unique tracking number for each award. Participating agencies are also required to provide data about the award recipient, such as gender and socio-economic status, and information about the type of firms that received the awards, such as the number of employees and geographic location. Much of the data participating agencies collected are provided by the SBIR applicants when they apply for an award. Agencies provide additional information, such as the grant/contract number and the dollar amount of the award, after the award is made. For the most part, all of the agencies we reviewed in 2006 provided the majority of the data elements outlined in the policy directive. However, some of the agencies were not providing the full range of required data elements. As a result, SBA did not have complete information on the characteristics of all SBIR awards made by the agencies. SBA officials told us that agencies did not routinely provide all of the data elements outlined in the policy directive because either they did not capture the information in their agency databases or they were not requesting the information from the SBIR applicants. Officials at the participating agencies cited additional reasons for the incomplete data they provided to SBA. For example, some officials noted that SBA's Tech- Net annual reporting requirements often change and others said that if the company or contact information changes and the SBIR recipient fails to provide updated information to the agency, the agency cannot provide this information to SBA. Participating agencies were providing some data that are inconsistent with SBA's formatting guidance, and while some of these inconsistencies were corrected by SBA's quality assurance processes, others were not. In 2006, we determined that almost a quarter of the data provided by five of the eight agencies we reviewed was incorrectly formatted for one or more fields in the Tech-Net database. As a result, we concluded that these inconsistent or inaccurate data elements compromised the value of the database for program evaluation purposes. SBA's quality assurance efforts focus on obtaining complete and accurate data for those fields essential to tracking specific awards, such as the tracking number and award amount, rather than on those fields that contain demographic information about the award recipient. We found that SBA electronically checked the data submitted by the participating agencies to locate and reformat inconsistencies, but it did not take steps to ensure that all agency-provided data were accurate and complete. We also determined that inconsistencies or inaccuracies could arise in certain data fields because SBA interpreted the absence of certain data elements as a negative entry without confirming the accuracy of such an interpretation with the agency. As we reported in 2006, such inaccuracies and inconsistencies were a concern because information in the Tech-Net database would be used to populate the government-use section of the database that SBA was developing (as discussed above) to support SBIR program evaluations. However, at the time of our review, SBA had no plans to correct any of the errors or inconsistencies in the database that related to the historical data already collected. As a result, we concluded that the errors in the existing database would migrate to the government-use section of the database and would compromise the usefulness of the government-use database for program evaluation and monitoring purposes. To address the concerns that we identified with regard to the quality of the data that SBA was collecting for the Tech-Net database, we recommended in our 2006 report that SBA work with the participating agencies to strengthen the completeness, accuracy, and consistency of its data collection efforts. According to an SBA official, the database is currently operational and agencies have entered data for fiscal years 2007 and 2008 over the Internet. Moreover, according to this official, the system is set up in such a way that it does not accept incorrectly formatted data. In 2006, we also found that SBA and some participating agencies focused on a few select criteria for determining applicants' eligibility for SBIR awards. Specifically, we reviewed DOD's, NIH's, and SBA's processes to determine eligibility of applicants for the SBIR program and found that they focused largely on three SBIR criteria in their eligibility reviews-- ownership, size in terms of the number of employees, and for-profit status of SBIR applicants. Although agency officials also told us that they consider information on the full range of criteria, such as whether the principal investigator is employed primarily by the applying firm, and the extent to which work on the project will be performed by others. Moreover, we found that both NIH and DOD largely relied on applicants to self-certify that they met all of the SBIR eligibility criteria as part of their SBIR applications. For example, at NIH, applicants certified that they met the eligibility criteria by completing a verification statement when NIH notified them that their application had been selected for funding but before NIH made the award. The verification statement directs applicants to respond to a series of questions relating to for-profit status, ownership, number of employees, where the work would be performed, and the primary employment of the principal investigator, among others. Similarly, DOD's cover sheet for each SBIR application directs applicants to certify that they met the program's eligibility criteria. NIH and DOD would not fund applications if the questions on their agency's verification statement or cover sheet were not answered. Both NIH and DOD also warned applicants of the civil and criminal penalties for making false, fictitious, or fraudulent statements. In some cases the agencies made additional efforts to ensure the accuracy of the information applicants provided when they observed certain discrepancies in the applications. In 2006, we reported that when officials at the agencies had unresolved concerns about the accuracy of an applicant's eligibility information, they referred the matter to SBA to make an eligibility determination. We found that when SBA received a letter from the agency detailing its concerns, SBA officials contacted the applicants and asked them to re-certify their eligibility status and might request additional documentation on the criteria of concern. Upon making a determination of eligibility, SBA then notified the official at the inquiring agency, and the applicant, of its decision. Although, SBA made the information about firms it found ineligible publicly available on its Web site so that all participating agencies and the public could access the information, we found that it did not consistently include information on the Web site identifying whether or not the determination was for the SBIR program. An SBA official told us the agency planned to include such information on its Web site more systematically before the end of fiscal year 2006. Once the agencies received information about applicants' eligibility they also had different approaches for retaining and sharing this information. For example, while both NIH and DOD noted the determination of ineligibility in the applicant's file, NIH also centrally tracked ineligible firms and made this information available to all of its institutes and centers that make SBIR awards. In contrast, DOD did not have a centralized process to share the information across its awarding components, although DOD officials told us it was common practice for awarding components to share such information electronically. In conclusion, Mr. Chairman, while the SBIR program is generally recognized as a successful program that has encouraged innovation and helped federal agencies achieve their R&D goals, it has continued to suffer from some long-standing evaluation and monitoring issues that are made more difficult because of a lack of accurate, reliable, and comprehensive information on SBIR applicants and awards. The Congress recognized the need for a comprehensive database in 2000 when it mandated that SBA develop a government-use database. Although SBA did not meet its statutorily mandated deadline of June 2001, the database has been operational since October 2008, and contains limited new information but may also contain inaccurate historical data. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the Committee may have. For further information about this statement, please contact me at (202) 512-3841 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. Vondalee Hunt, Anu Mittal, and Cheryl Williams also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Small Business Innovation Development Act of 1982 established the Small Business Innovation Research program (SBIR) to stimulate technological innovation, use small businesses to meet federal research and development (R&D) needs, foster and encourage participation by minority and disadvantaged persons in technological innovation, and increase private sector commercialization of innovations derived from federal R&D. Since the program's inception, GAO has conducted numerous reviews of the SBIR program. This statement summarizes GAO's past findings on the SBIR program's (1) successes and challenges, (2) data collection issues that affect program monitoring and evaluation, and (3) how agencies make eligibility determinations for the program. GAO is not making any new recommendations in this statement. Between July 1985 and June 1999, GAO found that the SBIR program was achieving its goals to enhance the role of small businesses in federal R&D, stimulate commercialization of research results, and support the participation of small businesses owned by women and/or disadvantaged persons. More specifically, GAO found that throughout the life of the program, awards have been based on technical merit and are generally of good quality. In addition, the SBIR program successfully attracts many qualified companies, has had a high level of competition, consistently has had a high number of first-time participants, and attracts hundreds of new companies annually. Further, SBIR has helped serve agencies' missions and R&D needs; although GAO found that agencies differ in the emphasis they place on funding research to support their mission versus more generalized research. During these reviews GAO also identified areas of weakness and made recommendations that could strengthen the program further. Many of these recommendations have been either fully or partially addressed by the Congress in various reauthorizations of the program or by the agencies themselves. For example, in 2005, GAO found that the issue of how to assess the performance of the SBIR program remains somewhat unresolved after almost two decades, and identified data and information gaps that make assessment of the SBIR program a challenge. Many of the solutions to improve the SBIR program could be addressed, in part, by collecting better data and establishing a government-use database, so that SBA and participating agencies can share information and enhance their efforts to monitor and evaluate the program. However, in 2006, GAO reported that SBA was 5 years behind schedule in complying with a congressional mandate to develop a government-use database that could facilitate agencies' monitoring and evaluation efforts. Moreover, the information that SBA was collecting for the database was incomplete and inconsistent, thereby limiting its usefulness. In 2006, SBA told GAO that it expected to have the government-use database operational early in fiscal year 2007. However, the database did not become operational until October 2008 and currently contains 2 years of new data, according to an SBA official. The database also does not permit information to be entered in an inconsistent format. In 2006, GAO also found that SBA, NIH, and DOD focus on a few select criteria to determine the eligibility of applicants for SBIR awards. GAO reported that both NIH and DOD largely relied on applicants to self-certify that they met all of the SBIR eligibility criteria as part of their SBIR applications, although both made additional efforts to ensure the accuracy of the information when they observed discrepancies in the applications. When the agencies were unable to verify the eligibility of an applicant, they referred the application to SBA for an eligibility determination. GAO found that when SBA finds an applicant to be ineligible for the SBIR program, it places this information on its Web site but does not consistently identify that the ineligibility determination was made for the SBIR program.

We assessed the GCSS-Army schedule that supported DOD's December 2012 full deployment decision using the GAO Schedule Guide to determine whether it was comprehensive, well-constructed, credible, and controlled. To assess the schedule, we obtained and reviewed documentation, including the integrated master plan, work breakdown structure, and statement of work. To assess the program's cost estimate, we used the GAO Cost Guide to evaluate the GCSS-Army Program Management Office's estimating methodologies, assumptions, and results to determine whether the cost estimate was comprehensive, well-documented, accurate, and credible. We obtained and reviewed documentation, including the program office estimate, software cost model, independent cost estimate, and risk and uncertainty analysis. We also met with key program officials, such as the program manager, lead schedulers, and cost estimators to present the preliminary results of our assessment of the program's schedule and cost estimates best practices and obtained explanations and clarifications. We conducted this performance audit from October 2011 to September 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. GCSS-Army was initiated in December 2003 and is intended to provide all active Army, National Guard, and Army Reserve tactical units with the capability to track supplies, spare parts, and organizational equipment. The system is also intended to track unit maintenance, total cost of ownership, and other financial transactions related to logistics for all Army units--about 160,000 users. GCSS-Army is intended to integrate approximately 40,000 local supply and logistics databases into a single, enterprise-wide system. In December 2012, the Under Secretary of Defense for Acquisition, Technology and Logistics granted full deployment decision approval for GCSS-Army to be deployed to all remaining locations beyond the limited fielding locations of the life-cycle acquisition process. DOD officials reported that the GCSS-Army full deployment will be completed by the fourth quarter of fiscal year 2017. GCSS-Army program functionality is intended to be implemented across the Army in two waves--the first is to include two releases and is to provide supply (warehouse) and financial reporting capabilities, and the second is to include one release, which is to provide property book and maintenance capabilities. DOD has approved the funding for the Army to proceed with the deployment of the GCSS-Army functionality to all intended locations. This funding is approximately $3.7 billion. The Army reported that it had spent about $1.6 billion as of June 30, 2014. In October 2010, we reported that the Army did not fully follow best practices in developing a reliable schedule and cost estimate for implementing GCSS-Army. In particular, the Army had not developed a fully integrated master schedule that reflected all government and contractor activities and had not performed a sensitivity analysis for the cost estimate. We recommended that the Army develop an integrated master schedule that fully incorporated best practices, such as capturing all activities, sequencing all activities, integrating activities horizontally and vertically, establishing the critical path for all activities, and conducting a schedule risk analysis. In addition, we recommended that the Army update the cost estimate by using actual costs and preparing a sensitivity analysis. DOD concurred with our recommendations, and this report provides the status of the department's efforts to address our prior recommendations. In March 2009, we published the Cost Guide to address a gap in federal guidance about processes, procedures, and practices needed to ensure reliable cost estimates. The Cost Guide provides a consistent methodology based on best practices that can be used across the federal government to develop, manage, and evaluate capital program cost estimates. The methodology is a compilation of characteristics and associated best practices that federal cost estimating organizations and industry use to develop and maintain reliable cost estimates throughout the life of an acquisition program. In May 2012, we issued an exposure draft of the Schedule Guide as a companion to the Cost Guide. A consistent methodology for developing, managing, and evaluating capital program cost estimates includes the concept of scheduling the necessary work to a timeline, as discussed in the Cost Guide. Simply put, schedule variances are usually followed by cost variances. Because some program costs, such as labor, supervision, rented equipment, and facilities, cost more if the program takes longer, a reliable schedule can contribute to an understanding of the cost impact if the program does not finish on time. In addition, management tends to respond to schedule delays by adding more resources or authorizing overtime. Further, a schedule risk analysis allows for program management to account for the cost effects of schedule slippage when developing the life-cycle cost estimate. A cost estimate cannot be considered fully credible if it does not account for the cost effects of schedule slippage. We found that the program schedule and cost estimates for the GCSS- Army did not fully meet best practices. Specifically, the GCSS-Army schedule supporting the December 2012 full deployment decision partially met the comprehensiveness and construction characteristics and substantially met the credibility and control characteristics for developing a high-quality and reliable schedule. In addition, the cost estimate fully met the comprehensiveness characteristic, substantially met the documentation and accuracy characteristics, and partially met the credibility characteristic for developing a high-quality and reliable cost estimate. It is important that the schedule and cost estimates are continually updated throughout the program's life cycle so that management has the best information available to make decisions. By incorporating best practices for developing reliable schedule and cost estimates, DOD would increase the probability of GCSS-Army successfully achieving full deployment by the fourth quarter of fiscal year 2017 to provide needed functionality for financial improvement and audit readiness. Our analysis found that the GCSS-Army program substantially met two and partially met the other two characteristics of a reliable schedule estimate and therefore did not provide the information needed to support the December 2012 full deployment decision (see table 1). Appendix I contains our detailed analysis of the GCSS-Army schedule estimate. The success of any program depends on having a reliable schedule of the program's work activities that will occur, how long they will take, and how the activities are related to one another. As such, the schedule not only provides a road map for systematic execution of a program, but also provides the means by which to gauge progress, identify and address potential problems, and promote accountability. Comprehensive. A schedule should reflect all activities as defined in the program's work breakdown structure, including activities to be performed by the government and the contractor; the resources (e.g., labor, materials, and overhead) needed to complete each activity; and how long each activity will take. We found that the GCSS-Army schedule partially met the comprehensive characteristic. The schedule used to support the full deployment decision reflected all activities to be performed by both the government and contractor for the program. However, resources were not loaded into the schedule software and were not assigned to specific activities in the schedule. GCSS-Army program management officials told us that the contractor used a separate system outside the schedule to manage the resources needed for the program. Information on resource needs and availability in each work period assists the program office in forecasting the likelihood that activities will be completed as scheduled. If the current schedule does not allow insight into the current or projected allocation of resources, the risk of the program's schedule slipping is significantly increased. Our analysis also determined that activity durations were not manageable and reasonably estimated in the schedule. We found that 30 percent of the remaining activities in the schedule exceeded the standard best practice for activity duration, which should be shorter than approximately 44 working days, or 2 working months. For example, audit support activities had durations over 100 working days. Durations should be as short as possible to facilitate the objective measurement of accomplished effort. If activities are too long, the schedule may not have enough detail for effective progress measurement and reporting. Well-constructed. A schedule should be planned so that critical project dates can be met. To meet this objective, all activities should be logically sequenced--that is, listed in the order in which they are to be carried out. In particular, activities that must finish prior to the start of other activities (i.e., predecessor activities), as well as activities that cannot begin until other activities are completed (i.e., successor activities), should be identified and their relationships established. The schedule should identify the project's critical path. Establishing a valid critical path is necessary for examining the effects of any activity slipping along this path. The calculation of a critical path determines which activities drive the project's earliest completion date. The schedule should also identify total float so that the schedule's flexibility can be accurately determined. We found that the GCSS-Army schedule was partially well-constructed. The majority of logic used to sequence the activities within the schedule was generally error free, clearly indicating to program management the order of activities that must be accomplished. However, the schedule's critical path was not valid because it included level of effort activities and date constraints. Level of effort activities, such as program management, should not define the critical path because they are nondiscrete support activities that do not produce a definite end product; therefore, level of effort activities cannot determine the length of the project. In addition, date constraints prevent the critical path from being a continuous sequence of events from the current to finish dates of the project. Rather than relying on such constraints, the schedule should use logic and durations in order to reflect realistic start and completion dates for activities. Successfully identifying the critical path relies on several factors, such as capturing all activities; properly sequencing activities; and assigning resources, which, as noted earlier, had not been completely done. Without a valid critical path, management cannot focus on activities that will have detrimental effects on the key project milestones and deliverables if they slip. Further, our analysis found that 28 percent of remaining schedule activities had more than 100 working days of total float, meaning that those activities could slip almost 5 working months and not affect the estimated finish date of the program. Based on the remaining duration of the program, 100 working days of float would not appear to be reasonable. The GCSS-Army Program Management Office stated that total float was not reliable at the time of the full deployment decision because the schedule was being updated to reflect a modification to the system. Without accurate values of total float for a program activity, management cannot determine the flexibility of tasks and therefore cannot properly reallocate resources from tasks that can safely slip to tasks that cannot slip without adversely affecting the estimated program completion date. Credible. A schedule should be horizontally and vertically integrated. A horizontally integrated schedule links products and outcomes with other associated sequenced activities, which helps verify that activities are arranged in the right order to achieve aggregated products or outcomes. A vertically integrated schedule ensures that the start and completion dates for activities are aligned with such dates on subsidiary schedules supporting tasks and subtasks. A schedule risk analysis should also be performed using statistical techniques to predict the level of confidence in meeting a program's completion date. We found that the GCSS-Army schedule was substantially credible. The schedule was substantially horizontally integrated, which means that outcomes were aligned with sequenced activities. The schedule was also substantially vertically integrated; we were able to trace varying levels of activities and supporting subactivities. Such mapping or alignment among subsidiary schedules enables different groups--such as government teams and contractors--to work to the same master schedule, and provides assurance that the representation of the schedule to different audiences is consistent and accurate. However, our analysis found that a schedule risk analysis had not been fully conducted. GCSS-Army program management officials provided documentation for a schedule risk analysis, but we noted that risk analyses were not performed for all supporting activities because program management officials stated that the program fielding schedule was not finalized at the time of the full deployment decision. If a schedule risk analysis is not conducted, program management cannot determine (1) the likelihood that the project completion date will occur, (2) how much schedule risk contingency is needed to provide an acceptable level of certainty for completion by a specific date, (3) risks most likely to delay the project, (4) how much contingency reserve each risk requires, and (5) the activities that are most likely to delay the project. Controlled. A schedule should be continually updated using logic, durations, and actual progress to realistically forecast dates for program activities. A schedule narrative should accompany the updated schedule to provide decision makers and auditors a log of changes and their effect, if any, on the schedule time frame. The schedule should be analyzed continually for variances to determine when forecasted completion dates differ from planned dates. This analysis is especially important for those variations that affect activities identified as being in a program's critical path and that can affect a scheduled completion date. A baseline schedule should be used to manage the program scope, the time period for accomplishing it, and the required resources. We found that the GCSS-Army schedule was substantially controlled. GCSS-Army program management officials stated that they met weekly to discuss proposed schedule changes and update the schedule's progress, and management also prepared a schedule narrative document that contained a list of custom fields and assumptions. In addition, we found no anomalies throughout the schedule (e.g., activities with planned start dates scheduled to occur in the past and activities with actual finish dates scheduled to occur in the future). However, we found that there was not a documented baseline schedule to measure program performance against, which would allow management to monitor any schedule variances that affect the completion of work. Without a formally established baseline schedule to measure performance against, management cannot identify or mitigate the effect of unfavorable performance. In our October 2010 report, we recommended that the Army develop an integrated master schedule that fully incorporated best practices, such as capturing all activities, sequencing all activities, integrating activities horizontally and vertically, establishing the critical path for all activities, and conducting a schedule risk analysis. The Army's December 2012 GCSS-Army schedule used to support the full deployment decision addressed several of the best practices that were an issue in our prior report, including capturing all activities, sequencing all activities, and integrating activities horizontally and vertically. However, as discussed, we continued to identify several best practices that were not yet fully addressed and also identified several new areas where the 2012 schedule did not incorporate best practices, such as activity durations and baseline schedule. Although GCSS-Army is in full deployment, without fully addressing best practices for scheduling, program managers will not have the best information available to make decisions related to issues such as the sequencing of activities and the flexibility of the schedule according to available resources. We found that the GCSS-Army program fully met one, substantially met two, and partially met one of the characteristics of a reliable cost estimate and therefore did not provide the information needed to support the full deployment decision, as shown in table 2. Appendix II contains our detailed analysis of the GCSS-Army cost estimate. A reliable cost estimate is critical to the success of any program and is updated continually throughout its life cycle. Such an estimate provides the basis for informed investment decision making, realistic budget formulation and program resourcing, meaningful progress measurement, proactive course correction when warranted, and accountability for results. Comprehensive. A cost estimate should include costs of the program over its full life cycle, provide a level of detail appropriate to ensure that cost elements are neither omitted nor double-counted, and document all cost- influencing ground rules and assumptions. The cost estimate should also completely define the program and be technically reasonable. We found that the cost estimate for GCSS-Army was fully comprehensive. The cost estimate included both government and contractor costs of the program over its life cycle--from the inception of the program through design, development, deployment, and operation and maintenance. The cost estimate also included an appropriate level of detail, which provided assurance that cost elements were neither omitted nor double-counted, and included documentation of all cost-influencing ground rules and assumptions. The cost estimate documentation included the purpose of the cost estimate, a technical description of the program, and technical risks (e.g., the resolution for any identified deficiencies). Well-documented. A cost estimate should be supported by detailed documentation that describes how it was derived and how the expected funding will be spent in order to achieve a given objective. The documentation should capture such things as the source data used, the calculations performed, the results of the calculations, the estimating methodology used to derive each work breakdown structure element's cost, and evidence that the estimate was approved by management. The documentation should discuss the technical baseline description, and the data in the technical baseline should be consistent with the cost estimate. We found that the cost estimate for GCSS-Army was substantially well- documented. The cost estimate captured such things as the calculations performed to derive each element's cost and the results of the calculations. The documentation also included a technical baseline description that provided data consistent with the cost estimate. Further, the GCSS-Army Program Management Office presented evidence of receiving approval of the estimate through briefings to management. Although program management officials did not provide us with written documentation of the source data, the Office of the Deputy Assistant Secretary of the Army for Cost and Economics (DASA-CE) did provide us with a full deployment decision briefing, which showed each major cost element and listed the methodology and sources of the data. However, the briefing documents included a limited amount of the actual source data, and we could not determine their reliability. Without sufficient background information about the source data and reliability of the data, the GCSS-Army cost estimator cannot know with any confidence whether the data collected can be used directly or need to be modified before use in the cost estimate. Accurate. A cost estimate should provide for results that are unbiased, are not overly conservative or optimistic, and contain no major mistakes. A cost estimate should be based on an assessment of most likely costs (adjusted properly for inflation), updated to reflect significant changes and grounded in a historical record of cost estimating and actual experiences on other comparable programs. In addition, variances between planned and actual costs should be documented, explained, and reviewed, and estimating techniques for each cost element should be used appropriately. We found that the cost estimate for GCSS-Army was substantially accurate. The GCSS-Army cost model detailed the inflation indexes and properly applied the indexes to each relevant cost element and included time phasing of the costs. The GCSS-Army cost model did not include any major mistakes, and all its cost elements summed up properly and were consistent with the cost estimate. In addition, the estimating techniques (i.e., engineering build-up) used to create the estimate were used appropriately. The cost model documentation did not explain whether the cost estimate was updated to reflect changes in technical or program assumptions. The program management officials provided documentation that reflected the technical changes for the major deployment decisions, but the documentation did not include details on how the costs were updated. Unless such documentation is available to verify that the cost estimate is properly updated on a regular basis, management will not have reasonable assurance that the cost estimate provides accurate information to make informed decisions about the program. Credible. A cost estimate should discuss any limitations of the analysis because of uncertainty or biases surrounding data or assumptions. The cost estimate should include a sensitivity analysis that identifies a range of possible costs based on varying major assumptions and data. A risk and uncertainty analysis should be conducted to determine the level of risk associated with the cost estimate and identify the effects of changing key cost driver assumptions and factors. In addition, the estimate's results should be cross-checked and reconciled to an independent cost estimate to determine whether other estimating methods produce similar results. We found that the cost estimate was partially credible. The Army Cost Review Board developed an independent cost estimate that was reconciled to the program management officials' cost estimate. The program management officials' cost estimate mentioned results of a risk analysis; however the risk and uncertainty analysis was not documented. Further, since the cost estimate that was provided discussed risk only at a summary level, it is unclear how management considered risk related to the program. Without a fully documented risk and uncertainty analysis, the estimate will lose credibility and management's decision-making ability will be impaired because it will not know the level of confidence associated with achieving the cost estimate. In addition, program management officials provided a cost estimate that identified major cost drivers, including system deployment and training. The cost estimate documentation contained a reference that a sensitivity analysis was completed on these cost drivers, but results of this analysis were not documented. As a result, the GCSS-Army cost estimator will not have a clear understanding of how each major cost driver is affected by a change in a single assumption and thus which cost driver most affects the cost estimate. Further, GCSS-Army program officials provided us with one example of evidence that indicated that some cross-checking was performed using cost models; however, the results of this cross-checking were not documented. The purpose of cross-checking is to determine whether alternative methods would produce similar results, which would increase the credibility of the estimate. In our October 2010 report, we recommended that the Army update the GCSS-Army cost estimate by using actual costs and preparing a sensitivity analysis. For the 2012 cost estimate, we found that the Army had made progress, but we continued to identify deficiencies in documentation related to the sensitivity analysis, risk and uncertainty analysis, and cross-checking of major cost elements for reasonableness. While the Army made some improvements to the schedule and cost estimates that supported the full deployment decision, the Army did not fully meet best practices in developing schedule and cost estimates for the GCSS-Army program. The Army made progress in incorporating schedule best practices, such as capturing and sequencing all activities and integrating activities horizontally and vertically, but we identified other deficiencies in schedule and cost best practices. For example, GCSS- Army did not meet best practices related to schedule durations, a valid critical path, and a cost sensitivity analysis. It is critical to correct the deficiencies identified with the schedule and cost estimates to help ensure that the projected spending for this program is being used in the most efficient and effective manner. By incorporating best practices for developing reliable schedule and cost estimates, DOD would increase the probability of GCSS-Army successfully achieving full deployment by the fourth quarter of fiscal year 2017 to provide needed functionality for financial improvement and audit readiness. To help improve the implementation of GCSS-Army, we recommend that the Secretary of the Army take the following two actions: Ensure that the Under Secretary of the Army, in his capacity as the Chief Management Officer, directs the GCSS-Army Program Management Office to develop an updated schedule that fully incorporates best practices, including assigning resources to all activities, establishing durations of all activities, confirming that the critical path is valid, and ensuring reasonable total float. Ensure that the Under Secretary of the Army, in his capacity as the Chief Management Officer, directs the GCSS-Army Program Management Office to update the cost estimate to fully incorporate best practices by documenting the results of a risk and uncertainty analysis, the cross-checking of major cost elements to see if results are similar, and a sensitivity analysis. We provided a draft of this report to DOD for review and comment. In its written comments, reprinted in appendix III, DOD concurred with our recommendation to update the schedule to fully incorporate best practices and described planned and ongoing actions that the department is taking to address the recommendation. In particular, DOD indicated that the Army has taken steps to help ensure that (1) all activities are assigned resources in the schedule software, (2) all schedule activities with long durations have been detailed, (3) level of effort activities and date constraints have been removed from the schedule so that they do not define the critical path, and (4) the majority of the schedule activities associated with high total float have been removed. If effectively implemented, these actions should address the intent of our recommendation. DOD also concurred with our recommendation to update the cost estimate to fully incorporate best practices by documenting the results of a risk and uncertainty analysis, the cross-checking of major cost elements to see if results are similar, and a sensitivity analysis. DOD described completed actions that the department has taken to address the recommendation. DOD stated that GCSS-Army achieved Milestone C in August 2011 and a full deployment decision in December 2012, and that it prepared a cost estimate per DOD acquisition rules and guidelines. DOD also stated that the Army (1) followed all Army directed best practices and approvals from the Office of the Deputy Assistant Secretary of the Army for Cost and Economics and (2) prepared a sensitivity analysis, a risk analysis, and cross-checked major cost elements for similar results, but that those documented analyses and results were not included in the formal cost estimates as directed by the Army. DOD commented that these documented analyses and results are part of the formal working papers and were provided to GAO in February 2013. However, these actions do not fully address the intent of our recommendation. As stated in our report, we focused on the extent to which GCSS-Army's schedule and cost estimates were prepared consistent with GAO's Schedule and Cost Guides. We reviewed the cost estimate documentation provided by the Army in February 2013 and additional information provided in February 2014 and determined that the documentation did not fully meet best practices for a risk and uncertainty analysis, a sensitivity analysis, and cross-checking of major cost elements for similar results. As stated in our report, GCSS-Army program management officials provided a cost estimate that mentioned the results of a risk and uncertainty analysis, and contained a reference that a sensitivity analysis was completed. Also, GCSS-Army program management officials provided us with one example of evidence that indicated some cross-checking was performed using cost models. However, the results of the risk and uncertainty and sensitivity analyses, as well as the cross-checking were not documented consistent with best practices. As stated in our report, incorporating best practices for a reliable cost estimate would help ensure that DOD has a reliable cost estimate that provides the basis for effective resource allocation, proactive course correction when warranted, and accountability for results. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees; the Secretary of Defense; the Secretary of the Army; the Assistant Secretary of Defense (Acquisition); the Acting Deputy Chief Management Officer; the Under Secretary of Defense (Comptroller); the Under Secretary of the Army, in his capacity as the Chief Management Officer of the Army; and the Program Manager for GCSS- Army. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Asif A. Khan at (202) 512-9869 or [email protected] or Nabajyoti Barkakati at (202) 512-4499 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix IV. This appendix provides the results of our analysis of the extent to which the Global Combat Support System-Army schedule supporting the December 2012 full deployment decision met the characteristics of a high-quality, reliable schedule. Table 3 provides the detailed results of our analysis. GAO's methodology includes five levels of compliance with its best practices. "Not met" means the program provided no evidence that satisfies any of the criterion. "Minimally met" means the program provided evidence that satisfies a small portion of the criterion. "Partially met" means the program provided evidence that satisfies about half of the criterion. "Substantially met" means the program provided evidence that satisfies a large portion of the criterion. "Fully met" means the program provided evidence that completely satisfies the criterion. This appendix provides the results of our analysis of the extent to which the Global Combat Support System-Army cost estimate supporting the December 2012 full deployment decision met the characteristics of a high-quality cost estimate. Table 4 provides the detailed results of our analysis. GAO's methodology includes five levels of compliance with its best practices. "Not met" means the program provided no evidence that satisfies any of the criterion. "Minimally met" means the program provided evidence that satisfies a small portion of the criterion. "Partially met" means the program provided evidence that satisfies about half of the criterion. "Substantially met" means the program provided evidence that satisfies a large portion of the criterion. "Fully met" means the program provided evidence that completely satisfies the criterion. In addition to the contacts named above, Arkelga Braxton (Assistant Director), Karen Richey (Assistant Director), Beatrice Alff, Tisha Derricotte, Jennifer Echard, Emile Ettedgui, Patrick Frey, and Jason Lee made key contributions to this report.

DOD officials have stated that the implementation of enterprise resource planning systems, such as GCSS-Army, is critical to the department's goal of correcting financial management deficiencies and ensuring that its financial statements are validated as audit ready by September 30, 2017, as called for by the National Defense Authorization Act for Fiscal Year 2010. GAO was asked to review the schedule and cost estimates for selected DOD systems. This report addresses the extent to which the schedule and cost estimates for GCSS-Army were prepared consistent with GAO's Schedule and Cost Guides. The schedule and cost estimates are designed to cover GCSS-Army implementation through 2017. GAO assessed the schedule and cost estimates that supported DOD's December 2012 full deployment decision, which granted approval for GCSS-Army to be deployed for operational use to all remaining locations. GAO also met with GCSS-Army program officials, including lead schedulers and cost estimators. The Army made some improvements to its schedule and cost estimates that supported the December 2012 full deployment decision for the Global Combat Support System-Army (GCSS-Army); however, the schedule and cost estimates did not fully meet best practices. GAO found that the schedule substantially met the credibility and control characteristics for developing a high-quality and reliable schedule. For example, the schedule was horizontally integrated, which means that it links products and outcomes with other associated sequenced activities. In addition, the GCSS-Army program management officials followed general guidelines for updating the schedule on a regular basis. GAO found that the schedule partially met the comprehensiveness and construction characteristics for a reliable schedule. Specifically, resources were not assigned to specific activities, and the schedule lacked a valid critical path, preventing management from focusing on the activities most likely to have detrimental effects on key program milestones if not completed as planned. By incorporating best practices for developing a reliable schedule, the Department of Defense (DOD) would increase the probability of completing the GCSS-Army program by the projected date. GAO found that the GCSS-Army cost estimate fully or substantially met the comprehensiveness, documentation, and accuracy characteristics of a high-quality and reliable cost estimate. For example, the cost estimate included both government and contractor costs for the program over its life cycle, provided documentation that substantially described detailed calculations used to derive each element's cost, and was adjusted for inflation. In addition, GAO found that the cost estimate partially met the credibility characteristic of a reliable cost estimate. Although program management officials provided a cost model that discussed a limited risk analysis, the results of the risk and uncertainty analysis were not documented. Incorporating best practices would help ensure that DOD has a reliable cost estimate that provides the basis for effective resource allocation, proactive course correction when warranted, and accountability for results. GAO is making two recommendations aimed at improving the Army's implementation of schedule and cost best practices for GCSS-Army. DOD concurred, but the completed actions it described related to the cost estimate were not fully responsive to GAO's recommendation. GAO continues to believe that fully incorporating best practices in the cost estimate would help improve its reliability.

EPA's enforcement program depends heavily upon inspections by regional or state enforcement staff as the primary means of detecting violations and evaluating overall facility compliance. Thus, the quality and the content of the agency's and states' inspections, and the number of inspections undertaken to ensure adequate coverage, are important indicators of the enforcement program's effectiveness. However, as we reported in 2000, EPA's regional offices varied substantially on the actions they take to enforce the Clean Water Act and Clean Air Act. Consistent with earlier observations of EPA's Office of Inspector General and internal agency studies, we found these variations in regional actions reflected in the (1) number of inspections EPA and state enforcement personnel conducted at facilities discharging pollutants within a region, (2) number and type of enforcement actions taken, and (3) the size of the penalties assessed and the criteria used in determining the penalties assessed. For example, as figure 1 indicates, the number of inspections conducted under the Clean Air Act in fiscal year 2000 compared with the number of facilities in each region subject to EPA's inspection under the act varied from a high of 80 percent in Region 3 to a low of 27 percent in Regions 1 and 2. While the variations in enforcement raise questions about the need for greater consistency, it is also important to get behind the data to understand the cause of the variations and the extent to which they reflect a problem. For example, EPA attributed the low number of inspections by its Region 5, in Chicago, to the regional office's decision at the time to focus limited resources on performing detailed and resource-intensive investigations of the region's numerous electric power plants, rather than conducting a greater number of less intensive inspections. We agree that regional data can be easily misinterpreted without the contextual information needed to clarify whether variation in a given instance is inappropriate or whether it reflects the appropriate exercise of flexibility by regions and states to tailor their priorities to their individual needs and circumstances. In this regard, we recommended that it would be appropriate for EPA to (1) clarify which aspects of the enforcement program it expects to see implemented consistently from region to region and which aspects may appropriately be subject to greater variation and (2) supplement region-by-region data with contextual information that helps to explain why variations occur and thereby clarify the extent to which variations are problematic. Our findings were also consistent with the findings of EPA's Inspector General and OECA that regions vary in the way they oversee state- delegated programs. In this regard, contrary to EPA policy, some regions did not (1) conduct an adequate number of oversight inspections of state programs, (2) sufficiently encourage states to consider economic benefit in calculating penalties, (3) take more direct federal actions where states were slow to act, and (4) require states to report all significant violators. Regional and state officials generally indicated that it was difficult for them to ascertain the extent of variation in regional enforcement activities, given their focus on activities within their own geographic environment. However, EPA headquarters officials responsible for the air and water programs noted that such variation is fairly commonplace and does pose problems. The director of OECA's water enforcement division, for example, told us that, in reacting to similar violations, enforcement responses in certain regions are stronger than they are in others and that such inconsistencies have increased. Similarly, the director of OECA's air enforcement division said that, given the considerable autonomy of the regional offices, it is not surprising that variations exist in how they approach enforcement and state oversight. In this regard, the director noted, disparities exist among regions in the number and quality of inspections conducted and in the number of permits written in relation to the number of sources requiring permits. In response to these findings, a number of regions have begun to develop and implement state audit protocols, believing that having such protocols could help them review the state programs within their jurisdiction with greater consistency. Here, too, regional approaches differ. For example: Region 1, in Boston, has adopted a comprehensive "multimedia" approach in which it simultaneously audits all of a state's delegated environmental programs. Region 3, in Philadelphia, favors a more targeted approach in which air, water, and waste programs are audited individually. In Region 5, in Chicago, the office's air enforcement branch chief said that he did not view an audit protocol as particularly useful, noting that he prefers regional staff to engage in joint inspections with states to assess the states' performance in the field and to take direct federal action when a state action is inadequate. We recognize the potential of these protocols to achieve greater consistency by a region in its oversight of its states, and the need to tailor such protocols to meet regional concerns. However, we also believe that EPA guidance on key elements that should be common to all protocols would help engender a higher level of consistency among all 10 regions in how they oversee states. While EPA's data show variations in key measures associated with the agency's enforcement program, they do little to explain the causes of the variations. Without information on causes, it is difficult to determine the extent to which variations represent a problem, are preventable, or reflect appropriate regional and state flexibility in applying national program goals to unique circumstances. Our work identified the following causes: (1) differences in philosophical approaches to enforcement, (2) incomplete and inaccurate national enforcement data, and (3) an antiquated workforce planning and allocation system. While OECA has issued policies, memorandums, and other documents to guide regions in their approach to enforcement, the considerable autonomy built into EPA's decentralized, multilevel organizational structure allows regional offices considerable latitude in adapting headquarters' direction in a way they believe best suits their jurisdiction. The variations we identified often reflect different enforcement approaches in determining whether the region should (1) rely predominantly on fines and other traditional enforcement methods to deter noncompliance and to bring violators into compliance or (2) place greater reliance on alternative strategies, such as compliance assistance (workshops, site visits, and other activities to identify and resolve potential compliance problems). Regions have also differed on whether deterrence could be achieved best through a small number of high-profile, resource-intensive cases or a larger number of smaller cases that establish a more widespread, albeit lower profile, enforcement presence. Further complicating matters are the wide differences among states in their enforcement approaches and the various ways in which regions respond to these differences. Some regions step more readily into cases when they consider a state's action to be inadequate, while other regions are more concerned about infringing on the discretion of states that have been delegated enforcement responsibilities. While all of these approaches may be permissible, EPA has experienced problems in identifying and communicating the extent to which variation either represents a problem or the appropriate exercise of flexibility by regions and states to apply national program goals to their unique circumstances. OECA needs accurate and complete enforcement data to determine whether regions and states are consistently implementing core program requirements and, if not, whether significant variations in meeting these requirements should be corrected. The region or the state responsible for carrying out the enforcement program is responsible for entering data into EPA's national databases. However, both the quality of and quality controls over these data were criticized by state and regional staff we interviewed. "managers in the regions and in OECA headquarters have become increasingly frustrated that they are not receiving from the reports and data analyses they need to manage their programs... has been less attention to the data in the national systems, a commensurate decline in data quality, and insufficient use of data by enforcement/compliance managers." Consistent with our findings and recommendations, EPA's Office of Inspector General recently reported that, "OECA's 2005 publicly-reported GPRA performance measures do not effectively characterize changes in compliance or other outcomes because OECA lacks reliable compliance rates and other reliable outcome data. In the absence of compliance rates, OECA reports proxies for compliance to the public and does not know if compliance is actually going up or down. As a result, OECA does not have all the data it needs to make management and program decisions. What is missing most, the biggest gap, is information about compliance rates. OECA cannot demonstrate the reliability of other measures because it has not verified that estimated, predicted, or facility self-reported outcomes actually took place. Some measures do not clearly link to OECA's strategic goals. Finally, OECA frequently changed its performance measures from year to year, which reduced transparency." For example, between fiscal years 1999-2005, OECA reported on a low of 23 performance measures to a high of 69 measures, depending on the fiscal year. Although EPA is working to improve its data, the problems are extensive and complex. For example, the Inspector General recently reported that OECA cannot generate programmatic compliance information for five of six program areas; lacks knowledge of the number, location, and levels of compliance for a significant portion of its regulated universe; and concentrates most of its regulatory activities on large entities and knows little about the identities or cumulative impact of small entities. Consequently, the Inspector General reported, OECA currently cannot develop programmatic compliance information, adequately report on the size of the universe for which it maintains responsibility, or rely on the regulated universe data to assess the effectiveness of enforcement strategies. As we reported, EPA's process for budgeting and allocating resources does not fully consider the agency's current workload, either for specific statutory requirements, such as those included in the Clean Water Act, or for broader goals and objectives in the agency's strategic plan. Instead, in preparing its requests for funding and staffing, EPA makes incremental adjustments, largely based on historical precedents, and thus its process does not reflect a bottom-up review of the nature or distribution of the current workload. While EPA has initiated several projects over the past decade to improve its workload and workforce assessment systems, it continues to face major challenges in this area If EPA is to substantially improve its resource planning, we reported, it must adopt a more rigorous and systematic process for (1) obtaining reliable data on key workload indicators, such as the quality of water in particular areas, which can be used to budget and allocate resources, and (2) designing budget and cost accounting systems that are able to isolate the resources needed and allocated to key enforcement activities. Without reliable workforce information, EPA cannot ensure consistency in its enforcement activities by hiring the right number or type of staff or allocating existing staff resources to meet current or future needs. In this regard, since 1990, EPA has hired thousands of employees without systematically considering the workforce impact of changes in environmental statutes and regulations, technological advances in affecting the skills and expertise needed to conduct enforcement actions, or the expansion in state environmental staff. EPA has yet to factor these workforce changes into its allocation of existing staff resources to its headquarters and regional offices to meet its strategic goals. Consequently, should EPA either downsize or increase its enforcement and compliance staff, it would not have the information needed to determine how many employees are appropriate, what technical skills they must have, and how best to allocate employees among strategic goals and geographic locations in order to ensure that reductions or increases could be absorbed with minimal adverse impacts in carrying out the agency's mission. Over the past several years, EPA has initiated or planned several actions to improve its enforcement program. We believe that a few of these actions hold particular promise for addressing inconsistencies in regional enforcement activities. These actions include (1) the creation of a State Review Framework, (2) improvements in the quality of enforcement data, and (3) enhancements to the agency's workforce planning and allocation system. The State Review Framework is a new process for conducting performance reviews of enforcement and compliance activities in the states (as well as for nondelegated programs implemented by EPA regions). These reviews are intended to provide a mechanism by which EPA can ensure a consistent level of environmental and public health protection across the country. OECA is in the second year of a 3-year project to make State Review Framework reviews an integral part of the regional and state oversight and planning process and to integrate any regional or state corrective or follow-up actions into working agreements between headquarters, regions, and states. It is too early to assess whether the process will provide an effective means for ensuring more consistent enforcement actions and oversight of state programs to help ensure a level playing field for the regulated community across the country. Issues that still need to be addressed include how EPA will assess states' implementation of alternative enforcement and compliance strategies, such as strategies to assist businesses in their efforts to comply with environmental regulations; encourage businesses to take steps to reduce pollution; offer incentives (e.g., public recognition) for businesses that demonstrate good records of compliance; and encourage businesses to participate in programs to audit their environmental performance and make the results of these audits and corrective actions available to EPA, other environmental regulators, and the public. Regardless of other improvements EPA makes to the enforcement program, it needs to have sufficient environmental data to measure changes in environmental conditions, assess the effectiveness of the program, and make decisions about resource allocations. Through its Environmental Indicators Initiative and other efforts, EPA has made some progress in addressing critical data gaps in the agency's environmental information. However, the agency still has a long way to go in obtaining the data it needs to manage for environmental results and needs to work with its state and other partners to build on its efforts to fill critical gaps in environmental data. Filling such gaps in EPA's knowledge of environmental conditions and trends should, in turn, translate into better approaches in allocating funds to achieve desired environmental results. Such knowledge will be useful in making future decisions related to strategic planning, resource allocations, and program management. Nevertheless, most of the performance measures that EPA and the states are still using focus on outputs rather than on results, such as the number of environmental pollution permits issued, the number of environmental standards established, and the number of facilities inspected. These types of measures can provide important information for EPA and state managers to use in managing their programs, but they do not reflect the actual environmental outcomes that EPA must know in order to ensure that resources are being allocated in the most cost-effective ways to improve environmental conditions and public health. EPA also has worked with the states and regional offices to improve enforcement data in its Permit Compliance System and believes that its efforts have improved data quality. EPA officials said that the system will be incorporated into the Integrated Compliance Information System, which is being phased in this year. According to information EPA provided, the modernization effort will identify the data elements to be entered and maintained by the states and regions and will include additional data entry for minor facilities and special regulatory program areas, such as concentrated animal feeding operations, combined sewer overflows, and storm water. Regarding the National Water Quality Inventory, the Office of Water recently began advocating the use of standardized, probability-based, statistical surveys of state waters so that water quality information would be comparable among states and from year-to-year. While these efforts are steps in the right direction, progress in this area has been slow and the benefits of initiatives currently in the discussion or planning stages are likely to be years away from realization. For example, initiatives to improve EPA's ability to manage for environmental results are essentially long-term. They will require a long-term commitment of management attention, follow-through, and support--including the dedication of appropriate and sufficient resources--for their potential to be fully realized. A number of similar initiatives in the past have been short-lived and unproductive in terms of lasting contributions to improved performance management. The ultimate payoff will depend on how fully EPA's organization and management support these initiatives and the extent to which identified needs are addressed in a determined, systematic, and sustained fashion over the next several years. Since the late 1990s, EPA has made progress in improving the management of its human capital. EPA's human capital strategic plan was designed to ensure a systematic process for identifying the agency's human capital requirements to meet strategic goals. Furthermore, EPA's strategic planning includes a cross-goal strategy to link strategic planning efforts to the agency's human capital strategy. Despite such progress, effectively implementing a human capital strategic plan remains a major challenge. Consequently, the agency needs to continue monitoring progress in developing a system that will ensure a well-trained and motivated workforce with the right mix of skills and experience. In this regard, the agency still has not taken the actions that we recommended in July 2001 to comprehensively assess its workforce--how many employees it needs to accomplish its mission, what and where technical skills are required, and how best to allocate employees among EPA's strategic goals and geographic locations. Furthermore, as previously mentioned, EPA's process for budgeting and allocating resources does not fully consider the agency's current workload. With prior years' allocations as the baseline, year-to-year changes are marginal and occur in response to (1) direction from the Office of Management and Budget and the Congress, (2) spending caps imposed by EPA's Office of the Chief Financial Officer, and (3) priorities negotiated by senior agency managers. EPA's program offices and regions have some flexibility in realigning resources based on their actual workload, but the overall impact of these changes is also minor, according to agency officials. Changes at the margin may not be sufficient because both the nature and distribution of the workload have changed as the scope of activities regulated has increased and as EPA has taken on new responsibilities while shifting others to the states. For example, controls over pollution from storm water and animal waste at concentrated feeding operations have increased the number of regulated entities by hundreds of thousands and required more resources in some regions of the country. However, EPA may be unable to respond effectively to changing needs and constrained resources because it does not have a system in place to conduct periodic "bottom-up" assessments of the work that needs to be done, the distribution of the workload, or the staff and other resource needs. Mr. Chairman, to its credit, EPA has initiated a number of actions to improve its enforcement activities and has invested considerable time and resources to make these activities more effective and efficient. While we applaud EPA's actions, they have thus far achieved only limited success and illustrate both the importance and the difficulty of addressing the long-standing problems in ensuring the consistent application of enforcement requirements, fines and penalties for violations of requirements, and the oversight of state environmental programs. To finish the job, EPA must remain committed to continuing the steps that it has already taken. In this regard, given the difficulties of the improvements that EPA is attempting to make and the time likely to be required to achieve them, it is important that the agency remain vigilant. It needs to guard against any erosion of its efforts by factors that have hampered past efforts to improve its operations, such as changes in top management and priorities and constraints on available resources. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee may have. If you have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Major contributors to this testimony include Ed Kratzer, John C. Smith, Ralph Lowry, Ignacio Yanes, Kevin Bray, and Carol Herrnstadt Shulman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Environmental Protection Agency (EPA) enforces the nation's environmental laws and regulations through its Office of Enforcement and Compliance Assurance (OECA). While OECA provides overall direction on enforcement policies and occasionally takes direct enforcement action, many enforcement responsibilities are carried out by EPA's 10 regional offices. In addition, these offices oversee the enforcement programs of state agencies that have been delegated the authority to enforce federal environmental protection regulations. This testimony is based on GAO's reports on EPA's enforcement activities issued over the past several years and on observations from ongoing work that is being performed at the request of the Senate Committee on Environment and Public Works, and the Subcommittee on Interior, Environment and Related Agencies, House Committee on Appropriations. GAO's previous reports examined the (1) consistency among EPA regions in carrying out enforcement activities, (2) factors that contribute to any inconsistency, and (3) EPA's actions to address these factors. Our current work examines how EPA, in consultation with regions and states, sets priorities for compliance and enforcement and how the agency and states determine respective compliance and enforcement roles and responsibilities and allocate resources for these purposes. EPA regions vary substantially in the actions they take to enforce environmental requirements, according to GAO's analysis of key management indicators that EPA headquarters uses to monitor regional performance. These indicators include the number of inspections performed at regulated facilities and the amount of penalties assessed for noncompliance with environmental regulations. In addition, the regions differ substantially in their overall strategies to oversee states within their jurisdictions. For example, contrary to EPA policy, some regions did not require states to report all significant violators, while other regions adhered to EPA's policy in this regard. GAO identified several factors that contribute to regional variations in enforcement. These factors include (1) differences in philosophy among regional enforcement staff about how best to secure compliance with environmental requirements; (2) incomplete and unreliable enforcement data that impede EPA's ability to accurately determine the extent to which variations occur; and (3) an antiquated workforce planning and allocation system that is not adequate for deploying staff in a manner to ensure consistency and effectiveness in enforcing environmental requirements. EPA recognizes that while some variation in environmental enforcement is necessary to reflect local conditions, core enforcement requirements must be consistently implemented to ensure fairness and equitable treatment. Consequently, similar violations should be met with similar enforcement responses regardless of geographic location. In response to GAO findings and recommendations, EPA has initiated or planned several long-term actions that are intended to achieve greater consistency in state and regional enforcement actions. These include (1) a new State Review Framework process for measuring states' performance of core enforcement activities, (2) a number of initiatives to improve the agency's compliance and enforcement data, and (3) enhancements to the agency's workforce planning and allocation system to improve the agency's ability to match its staff and technical capabilities with the needs of individual regions. However, these actions have yet to achieve significant results and will likely require a number of years and a steady top-level commitment of staff and financial resources to substantially improve EPA's ability to target enforcement actions in a consistent and equitable manner.

Most Medicare beneficiaries receive their care on an FFS basis, with providers submitting claims for payment for each service provided. In addition to the Part A/B and DME MACs that process and pay claims, CMS also employs other types of contractors to specifically address fraud and improper payments. These include: Recovery Audit contractors (RA), which review claims postpayment in four RA jurisdictions to identify improper payments and Zone Program Integrity Contractors (ZPIC), which review claims on a pre- and postpayment basis in seven ZPIC jurisdictions to identify potential fraud. All of these contractors use data analysis to identify providers who bill improperly, whether by mistake or intentionally, to help target their claims review. CMS has expanded its Integrated Data Repository, which was set up to integrate Medicare and Medicaid claims, beneficiary, provider, and other data, and is currently populated with 5 years of historical Part A, Part B, and Part D paid claims data. CMS's contractors can use these data to analyze previously undetected indicators of aberrant billing activity throughout the claims processing cycle. CMS intends to develop shared data models and is pursuing data sharing and matching agreements with other federal agencies to identify potential fraud, waste, and abuse throughout federal health care programs. CMS has set expectations that RAs and ZPICs will provide information on types of potentially problematic claims to help the agency identify vulnerabilities. CMS has also recently developed a "Fraud Prevention System" which uses predictive modeling technology to screen all FFS claims before payment is made. Claims are streamed through the Fraud Prevention System prior to payment and analyzed on the basis of algorithms that include other information, such as past billing, to identify patterns of potentially fraudulent billing by providers. The billing is prioritized for risk of fraud, with the highest-priority cases investigated by ZPICs. Prior to applying predictive models to claims prepayment, CMS tests the algorithms to try to ensure that resources are targeted to the highest-risk claims or providers while payment of claims to legitimate providers continues to occur without disruption. Consistent with Medicare law, CMS sets national coverage and payment policies regarding when and how services will be covered by Medicare, as well as coding and billing requirements for claims.developed national payment policies related to MUEs to limit potentially CMS has improper and excess payments to providers for many services, especially those that are prone to potential fraud or that result from billing errors. A CMS MUE Workgroup, which includes staff from CMS and the MUE contractor, is responsible for developing the national MUE limits, in consultation with the medical community. MUE limits are developed as per-day limits on the number of units of a given service or medical product that can be provided by the same physician to the same beneficiary. The limits are developed on the basis of coding conventions defined in the American Medical Association's (AMA) Current Procedural Terminology manual, national and local policies and edits, coding guidelines developed by national societies, analysis of standard medical and surgical practice, as well as an analysis of current provider billing practices. Prior to their implementation, proposed MUE limits are released for a review and comment period to the AMA, national medical/surgical societies, and other national health care organizations. However, unpublished MUEs are not released for comment. The MUE files are updated quarterly and new limits may be added at these times. Although MUEs were developed as limits on the number of units of a service a provider could bill for a beneficiary in a single day, as we previously reported they are not implemented as such. Specifically, they do not look at total units on all claims from one provider for the same beneficiary across an entire day, and the limits may therefore be exceeded. A claim can have multiple lines and providers may bill multiple units of the same service for the same beneficiary on the same day on multiple lines of a claim. In processing the claim, contractors' automated systems only examine the number of units on each claim line. If the number of units on the claim line exceeds the MUE limit, the entire claim line is denied. However, as long as the units on a claim line are at or below the MUE limit, they are paid. Thus, the automated claims- processing systems allow the MUE per-day limits to be exceeded for a beneficiary if providers bill multiple units of the same service on multiple claim lines. The systems also allow limits to be exceeded for a beneficiary if a provider bills for multiple units of the same service performed on the same day on different claims. When claiming multiple units of the same service for one beneficiary, providers may, but are not required to, include a "modifier"-- a special code that indicates why the additional units are medically necessary. MACs may develop local coverage policies as long as these policies are consistent with national policies. To implement these local policies, some MACs have developed local edits for certain services. Similar to the national MUEs, these local edits set limits on the maximum number of units that may be billed by a provider for the same beneficiary on the same day. Providers may not exceed the local limits by billing additional units on multiple claim lines, unless they include modifiers to explain why the additional units are medically necessary. The local edits were developed for services that may be overused or abused in their jurisdiction, including services for which the MUE limits were being frequently exceeded. Without these local edits, the MUE limits would be exceeded much more frequently. The local limits were developed on the basis of clinical input from the MAC's medical directors and other clinicians, as well as analysis of claims data. The vast majority of Medicare payments in 2011 for services with unpublished MUEs were for services where the numbers of units were at or below the per-day MUE limits. However, because the MUE limits were not implemented as per-day limits, approximately $14 million was paid for services that exceeded MUE limits. Moreover, by applying on a national basis the more restrictive local limits used by some contractors, (which are implemented as per-day limits), we found that CMS could have lowered payments by an additional $7.8 million. We also found that payments exceeding unpublished MUE limits were concentrated within certain services and states. In 2011, Medicare paid approximately $23.9 billion for 1,845 types of services with unpublished MUEs. The vast majority--about 99.9 percent--was paid for services where the number of units providers billed was at or below the per-day MUE limits. The MUE contractor indicated that the limits were generally set high, so that the MUEs would not deny claims for medically necessary services. However, because MUEs were not implemented as per-day limits, approximately $14 million was paid for services where total units billed by a provider for a beneficiary on the same day exceeded the MUE limits. These payments were made for units of services exceeding MUE limits that were billed on multiple lines of a claim or across multiple claims. Although the automated claims-processing systems check each claim line, they do not check all units billed by a provider for a beneficiary on the same day to see if they exceed the limit. While providers may use modifiers on claim lines to indicate when it is medically necessary to exceed the MUE limits, no modifiers were included for the approximately $14 million in payments that we identified as exceeding the unpublished MUE limits to explain why the additional units were medically appropriate. CMS does not expect its contractors to check claims to determine if modifiers are included when billing additional units of services related to unpublished MUEs on multiple lines. CMS officials stated that because the MUEs are unpublished, providers may not know a given service has an MUE and therefore may not include a modifier when billing for services. See GAO-13-102. some MUEs that are likely to become DOS edits include those where it is anatomically impossible to exceed the MUE limit. For example, anatomical limits such as having only two eyes limits the number of times a given procedure could be performed for which a provider could submit a claim on the same day for the same patient. CMS officials told us that they probably will not apply this policy to some of the unpublished MUEs where clear anatomical or other restrictions may not exist, such as those for some Part B drugs and DME. Contractors that we interviewed were aware of the new policy, had seen the draft version, and were generally supportive of the effort. Our examination of 13 services where MACs developed more restrictive local edits than the unpublished MUEs showed Medicare payments could have been reduced had CMS examined these edits and adopted them as part of its program integrity responsibilities. If CMS had used these limits and implemented them as per-day edits, instead of using the unpublished MUE limits on these services, Medicare payments would have been lowered by an additional $7.8 million. This indicates that there is a potential for additional savings if some of these local edits were applied nationally. Four of the MACs from whom we requested local edits had implemented edits related to unpublished MUEs. At least three of the contractors had more restrictive limits for the 13 services we analyzed. Contractors told us that they had developed more restrictive edits because the MUE limits were being exceeded frequently or they had observed potentially fraudulent or abusive billing for these services. While the unpublished MUE limits were implemented at a claim-line level, contractors told us that their local limits were implemented as per-day limits. Contractors also told us that CMS does not request information on their local edits, nor do they routinely share them with CMS. The MUE contractor told us that the MUE Workgroup was aware of one contractor's local edits for certain services with unpublished MUEs, but was not aware of other contractors' local edits for these services. Because CMS has not communicated with its contractors regarding their local edits or monitored their use, it is not evaluating these local edits. As a result, it may be missing an opportunity to identify situations in which savings could be achieved by implementing some of the local edits nationally. Payments for services that exceeded the per-day MUE limits were concentrated within certain services. For example, of the over 1,800 services with unpublished MUEs, 717 had payments that exceeded the MUE limits. Of these, 20 services accounted for almost half of all payments that exceeded the MUE limits, with the top service alone accounting for over 8 percent of such payments. Many of these top 20 services were for prescription drugs, DME, and clinical laboratory services. Payments for services that exceeded the unpublished MUE limits also tended to be concentrated in certain states. Five states with the highest payments that exceeded the MUE limits (Arkansas, California, New York, Pennsylvania, and Texas) accounted for almost half of these payments, although they accounted for 30 percent of total payments for all services with unpublished MUEs. CMS and its contractors do not have a system in place for examining claims to determine the extent to which providers may be exceeding unpublished MUE limits and whether payments for such services were proper. Payments that exceeded MUE limits were concentrated among certain providers, which could facilitate such examination. CMS officials and contractors that we interviewed said they do not have a system in place for regularly examining claims related to services with unpublished MUEs from providers that most often exceeded MUE limits.While CMS has several strategies to reduce improper payments, and it reviews aberrant billing patterns at a provider level, that is, across all services billed by the provider, officials told us that they have no plans to review services specifically related to MUEs. Similarly, contractors told us that they do not examine claims specifically related to MUEs, although they do review claims to detect other aberrant billing patterns and identify emerging new vulnerabilities. For example, one contractor told us it evaluates weekly billing reports to examine whether its medical review strategies are appropriate and focused on problem areas. It also reviews data from multiple other sources including reports from the Office of the Inspector General and those we have issued, and findings from the RAs. However, the contractor's reviews are conducted at a provider level, that is, across all services billed by the provider but not specifically for services with unpublished MUE limits. As a result, providers may be unlikely to have their billing reviewed more closely if they frequently bill above unpublished MUE limits, but do not have other aberrant billing patterns. We provided a list of 10 providers with payments of at least $3,000 that exceeded the unpublished MUE limits in each contractor's jurisdiction to the contractors we interviewed to determine if they were scrutinizing these providers' billing patterns. One contractor told us that it was reviewing claims submitted by 1 of the 10 providers that was included on the list we had forwarded to them. The contractor had received a potential fraud referral on this provider, although not specifically related to billings for services with unpublished MUEs. However, the remaining contractors were not reviewing any of the providers we identified. We found that a small number of providers accounted for a large share of payments for services that exceeded the unpublished MUE limits. For example, 419 providers received at least $5,000 for services that exceeded the unpublished MUEs in 2011. Of these, the 100 providers with the highest payments that exceeded the MUE limits accounted for nearly 44 percent of total excess payments, although they accounted for only about 1 percent of total payments for all services with unpublished MUEs. In addition, the provider with the highest payments that exceeded the unpublished MUE limits alone accounted for about 4 percent of these payments, although this provider accounted for less than 0.1 percent of total payments for all services with unpublished MUEs. Certain provider types were more likely to have payments that exceeded the MUE limits. About 26 percent of the top 100 providers exceeding unpublished MUE limits included clinical laboratories and DME providers. Researchers have noted that there is potential for fraud and abuse with some laboratory services that can be self-referred, such as certain pathology tests. For example, a pathologist examining a surgical pathology specimen may self-refer by ordering and performing additional tests on the pathology specimen without seeking the consent of the original ordering physician. Some contractors we interviewed told us that certain DME items, such as diabetic testing supplies, are prone to potentially fraudulent billing. CMS has also estimated improper DME billing of 66 percent in fiscal year 2012--higher than for any other service measured. Developing more cost-effective strategies for ensuring the appropriateness of Medicare payments could help ensure the long-term sustainability of the program. Although almost all payments for services with unpublished MUEs were made for services at or below the MUE limits, we found that there are still opportunities to realize savings. When analyzed on a per-day basis, payments that potentially should not have been made for services that exceeded the unpublished MUE limits totaled approximately $14 million. In November 2012, we recommended that CMS implement MUEs that assess all quantities of services provided to the same beneficiary by the same provider on the same day--in other words, as per-day limits--but allow the limits to be exceeded if the provider included modifiers to explain the medical necessity of exceeding the limits. The MUE contractor recently announced that CMS began implementing our recommendation for certain services as of April 1, 2013. However, CMS officials told us these are unlikely to be applied to some of the services with unpublished MUEs, such as Part B Drugs and DME services. We continue to believe that our recommendation should be implemented for all MUEs to help strengthen the financial health of the program. Continuously seeking new methods for improving oversight of provider payments is another important way to strengthen program integrity. Contractors' local edits could serve as a resource for CMS to use in developing or revising MUEs and in reducing payments for services that are potentially improperly billed. Unpublished MUEs were developed for services and items that have been fraudulently or abusively billed in the past. Therefore, systematically examining billing information and claims from providers that exceed these limits and do not use modifiers to indicate the excess units are medically appropriate, could help identify improper payments and could inform CMS's program integrity efforts. To improve the effectiveness of the unpublished MUEs and better ensure Medicare program integrity, we recommend that the CMS Administrator take the following two actions: examine contractor local edits related to unpublished MUEs to determine whether any of the national unpublished MUE limits should be revised; and consider periodically reviewing claims to identify the providers exceeding the unpublished MUE limits and determine whether their billing was proper. We provided a draft of this report to HHS for comment and received written comments, which are reprinted in appendix I. In its written comments, HHS concurred with both our recommendations. For the recommendation to examine contractor local edits related to unpublished MUEs, HHS concurred and indicated that CMS would review making revisions to the MUEs in order to ensure that the edit levels are appropriate on the basis of input from national health care organizations, providers, Medicare Administrative Contractors, and CMS personnel, as well as data analysis. For the second recommendation, HHS concurred and indicated that CMS would conduct further analysis to determine the appropriate actions, if necessary. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of CMS, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, Sheila K. Avruch, Assistant Director; Iola D'Souza; Eagan Kemp; Richard Lipinski; and Laurie Pachter made key contributions to this report.

CMS has estimated improper Medicare fee-for-service payments of $29.6 billion in fiscal year 2012. To help prevent improper payments, CMS has implemented national MUEs, which limit the amount of a service that is paid when billed by a provider for a beneficiary on the same day. The limits for certain services that have been fraudulently or abusively billed are unpublished to deter providers from billing up to the maximum allowable limit. GAO was asked to review issues related to MUEs. This report examines the extent to which CMS has (1) paid for services that exceeded the unpublished MUE limits and (2) examined billing from providers that exceeded unpublished MUE limits. GAO analyzed Medicare claims related to these limits in 2011, and interviewed CMS officials and selected contractors in states with high improper payments. Less than 0.1 percent of payments Medicare made in 2011 were for amounts of services that exceeded certain unpublished limits for excess billing and where the claims did not include information from the providers to indicate why the additional services were medically necessary. These limits are set by the Centers for Medicare & Medicaid Services (CMS)--an agency within the Department of Health and Human Services (HHS)--as a means to avoid potentially improper payments. To implement these limits, CMS established automated controls in its payment systems called Medically Unlikely Edits (MUE). These MUEs compare the number of certain services billed against limits for the amount of services likely to be provided under normal medical practice to a beneficiary by the same provider on the same day--for example, no more than one of the same operation on each eye. GAO analysis of 2011 claims data found approximately $14 million out of a total of $23.9 billion in Medicare payments for services that exceeded unpublished MUE limits and where the claims did not include information from the providers to indicate why the additional services were medically necessary. As GAO has previously reported, claims could exceed the limits because the MUEs are not set up as per-day limits that assess all services billed by a provider for a single beneficiary on the same day. CMS plans to begin implementing MUEs for some services as per-day limits for services where it would be impossible to exceed the limits for anatomical or other reasons. Medicare contractors that pay claims may develop local edits, which can set more restrictive limits for some services than the national unpublished MUE limits. GAO's analysis of claims data applying a few of these more restrictive local limits showed that by applying them instead of the relevant national MUE limits, CMS could have lowered payments by an additional $7.8 million. However, CMS is not evaluating these local edits to determine if these lower limits might be more appropriate. To the extent that these and other local edits are not evaluated more systematically, CMS may be missing an opportunity to achieve savings by revising some national MUEs to correspond with more restrictive local limits. CMS and its contractors did not have a system in place for examining claims to determine the extent to which providers may be exceeding unpublished MUE limits and whether payments for such services were proper. CMS officials and contractors told us that they examine aberrant billing patterns at a provider level, that is, across all services billed by the provider, but not specifically for services with unpublished MUE limits. GAO found that payments that exceeded MUE limits were concentrated among certain providers and types of specialties, in certain states, and for certain services. For example, the top 100 providers with payments that exceeded the MUE limits accounted for nearly 44 percent of total payments that exceeded the MUE limits, although they accounted for only about 1 percent of total payments for all services with unpublished MUEs. Moreover, about 26 percent of the top 100 providers included clinical laboratories and durable medical equipment providers, both of which have been identified in the past as having high potential for fraudulent billings. Because unpublished MUEs were developed for services and items that have been fraudulently or abusively billed in the past, without systematically examining billing information and claims from the top providers exceeding those limits CMS may be missing another opportunity to improve its program integrity efforts. GAO recommends that CMS examine contractor edits to determine if any national unpublished MUE limits should be revised; and consider reviewing claims to identify providers that exceed the unpublished MUE limits, and determine whether their billing was proper. In its written comments, HHS concurred with both our recommendations.

The tens of thousands of individuals who responded to the September 11, 2001, attack on the WTC experienced the emotional trauma of the disaster and were exposed to a noxious mixture of dust, debris, smoke, and potentially toxic contaminants, such as pulverized concrete, fibrous glass, particulate matter, and asbestos. A wide variety of health effects have been experienced by responders to the WTC attack, and several federally funded programs have been created to address the health needs of these individuals. Numerous studies have documented the physical and mental health effects of the WTC attacks. Physical health effects included injuries and respiratory conditions, such as sinusitis, asthma, and a new syndrome called WTC cough, which consists of persistent coughing accompanied by severe respiratory symptoms. Almost all firefighters who responded to the attack experienced respiratory effects, including WTC cough. One study suggested that exposed firefighters on average experienced a decline in lung function equivalent to that which would be produced by 12 years of aging. A recently published study found a significantly higher risk of newly diagnosed asthma among responders that was associated with increased exposure to the WTC disaster site. Commonly reported mental health effects among responders and other affected individuals included symptoms associated with post-traumatic stress disorder (PTSD), depression, and anxiety. Behavioral health effects such as alcohol and tobacco use have also been reported. Some health effects experienced by responders have persisted or worsened over time, leading many responders to begin seeking treatment years after September 11, 2001. Clinicians involved in screening, monitoring, and treating responders have found that many responders' conditions--both physical and psychological--have not resolved and have developed into chronic disorders that require long-term monitoring. For example, findings from a study conducted by clinicians at the NY/NJ WTC Consortium show that at the time of examination, up to 2.5 years after the start of the rescue and recovery effort, 59 percent of responders enrolled in the program were still experiencing new or worsened respiratory symptoms. Experts studying the mental health of responders found that about 2 years after the WTC attack, responders had higher rates of PTSD and other psychological conditions compared to others in similar jobs who were not WTC responders and others in the general population. Clinicians also anticipate that other health effects, such as immunological disorders and cancers, may emerge over time. There are six key programs that currently receive federal funding to provide voluntary health screening, monitoring, or treatment at no cost to responders. The six WTC health programs, shown in table 1, are (1) the FDNY WTC Medical Monitoring and Treatment Program; (2) the NY/NJ WTC Consortium, which comprises five clinical centers in the NY/NJ area; (3) the WTC Federal Responder Screening Program; (4) the WTC Health Registry; (5) Project COPE; and (6) the Police Organization Providing Peer Assistance (POPPA) program. The programs vary in aspects such as the HHS administering agency or component responsible for administering the funding; the implementing agency, component, or organization responsible for providing program services; eligibility requirements; and services. The WTC health programs that are providing screening and monitoring are tracking thousands of individuals who were affected by the WTC disaster. As of June 2007, the FDNY WTC program had screened about 14,500 responders and had conducted follow-up examinations for about 13,500 of these responders, while the NY/NJ WTC Consortium had screened about 20,000 responders and had conducted follow-up examinations for about 8,000 of these responders. Some of the responders include nonfederal responders residing outside the NYC metropolitan area. As of June 2007, the WTC Federal Responder Screening Program had screened 1,305 federal responders and referred 281 responders for employee assistance program services or specialty diagnostic services. In addition, the WTC Health Registry, a monitoring program that consists of periodic surveys of self-reported health status and related studies but does not provide in- person screening or monitoring, collected baseline health data from over 71,000 people who enrolled in the Registry. In the winter of 2006, the Registry began its first adult follow-up survey, and as of June 2007 over 36,000 individuals had completed the follow-up survey. In addition to providing medical examinations, FDNY's WTC program and the NY/NJ WTC Consortium have collected information for use in scientific research to better understand the health effects of the WTC attack and other disasters. The WTC Health Registry is also collecting information to assess the long-term public health consequences of the disaster. Beginning in October 2001 and continuing through 2003, FDNY's WTC program, the NY/NJ WTC Consortium, the WTC Federal Responder Screening Program, and the WTC Health Registry received federal funding to provide services to responders. This funding primarily came from appropriations to the Department of Homeland Security's Federal Emergency Management Agency (FEMA), as part of the approximately $8.8 billion that the Congress appropriated to FEMA for response and recovery activities after the WTC disaster. FEMA entered into interagency agreements with HHS agencies to distribute the funding to the programs. For example, FEMA entered into an agreement with NIOSH to distribute $90 million appropriated in 2003 that was available for monitoring. FEMA also entered into an agreement with ASPR for ASPR to administer the WTC Federal Responder Screening Program. A $75 million appropriation to CDC in fiscal year 2006 for purposes related to the WTC attack resulted in additional funding for the monitoring activities of the FDNY WTC program, NY/NJ WTC Consortium, and the Registry. The $75 million appropriation to CDC in fiscal year 2006 also provided funds that were awarded to the FDNY WTC program, the NY/NJ WTC Consortium, Project COPE, and the POPPA program for treatment services for responders. An emergency supplemental appropriation to CDC in May 2007 included an additional $50 million to carry out the same activities provided for in the $75 million appropriation made in fiscal year 2006. The President's proposed fiscal year 2008 budget for HHS includes $25 million for treatment of WTC-related illnesses for responders. In February 2006, the Secretary of HHS designated the Director of NIOSH to take the lead in ensuring that the WTC health programs are well coordinated, and in September 2006 the Secretary established a WTC Task Force to advise him on federal policies and funding issues related to responders' health conditions. The chair of the task force is HHS's Assistant Secretary for Health, and the vice chair is the Director of NIOSH. The task force reported to the Secretary of HHS in early April 2007. HHS's WTC Federal Responder Screening Program has had difficulties ensuring the uninterrupted availability of services for federal responders. First, the provision of screening examinations has been intermittent. (See fig. 1.) After resuming screening examinations in December 2005 and conducting them for about a year, HHS again placed the program on hold and suspended scheduling of screening examinations for responders from January 2007 to May 2007. This interruption in service occurred because there was a change in the administration of the WTC Federal Responder Screening Program, and certain interagency agreements were not established in time to keep the program fully operational. In late December 2006, ASPR and NIOSH signed an interagency agreement giving NIOSH $2.1 million to administer the WTC Federal Responder Screening Program. Subsequently, NIOSH and FOH needed to sign a new interagency agreement to allow FOH to continue to be reimbursed for providing screening examinations. It took several months for the agreement between NIOSH and FOH to be negotiated and approved, and scheduling of screening examinations did not resume until May 2007. Second, the program's provision of specialty diagnostic services has also been intermittent. After initial screening examinations, responders often need further diagnostic services by ear, nose, and throat doctors; cardiologists; and pulmonologists; and FOH had been referring responders to these specialists and paying for the services. However, the program stopped scheduling and paying for these specialty diagnostic services in April 2006 because the program's contract with a new provider network did not cover these services. In March 2007, FOH modified its contract with the provider network and resumed scheduling and paying for specialty diagnostic services for federal responders. In July 2007 we reported that NIOSH was considering expanding the WTC Federal Responder Screening Program to include monitoring examinations--follow-up physical and mental health examinations--and was assessing options for funding and delivering these services. If federal responders do not receive this type of monitoring, health conditions that arise later may not be diagnosed and treated, and knowledge of the health effects of the WTC disaster may be incomplete. In February 2007, NIOSH sent a letter to FEMA, which provides the funding for the program, asking whether the funding could be used to support monitoring in addition to the onetime screening currently offered. A NIOSH official told us that as of August 2007 the agency had not received a response from FEMA. NIOSH officials told us that if FEMA did not agree to pay for monitoring of federal responders, NIOSH would consider using other funding. According to a NIOSH official, if FEMA or NIOSH agrees to pay for monitoring of federal responders, this service would be provided by FOH or one of the other WTC health programs. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area, although it recently took steps toward expanding the availability of these services. Initially, NIOSH made two efforts to provide screening and monitoring services for these responders, the exact number of which is unknown. The first effort began in late 2002 when NIOSH awarded a contract for about $306,000 to the Mount Sinai School of Medicine to provide screening services for nonfederal responders residing outside the NYC metropolitan area and directed it to establish a subcontract with AOEC. AOEC then subcontracted with 32 of its member clinics across the country to provide screening services. From February 2003 to July 2004, the 32 AOEC member clinics screened 588 nonfederal responders nationwide. AOEC experienced challenges in providing these screening services. For example, many nonfederal responders did not enroll in the program because they did not live near an AOEC clinic, and the administration of the program required substantial coordination among AOEC, AOEC member clinics, and Mount Sinai. Mount Sinai's subcontract with AOEC ended in July 2004, and from August 2004 until June 2005 NIOSH did not fund any organization to provide services to nonfederal responders outside the NYC metropolitan area. During this period, NIOSH focused on providing screening and monitoring services for nonfederal responders in the NYC metropolitan area. In June 2005, NIOSH began its second effort by awarding $776,000 to the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide both screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. In June 2006, NIOSH awarded an additional $788,000 to DCC to provide screening and monitoring services for these responders. NIOSH officials told us that they assigned DCC the task of providing screening and monitoring services to nonfederal responders outside the NYC metropolitan area because the task was consistent with DCC's responsibilities for the NY/NJ WTC Consortium, which include data monitoring and coordination. DCC, however, had difficulty establishing a network of providers that could serve nonfederal responders residing throughout the country--ultimately contracting with only 10 clinics in seven states to provide screening and monitoring services. DCC officials said that as of June 2007 the 10 clinics were monitoring 180 responders. In early 2006, NIOSH began exploring how to establish a national program that would expand the network of providers to provide screening and monitoring services, as well as treatment services, for nonfederal responders residing outside the NYC metropolitan area. According to NIOSH, there have been several challenges involved in expanding a network of providers to screen and monitor nonfederal responders nationwide. These include establishing contracts with clinics that have the occupational health expertise to provide services nationwide, establishing patient data transfer systems that comply with applicable privacy laws, navigating the institutional review board process for a large provider network, and establishing payment systems with clinics participating in a national network of providers. On March 15, 2007, NIOSH issued a formal request for information from organizations that have an interest in and the capability of developing a national program for responders residing outside the NYC metropolitan area. In this request, NIOSH described the scope of a national program as offering screening, monitoring, and treatment services to about 3,000 nonfederal responders through a national network of occupational health facilities. NIOSH also specified that the program's facilities should be located within reasonable driving distance to responders and that participating facilities must provide copies of examination records to DCC. In May 2007, NIOSH approved a request from DCC to redirect about $125,000 from the June 2006 award to establish a contract with a company to provide screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. Subsequently, DCC contracted with QTC Management, Inc., one of the four organizations that had responded to NIOSH's request for information. DCC's contract with QTC does not include treatment services, and NIOSH officials are still exploring how to provide and pay for treatment services for nonfederal responders residing outside the NYC metropolitan area. QTC has a network of providers in all 50 states and the District of Columbia and can use internal medicine and occupational medicine doctors in its network to provide these services. In addition, DCC and QTC have agreed that QTC will identify and subcontract with providers outside of its network to screen and monitor nonfederal responders who do not reside within 25 miles of a QTC provider. In June 2007, NIOSH awarded $800,600 to DCC for coordinating the provision of screening and monitoring examinations, and QTC will receive a portion of this award from DCC to provide about 1,000 screening and monitoring examinations through May 2008. According to a NIOSH official, QTC's providers have begun conducting screening examinations, and by the end of August 2007, 18 nonfederal responders had completed screening examinations, and 33 others had been scheduled. In fall 2006, NIOSH awarded and set aside funds totaling $51 million from its $75 million appropriation for four WTC health programs in the NYC metropolitan area to provide treatment services to responders enrolled in these programs. Of the $51 million, NIOSH awarded about $44 million for outpatient services to the FDNY WTC program, the NY/NJ WTC Consortium, Project COPE, and the POPPA program. NIOSH made the largest awards to the two programs from which almost all responders receive medical services, the FDNY WTC program and NY/NJ WTC Consortium (see table 2). In July 2007 we reported that officials from the FDNY WTC program and the NY/NJ WTC Consortium expected that their awards for outpatient treatment would be spent by the end of fiscal year 2007. In addition to the $44 million it awarded for outpatient services, NIOSH set aside about $7 million for the FDNY WTC program and NY/NJ WTC Consortium to pay for responders' WTC-related inpatient hospital care as needed. The FDNY WTC program and NY/NJ WTC Consortium used their awards from NIOSH to continue providing treatment services to responders and to expand the scope of available treatment services. Before NIOSH made its awards for treatment services, the treatment services provided by the two programs were supported by funding from private philanthropies and other organizations. According to officials of the NY/NJ WTC Consortium, this funding was sufficient to provide only outpatient care and partial coverage for prescription medications. The two programs used NIOSH's awards to continue to provide outpatient services to responders, such as treatment for gastrointestinal reflux disease, upper and lower respiratory disorders, and mental health conditions. They also expanded the scope of their programs by offering responders full coverage for their prescription medications for the first time. A NIOSH official told us that some of the commonly experienced WTC conditions, such as upper airway conditions, gastrointestinal disorders, and mental health disorders, are frequently treated with medications that can be costly and may be prescribed for an extended period of time. According to an FDNY WTC program official, prescription medications are now the largest component of the program's treatment budget. The FDNY WTC program and NY/NJ Consortium also expanded the scope of their programs by paying for inpatient hospital care for the first time, using funds from the $7 million that NIOSH had set aside for this purpose. According to a NIOSH official, NIOSH pays for hospitalizations that have been approved by the medical directors of the FDNY WTC program and NY/NJ WTC Consortium through awards to the programs from the funds NIOSH set aside for this purpose. By August 31, 2007, federal funds had been used to support 34 hospitalizations of responders, 28 of which were referred by the NY/NJ WTC Consortium's Mount Sinai clinic, 5 by the FDNY WTC program, and 1 by the NY/NJ WTC Consortium's CUNY Queens College program. Responders have received inpatient hospital care to treat, for example, asthma, pulmonary fibrosis, and severe cases of depression or PTSD. According to a NIOSH official, one responder is now a candidate for lung transplantation and if this procedure is performed, it will be covered by federal funds. If funds set aside for hospital care are not completely used by the end of fiscal year 2007, he said they could be carried over into fiscal year 2008 for this purpose or used for outpatient services. After receiving NIOSH's funding for treatment services in fall 2006, the NY/NJ WTC Consortium ended its efforts to obtain reimbursement from health insurance held by responders with coverage. Consortium officials told us that efforts to bill insurance companies involved a heavy administrative burden and were frequently unsuccessful, in part because the insurance carriers typically denied coverage for work-related health conditions on the grounds that such conditions should be covered by state workers' compensation programs. However, according to officials from the NY/NJ WTC Consortium, responders trying to obtain workers' compensation coverage routinely experienced administrative hurdles and significant delays, some lasting several years. Moreover, according to these program officials, the majority of responders enrolled in the program either had limited or no health insurance coverage. According to a labor official, responders who carried out cleanup services after the WTC attack often did not have health insurance, and responders who were construction workers often lost their health insurance when they became too ill to work the number of days each quarter or year required to maintain eligibility for insurance coverage. According to a NIOSH official, although the agency had not received authorization as of August 30, 2007, to use the $50 million emergency supplemental appropriation made to CDC in May 2007, NIOSH was formulating plans for use of these funds to support the WTC treatment programs in fiscal year 2008. Screening and monitoring the health of the people who responded to the September 11, 2001, attack on the World Trade Center are critical for identifying health effects already experienced by responders or those that may emerge in the future. In addition, collecting and analyzing information produced by screening and monitoring responders can give health care providers information that could help them better diagnose and treat responders and others who experience similar health effects. While some groups of responders are eligible for screening and follow-up physical and mental health examinations through the federally funded WTC health programs, other groups of responders are not eligible for comparable services or may not always find these services available. Federal responders have been eligible only for the initial screening examination provided through the WTC Federal Responder Screening Program. NIOSH, the administrator of the program, has been considering expanding the program to include monitoring but has not done so. In addition, many responders who reside outside the NYC metropolitan area have not been able to obtain screening and monitoring services because available services are too distant. Moreover, HHS has repeatedly interrupted the programs it established for federal responders and nonfederal responders outside of NYC, resulting in periods when no services were available to them. HHS continues to fund and coordinate the WTC health programs and has key federal responsibility for ensuring the availability of services to responders. HHS and its agencies have recently taken steps to move toward providing screening and monitoring services to federal responders and to nonfederal responders living outside of the NYC area. However, these efforts are not complete, and the stop-and-start history of the department's efforts to serve these groups does not provide assurance that the latest efforts to extend screening and monitoring services to these responders will be successful and will be sustained over time. Therefore we recommended in July 2007 that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the attack on the WTC, regardless of who their employer was or where they reside. As of early September 2007 the department has not responded to this recommendation. 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 testimony, please contact 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. Helene F. Toiv, Assistant Director; Hernan Bozzolo; Frederick Caison; Anne Dievler; and Roseanne Price made key contributions to this statement. September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders. GAO-07-892. Washington, D.C.: July 23, 2007. September 11: HHS Has Screened Additional Federal Responders for World Trade Center Health Effects, but Plans for Awarding Funds for Treatment Are Incomplete. GAO-06-1092T. Washington, D.C.: September 8, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Program for Federal Responders Lags Behind. GAO-06-481T. Washington, D.C.: February 28, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Not for Federal Responders. GAO-05-1020T. Washington, D.C.: September 10, 2005. September 11: Health Effects in the Aftermath of the World Trade Center Attack. GAO-04-1068T. Washington, D.C.: September 8, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Six years after the attack on the World Trade Center (WTC), concerns persist about health effects experienced by WTC responders and the availability of health care services for those affected. Several federally funded programs provide screening, monitoring, or treatment services to responders. GAO has previously reported on the progress made and implementation problems faced by these WTC health programs. This testimony is based on and updates GAO's report, September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders ( GAO-07-892 , July 23, 2007). In this testimony, GAO discusses the status of (1) services provided by the Department of Health and Human Services' (HHS) WTC Federal Responder Screening Program, (2) efforts by the Centers for Disease Control and Prevention's National Institute for Occupational Safety and Health (NIOSH) to provide services for nonfederal responders residing outside the New York City (NYC) area, and (3) NIOSH's awards to WTC health program grantees for treatment services. In July 2007, following a re-examination of the status of the WTC health programs, GAO recommended that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the WTC attack, regardless of who their employer was or where they reside. As of early September 2007 the department has not responded to this recommendation. As GAO reported in July 2007, HHS's WTC Federal Responder Screening Program has had difficulties ensuring the uninterrupted availability of screening services for federal responders. From January 2007 to May 2007, the program stopped scheduling screening examinations because there was a change in the program's administration and certain interagency agreements were not established in time to keep the program fully operational. From April 2006 to March 2007, the program stopped scheduling and paying for specialty diagnostic services associated with screening. NIOSH, the administrator of the program, has been considering expanding the program to include monitoring, that is, follow-up physical and mental health examinations, but has not done so. If federal responders do not receive monitoring, health conditions that arise later may not be diagnosed and treated, and knowledge of the health effects of the WTC disaster may be incomplete. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC area, although it recently took steps toward expanding the availability of these services. In late 2002, NIOSH arranged for a network of occupational health clinics to provide screening services. This effort ended in July 2004, and until June 2005 NIOSH did not fund screening or monitoring services for nonfederal responders outside the NYC area. In June 2005, NIOSH funded the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide screening and monitoring services; however, DCC had difficulty establishing a nationwide network of providers and contracted with only 10 clinics in seven states. In 2006, NIOSH began to explore other options for providing these services, and in May 2007 it took steps toward expanding the provider network. NIOSH has awarded treatment funds to four WTC health programs in the NYC area. In fall 2006, NIOSH awarded $44 million for outpatient treatment and set aside $7 million for hospital care. The New York/New Jersey WTC Consortium and the New York City Fire Department WTC program, which received the largest awards, used NIOSH's funding to continue outpatient services, offer full coverage for prescriptions, and cover hospital care.

Some of the statutory rulemaking requirements that Congress has enacted over the years apply to all agencies, but some of the requirements are applicable only to certain agencies. Some of these requirements have been in place for more than 50 years, but most have been implemented within the past 20 years or so. The most long-standing and broadly applicable federal rulemaking requirements are in the Administrative Procedure Act (APA) of 1946. The APA provides for both formal and informal rulemaking. Formal rulemaking is used in ratemaking proceedings and in certain other cases when rules are required by statute to be made "on the record" after an opportunity for a trial-type agency hearing. Informal or "notice and comment" rulemaking is used much more frequently, and is the focus of my comments here today. In informal rulemaking, the APA generally requires that agencies publish a notice of proposed rulemaking (NPRM) in the Federal Register. The notice must contain (1) a statement of the time, place, and nature of public rulemaking proceedings; (2) reference to the legal authority under which the rule is proposed; and (3) either the terms or substance of the proposed rule or a description of the subjects and issues involved. "Interested persons" must then be given an opportunity to comment on the proposed rule. The APA does not specify the length of this comment period, but agencies commonly allow at least 30 days. After considering the public comments, the agency may then publish the final rule in the Federal Register. According to the APA, a final rule cannot become effective until at least 30 days after its publication unless (1) the rule grants or recognizes an exemption or relieves a restriction, (2) the rule is an interpretative rule or statement of policy, or (3) the agency determines that the rule should take effect sooner for good cause and publishes that determination with the rule. The APA also states that the notice and comment procedures generally do not apply when an agency finds, for "good cause," that those procedures are "impracticable, unnecessary, or contrary to the public interest." When agencies use the good cause exception, the act requires that they explicitly say so and provide a rationale for the exception's use when the rule is published in the Federal Register. Two procedures for noncontroversial and expedited rulemaking actions have been developed that are essentially applications of the good cause exception. "Direct final" rulemaking involves agency publication of a rule in the Federal Register with a statement that the rule will be effective on a particular date unless an adverse comment is received within a specified period of time (e.g., 30 days). If an adverse comment is filed, the direct final rule is withdrawn and the agency may publish the rule as a proposed rule. In "interim final" rulemaking, the agency issues a final rule without an NPRM that is generally effective immediately, but with a post-promulgation opportunity for the public to comment. If the public comments persuade the agency that changes are needed in the interim final rule, the agency may revise the rule by publishing a final rule reflecting those changes. In August 1998, we reported that about half of the 4,658 final regulatory actions published in the Federal Register during 1997 were issued without NPRMs. Although most of the final actions without NPRMs appeared to involve administrative or technical issues with limited applicability, some were significant actions, and 11 were "economically significant" (e.g., had at least a $100 million impact on the economy). Some of the explanations that the agencies offered in the preambles to their rules for using the good cause exception were not clear. For example, in several cases, the preambles said that an NPRM was "impracticable" because of statutory or other deadlines that had already passed by the time the rules were issued. In other cases, the agencies asserted in the preambles that notice and comment would delay rules that were, in some general way, in the "public interest." For example, in one such case, the agency said it was using the good cause exception because the rule would "facilitate tourist and business travel to and from Slovenia," and therefore delaying the rule to allow for public comments "would be contrary to the public interest." In another case, the agency said that soliciting public comments on the rule was "contrary to the public interest" because the rule authorized a "new and creative method of financing the development of public housing." The APA recognizes that NPRMS are not always practical, necessary, or in the public interest. However, when agencies publish final rules without NPRMs, the public's ability to participate in the rulemaking process is limited. Also, several of the regulatory reform requirements that Congress has enacted during the past 20 years use as their trigger the publication of an NPRM. Therefore, it is important that agencies clearly explain why notice and comment procedures are not followed. We recommended in our report that OMB notify executive departments and agencies that (1) their explanations in the preambles to their rules should clearly explain why notice and comment was impracticable, unnecessary, or not in the public interest, and (2) OMB would, as part of its review of significant final rules, focus on those explanations. Another statutory requirement that is applicable to both independent and non-independent regulatory agencies is the Paperwork Reduction Act (PRA), which was originally enacted in 1980 but was amended and recodified in 1995. The original PRA established the Office of Information and Regulatory Affairs (OIRA) within OMB to provide central agency leadership and oversight of governmentwide efforts to reduce unnecessary paperwork and improve the management of information resources. Under the act, agencies must receive OIRA approval for each information collection request before it is implemented. The act generally defines a "collection of information" as the obtaining or disclosure of facts or opinions by or for an agency by 10 or more non-federal persons. Many information collections, recordkeeping requirements, and third-party disclosures are contained in or are authorized by regulations as monitoring or enforcement tools, while others appear in separate written questionnaires. Under the PRA, agencies must generally provide the public with an opportunity to comment on a proposed information collection by publishing a 60-day notice in the Federal Register. For each proposed collection of information submitted to OIRA, the responsible agency must certify and provide a record of support that the collection, among other things, is necessary for the proper performance of the functions of the agency, is not unnecessarily duplicative of other information, reduces burden on the public to the extent practicable and appropriate, and is written in plain and unambiguous terminology. The agency must also publish a notice in the Federal Register stating that the agency has submitted the proposed collection to OIRA and setting forth, among other things, (1) a description of the need and proposed use of the information, (2) a description of the likely respondents and their proposed frequency of response, and (3) an estimate of the resultant burden. For any proposed information collection that is not contained in a proposed rule, OIRA must complete its review of an agency information collection request within 60 days of the date that the proposed collection is submitted. OIRA approvals can be for up to 3 years, but can be renewed by resubmitting their information collection requests to OIRA. Agency information collections that have not been approved by OIRA or for which approvals have expired are considered violations of the PRA, and those individuals and organizations subject to these collections' requirements cannot be penalized for failing to provide the information requested. The PRA also requires OIRA to set governmentwide and agency-specific burden reduction goals. The act envisioned a 35-percent reduction in governmentwide paperwork burden by the end of fiscal year 2000. However, earlier this year we testified that governmentwide paperwork burden has gone up, not down, since 1995. Federal agencies often indicate that they cannot reduce their paperwork burden because of existing and new statutory requirements that they collect more information. Nevertheless, some agencies do appear to be making progress. For example, the Department of Labor's paperwork estimate dropped from more than 266 million burden hours at the end of fiscal year 1995 to about 182 million burden hours at the end of fiscal year 2000--a 32 percent decrease. The Regulatory Flexibility Act (RFA), enacted in 1980 in response to concerns about the effect that federal regulations can have on small entities, is another example of a broadly-based rulemaking requirement. Under the RFA, independent and non-independent regulatory agencies must prepare an initial regulatory flexibility analysis at the time proposed rules are issued unless the head of the issuing agency determines that the proposed rule would not have a "significant economic impact upon a substantial number of small entities." The regulatory flexibility analysis must include a description of, among other things, (1) the reasons why the regulatory action is being considered; (2) the small entities to which the proposed rule will apply and, where feasible, an estimate of their number; (3) the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, and (4) any significant alternatives to the proposed rule that accomplish the statutory objectives and minimize any significant economic impact on small entities. The RFA also requires agencies to ensure that small entities have an opportunity to participate in the rulemaking process, and requires the Chief Counsel of the Small Business Administration's (SBA) Office of Advocacy to monitor agencies' compliance with the Act. Section 610 of the RFA requires agencies to review those rules that have or will have a significant impact within 10 years of their promulgation to determine whether they should be continued without change or should be amended or rescinded to minimize their impact on small entities. We have reported on the implementation of the RFA on several occasions in the past, and a recurring theme in our reports is the varying interpretation of the RFA's requirements by federal agencies. For example, in 1991, we reported that each of the four federal agencies that we reviewed had a different interpretation of key RFA provisions. The report pointed out that the RFA provided neither a mechanism to enforce compliance with the act nor guidance on implementing it. We recommended that Congress consider amending the RFA to require that SBA develop criteria for whether and how federal agencies should conduct RFA analyses. In 1994 we examined the 12 SBA annual reports on agencies' RFA compliance that had been issued since 1980. The reports indicated that agencies' compliance with the RFA varied widely from one agency to another, and that some agencies' compliance varied over time. We noted that the RFA does not expressly authorize SBA to interpret key provisions of the statute, and does not require SBA to develop criteria for agencies to follow in reviewing their rules. As a result, different rulemaking agencies were interpreting the statute differently. We said that if Congress wanted to strengthen the implementation of the RFA it should consider amending the act to provide SBA with clearer authority and responsibility to interpret the RFA's provisions and require SBA to develop criteria on whether and how agencies should conduct RFA analyses. We essentially repeated this recommendation in our 1999 report on the review requirements in section 610 of the RFA that the agencies we reviewed differed in their in their interpretation of those review requirements. We said that if Congress was concerned about these varying interpretations it might wish to consider clarifying those provisions. Last year we reported on the implementation of the RFA at EPA and concluded that, although the agency had established a high threshold for what constitutes a significant economic impact, the agency's determinations were within the broad discretion that the statute allowed. We again said that Congress could take action to clarify the act's requirements and help prevent concerns about how agencies are implementing the act. Earlier this year we testified on the need for congressional action in this area, noting that the promise of the RFA may never be realized until Congress or some other entity defines what a "significant economic impact" and a "substantial number of small entities mean in a rulemaking setting. To date, Congress has not acted on our recommendations. The RFA was amended in 1996 by the Small Business Regulatory Enforcement Fairness Act (SBREFA) to, among other things, make certain agency actions under the act judicially reviewable. For example, a small entity that is adversely affected or aggrieved by an agency's determination that its final rule would not have a significant impact on small entities could generally seek judicial review of that determination within 1 year of the date of the final agency action. In granting relief, a court may remand the rule to the agency or defer enforcement against small entities. SBA's Office of Advocacy noted in a report marking the 20th anniversary of the RFA that the addition of judicial review has been an incentive for agencies to comply with the act's requirements, and that small entities are not hesitant to initiate court challenges in appropriate cases. Another provision of SBREFA requires OSHA and the Environmental Protection Agency (EPA) to convene advocacy review panels before publishing an initial regulatory flexibility analysis. Specifically, the agency issuing the regulation (OSHA or EPA) must notify the SBA Chief Counsel for Advocacy and provide information on the draft rule's potential impacts on small entities and the type of small entities that might be affected. The Chief Counsel then must identify representatives of affected small entities within 15 days of the notification. SBREFA requires the panel to consist of full-time federal employees from the rulemaking agency, OIRA, and SBA's Chief Counsel for Advocacy. During the advocacy review panel process, the panel must collect the advice and recommendations of representatives of affected small entities about the potential impact of the draft rule. SBREFA also states that the panel must report on the comments received and on the panel's recommendations no later than 60 days after the panel is convened, and the panel's report must be made public as part of the rulemaking record. In 1998 we reported on how the first five advocacy review panels were implemented, including OSHA's panel on occupational exposure to tuberculosis. Agency officials and small entity representatives generally agreed that the panel process was worthwhile, providing valuable insights and opportunities for participation in the rulemaking process. However, some of the small entity representatives believed that the panels should be held earlier in the process, that the materials provided to them and the amount of time provided for their review could be improved, and that the agencies should improve the means by which they obtain comments. We noted that the trigger for the panel process is an agency's initial determination that a rule may have a significant economic impact on a substantial number of small entities, and again recommended that Congress give some entity clear authority and responsibility to interpret the RFA's provisions. The Unfunded Mandates Reform Act of 1995 (UMRA) is an example of a statutory requirement that appears to have had little substantive effect on agency rulemaking. For example, title II of UMRA generally requires covered federal agencies to prepare written statements containing specific information for any rule for which a proposed rule was published that includes a federal mandate that may result in the expenditure of $100 million or more in any 1 year by state, local, and tribal governments, in the aggregate, or by the private sector. The statute defined a "federal mandate" as not including conditions imposed as part of a voluntary federal program or as a condition of federal assistance. We examined the implementation of title II of UMRA during its first 2 years and concluded that it appeared to have only limited direct impact on agencies' rulemaking actions. Most of the economically significant rules promulgated during that period were not subject to the act's requirements for a variety of reasons (e.g., no proposed rule, or the mandates were a condition of federal assistance or part of a voluntary program). There were only two rules without an UMRA written statement that we believed should have had one (EPA's proposed national ambient air quality standards for ozone and particulate matter), but even in those rules we believed that the agency had satisfied the substantive UMRA written statement requirements. Also, title II contains exemptions that allowed agencies not to take certain actions if they determined that they were duplicative or not "reasonably feasible." The title also required agencies to take certain actions that they already were required to take or had completed or that were already under way. Another crosscutting rulemaking requirement of note is the National Environmental Policy Act of 1969 (NEPA). NEPA requires federal agencies to include in every recommendation or report related to "major Federal actions significantly affecting the quality of the human environment" a detailed statement on the environmental impact of the proposed action. According to the act and its implementing regulations developed by the Council on Environmental Quality, the statement must delineate the direct, indirect, and cumulative effects of the proposed action. Agencies are also required to include in the statement (1) any adverse environmental effects that cannot be avoided should the proposal be implemented, (2) alternatives to the proposed action, (3) the relationship between local short-term uses of the environment and the maintenance and enhancement of long-term productivity, and (4) any irreversible and irretrievable commitments of resources that would be involved if the proposed action should be implemented. Before developing any such environmental impact statement, NEPA requires the responsible federal official to consult with and obtain comments of any federal agency that has jurisdiction by law or special expertise with respect to any environmental impact involved. Agencies must make copies of the statement and the comments and views of appropriate federal, state, and local agencies available to the president, the Council on Environmental Quality, and to the public. The adequacy of an agency's environmental impact statement is subject to judicial review. The crosscutting statutory requirements that I have just listed are by no means the only statutory requirements that guide agency rulemaking. Regulations generally start with an act of Congress and are the means by which statutes are implemented and specific requirements are established. The statutory basis for a regulation can vary in terms of its specificity, from very broad grants of authority that state only the general intent of the legislation to very specific requirements delineating exactly what regulatory agencies should do and how they should do it. In 1999, we issued a report that examined this issue of regulatory discretion, and we reported that in many of the cases that we examined the statutes gave the agencies little or no discretion in establishing regulatory requirements that businesses viewed as burdensome. For example, we concluded that the Occupational Safety and Health Act gave OSHA no discretion in whether to hold companies (rather than individual employees) responsible for health and safety violations. Also, as other witnesses today will likely describe in detail, OSHA also follows numerous procedural and consultative steps before issuing a rule that may or may not be statutorily driven. For example, interested parties who comment on proposed OSHA rules may request a public hearing when none has been announced in the notice. When such a hearing is requested, OSHA says it will schedule one, and will publish in advance the time and place for it in the Federal Register. Therefore, federal agencies must be aware of the statutory requirements underlying their regulations, and must craft rules that are consistent with those requirements. Similarly, agency rulemaking is often significantly influenced by court decisions interpreting statutory requirements, and OSHA rulemaking is a good case in point. For example, in its 1980 "Benzene" decision, the Supreme Court ruled that, before promulgating new health standards, OSHA must demonstrate that the particular chemical to be regulated poses a "significant risk" under workplace conditions permitted by current regulations. The court also said that OSHA must demonstrate that the new limit OSHA proposes will substantially reduce that risk. This decision effectively requires OSHA to evaluate the risks associated with exposure to a chemical and to determine that these risks are "significant" before issuing a standard. Other court decisions have required OSHA rulemaking to demonstrate the technical and economic feasibility of its requirements. During the past 20 years, each president has issued executive orders and/or presidential directives designed to guide the federal rulemaking process, often with the goal of reducing regulatory burden. Although independent regulatory agencies are generally not covered by these requirements, they are often encouraged to follow them. One of the most important of the current set of executive orders governing the rulemaking process is Executive Order 12866, "Regulatory Planning and Review," which was issued by President Clinton in September 1993. Under the order, non-independent regulatory agencies are required to submit their "significant" rules to OIRA before publishing them in the Federal Register at both the proposed and final rulemaking stages. OIRA must generally notify the agency of the results of its review of a proposed or final rule within 90 calendar days after the date the rule and related analyses are submitted. The agencies are required to submit the text of the draft regulatory action and an assessment of the potential costs and benefits of the action to OIRA. They are required to submit a detailed economic analysis for any regulatory actions that are "economically significant" (e.g., have annual effects on the economy of $100 million or more). According to the executive order, the analyses should include an assessment of the costs and benefits anticipated from the action as well as the costs and benefits of "potentially effective and reasonably feasible alternatives to the planned regulation." The order also states that, in choosing among alternatives, an agency should select those approaches that maximize net benefits and "base its decisions on the best reasonably obtainable scientific, technical, economic, and other information concerning the need for, and consequences of, the intended regulation." In January 1996, OMB issued "best practices" guidance on preparing cost- benefit analyses under the executive order. The guidance gives agencies substantial flexibility regarding how the analyses should be prepared, but also indicates that the analyses should contain certain basic elements and should be "transparent"--disclosing how the study was conducted, what assumptions were used, and the implications of plausible alternative assumptions. At the request of Members of Congress, we have examined agencies' economic analyses both in our reviews of selected federal rules issued by multiple agencies and in the context of particular regulatory actions. In one of our reviews, we reported that some of the 20 economic analyses from five agencies that we reviewed did not incorporate all of the best practices set forth in OMB's guidance. Five of the analyses did not discuss alternatives to the proposed regulatory action, and, in many cases, it was not clear why the agencies used certain assumptions. Also, five of the analyses did not discuss uncertainty associated with the agencies' estimates of benefits and/or costs, and did not document the agencies' reasons for not doing so. We recommended that OMB's best practices guidance be amended to provide that economic analyses should (1) address all of the best practices or state the agency's reason for not doing so, (2) contain an executive summary, and (3) undergo an appropriate level of internal or external peer review by independent experts. To date, OMB has not acted on our recommendations. Executive Order 12866 also includes several other notable requirements. For example, section 5 of the order requires agencies to periodically review their existing significant regulations to determine whether they should be modified or eliminated. In March 1995, President Clinton reemphasized this requirement by directing each agency to conduct a page-by-page review of all existing regulations. In June 1995, the President announced that 16,000 pages had been eliminated from the Code of Federal Regulations. We reported on this review effort in October 1997, noting that the page elimination totals that four agencies reported did not take into account pages that had been added while the eliminations took place. We also said that about 50 percent of the actions taken appeared to have no effect on the burden felt by regulated entities, would have little effect, or could increase regulatory burden. Another part of the executive order requires agencies to prepare an agenda of all regulations under development or review and a plan describing in greater detail the most important regulatory actions that the agency expects to issue in proposed or final form in the next fiscal year or thereafter. The order also requires agencies to identify for the public in a complete, clear, and simple manner the substantive changes that are made to rules while under review at OIRA and, separately, the changes made at the suggestion or recommendation of OIRA. In January 1998 we reported on the implementation of this requirement, and concluded that the four agencies we reviewed had complete documentation available to the public of these changes for only about one-quarter of the 122 regulatory actions that we reviewed. OSHA had complete documentation available for one of its three regulatory actions, but the information was contained in files separate from the public rulemaking docket to ensure that it did not become part of the official rulemaking record and, therefore, subject to litigation. Executive Order 12612 on "Federalism," issued by President Reagan in 1987, was similar to the RFA in that it gave federal agencies broad discretion to determine the applicability of its requirements. The executive order required the head of each federal agency to designate an official to be responsible for determining which proposed policies (including regulations) had "sufficient federalism implications" to warrant preparation of a federalism assessment. If the designated official determined that such an assessment was required, it had to accompany any proposed or final rule submitted to OMB for review. We examined the preambles of more than 11,000 final rules that federal agencies issued between April 1996 and December 1998 to determine how often they mentioned the executive order and how often the agencies indicated that they had prepared a federalism assessment. Our work indicated that Executive Order 12612 had relatively little visible effect on federal agencies' rulemaking actions during this time frame. The preambles to only 5 of the more than 11,000 rules indicated that the agencies had conducted a federalism assessment. Most of these rules were technical or administrative in nature, but 117 were economically significant rules. However, the agencies prepared a federalism assessment for only one of these economically significant rules. The lack of assessments for these rules is particularly surprising given that the agencies had previously indicated that 37 of the rules would affect state and local governments, and said that 21 of them would preempt state and local laws in the event of a conflict. Federal agencies had broad discretion under Executive Order 12612 to determine whether a proposed policy has "sufficient" federalism implications to warrant the preparation of a federalism assessment. Some agencies have clearly used that discretion to establish an extremely high threshold. For example, in order for an EPA rule to require a federalism assessment, the agency's guidance said that the rule must, among other things, have an "institutional" effect on the states (not just a financial effect), and affect all or most of the states in a direct, causal manner. Under these standards, an EPA regulation that has a substantial financial effect on all states, but does not affect the "institutional" role of the states, would not require a federalism assessment. Executive Order 12612 was revoked by President Clinton's Executive Order 13132 on "Federalism," which was issued August 4, 1999, and took effect on November 2, 1999. Like the old executive order, the new order provides agencies with substantial flexibility to determine which of their actions have "federalism implications" and, therefore, when they should prepare a "federalism summary impact statement." Non-independent regulatory agencies are also covered by an array of other executive orders and presidential directives or memoranda. These executive requirements include: Executive Order 13175, which requires consultation and coordination with Indian tribal governments. Agencies submitting final rules to OIRA under Executive Order 12866 must certify that this order's requirements were "met in a meaningful and timely manner." Executive Order 12988 on civil justice reform, which generally requires agencies to review existing and new regulations to ensure that they comply with specific requirements (e.g., "eliminate drafting errors and ambiguity" and "provide a clear legal standard for affected conduct") to improve regulatory drafting in order to minimize litigation. Executive Order 12630 on constitutionally protected property rights, which says each agency "shall be guided by" certain principles when formulating or implementing policies that have "takings" implications. For example, the order says that private property should be taken only for "real and substantial threats," and "be no greater than is necessary." Executive Order 12898 on environmental justice, which says (among other things) that each agency must develop a strategy that identifies and addresses disproportionately high and adverse human health or environmental effects of its programs, policies, and activities on minority populations and low income populations. It also says that agencies should identify rules that should be revised to meet the objectives of the order. Executive Order 13045 on protection of children from environmental health risks and safety risks. The order says that for any substantive rulemaking action that is likely to result in an economically significant rule that concerns an environmental health risk or safety risk that may disproportionately affect children, the agency must provide OIRA (1) an evaluation of the environmental or safety effects on children and (2) an explanation of why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives. Executive Order 12889 on the North American Free Trade Agreement, which generally requires agencies subject to the APA to provide at least a 75-day comment period for any "proposed Federal technical regulation or any Federal sanitary or phytosanitary measure of general application." Various presidential memoranda or directives. For example, a March 4, 1995, presidential memorandum directed agencies to, among other things, focus their regulatory programs on results not process and expand their use of negotiated rulemaking. A June 1, 1998, presidential directive required agencies to use plain language in proposed and final rulemaking documents. One statutory requirement that I did not mention previously but that can clearly affect agency rulemaking is the Congressional Review Act (CRA), which was included as part of SBREFA in 1996. Under the CRA, before a final rule can become effective it must be filed with Congress and GAO. If OIRA considers the rule to be "major" (e.g., has a $100 million impact on the economy), the agency must delay its effective date by 60 days after the date of publication in the Federal Register or submission to Congress and GAO, whichever is later. Within 60 legislative or session days, a Member of Congress can introduce a resolution of disapproval that, if adopted by both Houses and signed by the president, can nullify the agency's rule.

This testimony discusses the procedural and analytical rulemaking requirements applicable to the Occupational Safety and Health Administration (OSHA) and other federal regulatory agencies. GAO found that the rulemaking requirements that have been placed on OSHA and other agencies are voluminous and require a wide range of procedural, consultative, and analytical actions on the part of the agencies. Federal agencies sometimes take years to develop final rules, and the requirements are not as effective as expected or as they could be. This lack of effectiveness can be traced to how the requirements have been implemented and the requirements themselves.

The five principal emissions from coal power plants are carbon dioxide, SO, particulate matter, and mercury. For the purposes of this report, we are focusing on power plants' emissions of SO, NO, and particulate matter since they, along with ozone, are the focus of a rule currently proposed by EPA--the Transport Rule--which seeks to limit the interstate transport of emissions of SO in order to abate violations of particulate matter and ozone NAAQS in downwind states. According to an EPA analysis, as of 2008, power plants emitted over 65 percent of SO emissions and almost 20 percent of NO emissions, nationwide. These emissions impact local air quality, but they can also travel hundreds of miles to impact the air quality of downwind states. In developing the Transport Rule, EPA has found that emissions of SO from 31 eastern states and the District of Columbia prevent downwind states from meeting NAAQS for ozone and particulate matter. SO and NO emissions contribute to the formation of fine particulate matter, and NO emissions contribute to the formation of ozone, which can cause or aggravate respiratory illnesses. the atmosphere, known as volatile organic compounds; and sunlight. Cars and power plants that burn fossil fuels are contributors of NO pollution. stack. In 1970, there were only 2 stacks higher than 500 feet in the United States, but this number had increased to more than 180 by 1985. While constructing a tall stack is a dispersion technique that helps to reduce pollution concentrations in the local area, using tall stacks does not reduce total emissions that can potentially be transported to downwind states. The 1977 amendments to the Clean Air Act discouraged the use of dispersion techniques to help attain NAAQS. Specifically, section 123 prohibits states from counting the dispersion effects of stack heights in excess of a stack's GEP height when determining a source's emissions limitation. The Clean Air Act defines GEP as "the height necessary to insure that emissions from the stack do not result in excessive concentrations of any air pollutant in the immediate vicinity of the source as a result of atmospheric downwash, eddies, or wakes which may be created by the source itself, nearby structures, or nearby terrain obstacles." According to federal regulations, a stack's GEP height is the higher of 65 meters, measured from the ground-level elevation at the base of the stack; a formula based on the height and width of nearby structure(s) (height plus 1.5 times the width or height, whichever is lesser); or the height demonstrated by a fluid model or field study that ensures the emissions from a stack do not result in excessive concentrations of any air pollutant as a result of atmospheric downwash created by the source itself, nearby structures, or nearby terrain features. Downwash occurs when large buildings or local terrain distort or impact wind patterns, and an area of more turbulent air forms, known as a wake. Emissions from a stack at a power plant can be drawn into this wake and brought down to the ground near the stack more quickly (see fig. 1). States issue air permits to major stationary sources of air pollution, such as power plants, and determine GEP for stacks when they set emissions limitations for these sources. Emissions limitations may be reset when plants undergo New Source Review. New Source Review is a preconstruction permitting program which requires a company that constructs a new facility or makes a major modification to an existing facility to meet new, more stringent emissions limitation based on the current state of pollution control technology. A stack's GEP height is used in air dispersion modeling that takes place when emissions limitations are developed for a source as part of the permitting process. Many sources contribute to levels of pollution that affect the ability of downwind states to attain and maintain compliance with NAAQS, and some of these pollutants may originate hundreds or thousands of miles from the areas where violations are detected. The Clean Air Act's "good neighbor provisions" under section 110 of the Act require states to prohibit emissions that significantly contribute to nonattainment or interfere with maintenance of NAAQS in downwind states or which will interfere with downwind states' ability to prevent significant deterioration of air quality. Section 126 of the Clean Air Act also allows a downwind state to petition EPA to determine that specific sources of air pollution in upwind states interfere with the downwind state's ability to protect air quality and for EPA to impose emissions limitations directly on these sources. As detailed in the timeline below, Congress granted EPA increased authority to address interstate transport of air pollution under the Clean Air Act, and EPA acted on this authority. 1977 amendments to the Clean Air Act. These amendments contained two provisions that focused on interstate transport of air pollution, the predecessor to the current good neighbor provision of section 110 of the Act and section 126. These amendments also established the New Source Review program. 1990 amendments to the Clean Air Act. These amendments added the Acid Rain Program (Title IV) to the Clean Air Act, which created a cap- and-trade program for SO emissions by 10 million tons from 1980 levels and reducing annual NO emissions by 2 million tons from 1980 levels by the year 2000. 1998 NO SIP Call. After concluding that NO emissions from 22 states and the District of Columbia contributed to the nonattainment of NAAQS for ozone in downwind states, EPA required these states to amend their SIPs to reduce their NO emissions. EPA took this regulatory action based on section 110 of the Clean Air Act. 2005 Clean Air Interstate Rule (CAIR). This regulation required SIP revisions in 28 states and the District of Columbia that were found to contribute significantly to nonattainment of NAAQS for fine particulate matter and ozone in downwind states. CAIR required reductions for SO emissions from 28 eastern states and the District of Columbia and included an option for states to meet these reductions through regional cap-and-trade programs. When the rule was finalized, EPA estimated it would annually reduce SO and NO emissions by 3.8 million and 1.2 million tons, respectively, by 2015. The U.S. Court of Appeals remanded CAIR to EPA in 2008 because it found significant flaws in the approach EPA used to develop CAIR, but allowed the rule to remain in place while EPA develops a replacement rule. 2010 Transport Rule. EPA proposed this rule to replace CAIR, which aims to reduce emissions of SO from power plants. If finalized as written, the rule would require emissions of SO to decrease 71 percent over 2005 levels and emissions of NO to decrease by 52 percent over 2005 levels by 2014. As described above, EPA's efforts to address the interstate transport of air pollution from power plants have focused on reducing the total emissions of SO from these plants. Unlike tall stacks, pollution controls help to reduce the actual emissions from power plants by either reducing the formation of these emissions or capturing them after they are formed. At coal power plants, these controls are generally installed in either the boiler, where coal is burned, or the duct work that connects a boiler to the stack. A single power plant can use multiple boilers to generate electricity, and the emissions from multiple boilers can sometimes be connected to a single stack. Figure 2 shows some of the pollution controls that may be used at coal power plants: fabric filters or electrostatic precipitators (ESP) to control particulate matter, flue gas desulfurization (FGD) units--known as scrubbers--to control SO emissions, and selective catalytic reduction (SCR) or selective non-catalytic reduction (SNCR) units to control NO emissions. The reduction in emissions from a coal power plant by the use of pollution controls can be substantial, as shown in table 1. The installation of pollution control equipment can also be expensive. According to a Massachusetts Institute of Technology study of coal power plants, it may cost anywhere from $215,000 per megawatt to $330,000 per megawatt to install controls at a coal power plant for particulate matter, SO. For a typical coal power plant with a capacity of 500 megawatts, this means that it could cost from $107 million to install these controls at a newly built facility up to $165 million to retrofit these controls at an existing facility. Additionally, pollution controls can require additional energy to operate, known as an energy penalty. According to our analysis of EIA data, which we updated with our survey results, we found a total of 284 tall smokestacks were operating at 172 coal power plants in 34 states, as of December 31, 2010. While about half of the tall stacks began operating more than 30 years ago, there has been an increase in the number of tall stacks that have begun operating in the last 4 years, which several stakeholders attributed to the need for new stacks when retrofitting existing plants with pollution control equipment. As of December 31, 2010, we found a total of 284 tall stacks were operating at 172 coal power plants in the United States. These tall stacks account for about 35 percent of the 808 stacks operating at coal power plants in the United States, and they are generally located at larger power plants. Specifically, we found these stacks are associated with 64 percent of the coal generating capacity. We found that 207 tall stacks (73 percent) are between 500 and 699 feet tall and that 63 stacks (22 percent) are between 700 and 999 feet tall. The remaining 14 stacks (5 percent) are 1,000 feet tall or higher, with the tallest stack at a coal power plant in the United States having a height of 1,038 feet at the Rockport Power Plant in Indiana. In figure 3, we show how a tall stack compares to the heights of other well-known structures. Thirty-five percent of the 284 tall stacks are concentrated in 5 states along the Ohio River Valley--Kentucky, Ohio, Indiana, Illinois, and Pennsylvania--at 59 coal power plants. Another 32 percent are located in Alabama, Missouri, West Virginia, Michigan, Georgia, Wyoming, Wisconsin, and Texas, while the remaining 33 percent of tall stacks are located across 21 other states. Figure 4 shows the location of coal power plants with operating tall stacks. For counts of all tall stacks by state, see appendix II. Forty-six percent of the 284 tall stacks operating at coal power plants in the United States as of December 31, 2010, went into service before 1980. Another 28 percent went into service in the 1980s, 7 percent went into service in the 1990s, and 18 percent went into service since 2000. Of the stacks that went into service since 2000, a vast majority went into service in the last 4 years, as shown in figure 5. Stack height is one of several factors that contribute to the interstate transport of air pollution. While the use of pollution controls has increased in recent years at coal power plants, several boilers connected to tall stacks remain uncontrolled for certain pollutants. Stack height is one of several factors that contribute to the interstate transport of air pollution. According to reports and stakeholders with expertise on this topic, tall stacks generally disperse pollutants over longer distances than shorter stacks and provide pollutants with more time to react in the atmosphere to form ozone or particulate matter. However, the interstate transport of air pollution is a complex process that involves several variables--such as total emissions from a stack, the temperature and velocity of the emissions, and weather--in addition to stack height. As a result, stakeholders had difficulty isolating the exact contribution of stack height to the interstate transport of air pollution, and we found limited research on this specific topic. For example, EPA staff involved in the modeling of interstate transport told us that it is difficult to determine the different impacts that stacks of varying heights have on the transport of air pollution. According to one atmospheric scientist we spoke with, the interstate transport of air pollution is a complex process and stack height represents just one variable in this process. Stakeholders struggled to identify the precise impact of tall stacks, due in part to the other factors that influence how high emissions from a stack will rise. The temperature and velocity of a stack's emissions, along with its height, contribute to what is known as an "effective stack height." Effective stack height takes into account not only the height at which emissions are released, but also how high the plume of emissions will rise, which is influenced by the temperature and velocity of these emissions. One atmospheric scientist told us the emissions from a shorter stack could rise higher than a taller stack, depending on the temperature and velocity of the emissions. Weather also plays a key role in the transport of air pollution. A study by the Northeast States for Coordinated Air Use Management (NESCAUM)-- a group that represents state air agencies in the Northeast--described weather patterns that can contribute to high-ozone days in the Ozone Transport Region, which includes 12 states in the Mid-Atlantic and New England regions and the District of Columbia. These high-ozone days typically occur in the summer on hot days, when the sun helps transform NO and volatile organic compounds into ozone. Wind speeds and wind direction also help to determine how emissions will travel. In the Mid- Atlantic United States, the wind generally blows from west to east during the day, and wind speeds are generally faster at higher elevations. The time of day can also influence the transport of air pollution. According to the NESCAUM report and researchers we spoke with, ozone can travel hundreds of miles at night with the help of high-speed winds known as the low-level jet. This phenomenon typically occurs at night when an atmospheric inversion occurs due to the ground cooling quicker than the upper atmosphere. A boundary layer can form between these two air masses several hundred feet off the ground, which can allow the low-level jet to form and transport ozone and particulate matter with its high winds. As the atmosphere warms the following day, this boundary layer can break down and allow these transported emissions to mix downward and affect local air quality. Air dispersion models typically take into account stack height along with these other factors when predicting the transport of emissions from power plants. For example, EPA used the Comprehensive Air Quality Model with Extensions (CAMx) to conduct the modeling to support the development of the Transport Rule. CAMx is a type of photochemical grid model, which separates areas into grids and aims to predict the transport of sources that lie within these grids. Key inputs into this model include stack height, the velocity and temperature of emissions, and weather data. EPA staff involved in conducting this modeling for the Transport Rule said they use the CAMx model to predict the actual impacts of air emissions, and they have not used this model to estimate the specific impact of stack height on interstate transport. They reported their modeling efforts in recent years have been done in support of CAIR and the Transport Rule, and have been focused on modeling the regional impacts of reducing total air emissions. Several stakeholders we spoke with said total emissions is a key contributor to interstate transport of air pollution, and the use of pollution controls at coal power plants is critical to reducing interstate transport of air pollution. Reducing the total emissions from a power plant influences how much pollution can react in the atmosphere to form ozone and particulate matter that can ultimately be transported. The use of pollution control equipment, particularly for SO and NO emissions, has increased over time, largely in response to various changes in air regulations, according to stakeholders and reports we reviewed. According to EIA data, the generating capacity of power plants that is controlled by FGDs has increased from about 87,000 megawatts to about 140,000 megawatts from 1997 to 2008. Since coal power plants had about 337,000 megawatts of generating capacity in 2008, this means that about 42 percent of the generating capacity was controlled by a FGD in 2008. Similarly, SCRs were installed at about 44,000 megawatts worth of capacity from 2004 through 2009, with about one-third of these installations occurring in 2009 alone, according to an EPA presentation on this topic. EPA and state officials, along with electric utility officials, told us that the increase in the use of these pollution controls is due to various air regulations, such as the Acid Rain Program and CAIR, which focused on reducing SO emissions. However, while we found that the use of pollution controls at coal power plants has increased in recent years, many boilers remain uncontrolled for certain pollutants, including several connected to tall stacks. For example, we found that 56 percent of the boilers attached to tall stacks at coal power plants do not have a FGD to control SO emissions. Collectively, we found that these uncontrolled boilers accounted for 42 percent of the total generating capacity of boilers attached to tall stacks. Our findings on FGDs are similar to EPA data on all coal power plants. In 2009, EPA estimated that 50 percent of the generating capacity of coal power plants did not have FGDs. For NO controls, we found that while about 90 percent of boilers attached to tall stacks have combustion controls in place to reduce the formation of NO emissions, a majority of these boilers lack post-combustion controls that can help to reduce NO emissions to a greater extent. Specifically, 63 percent of boilers connected to tall stacks do not have post-combustion controls for NO, such as SCRs or SNCRs, which help reduce NO emissions more than combustion controls alone. Collectively, we found that these boilers without post-combustion controls accounted for 54 percent of the total generating capacity of boilers attached to tall stacks. EPA data on all coal power plants show that 53 percent of the generating capacity for coal power plants did not have post-combustion controls for NO emissions in place in 2009. Tall stacks that had uncontrolled SO emissions were generally attached to older boilers that went into service prior to 1980. We found that approximately 85 percent of boilers without FGDs that were attached to tall stacks went into service before 1980. Similarly, over 70 percent of the boilers without post-combustion controls for NO went into service before 1980. Overall, we found that about 82 percent of the boilers that lacked both a FGD and post-combustion controls for NO went into service before 1980. Some stakeholders attributed the lack of pollution controls on older boilers to less stringent standards that were applied at the time the boilers were constructed. As discussed above, companies that construct a new facility or make a major modification to an existing facility must meet new emissions limitations based on the current state of pollution control technology. Because pollution control technology has advanced over time, the standards have become more stringent over time, meaning that boilers constructed before 1980 would have had higher allowable emissions and less need to install controls than boilers constructed in 2010. Unlike our findings on FGDs and post-combustion controls for NO emissions, we found that 100 percent of boilers attached to tall stacks were controlled for particulate matter. However, it is important to note that plants with uncontrolled SO and NO emissions contribute to the formation of additional particulate matter in the atmosphere. We identified 48 tall stacks built since 1988 that states reported are subject to the GEP provisions of the Clean Air Act and for which states could provide GEP height information. Of these 48 stacks, we found that 17 exceed their GEP height, 19 are at their GEP height, and 12 are below their GEP height. We found that 15 of the 17 stacks built above GEP were replacement stacks that were built as part of the process of installing pollution control equipment. These stacks vary in the degree to which they exceed GEP height, ranging from less than 1 percent above GEP to about 46 percent above GEP, as shown in table 2. The other 2 stacks built above GEP exceed their GEP height by 2 percent or less. When we followed up with utility officials regarding why these stacks were built above GEP, they reported that a variety of factors can influence stack height decisions. These factors included helping a plant's emissions clear local geographic features, such as valley walls. According to one state air protection agency, three stacks were built above GEP to provide further protection against downwash. Officials from two utilities said they built stacks above GEP at coal power plants to account for the impact of other structures, such as cooling towers, on the site. Other stakeholders said that utilities may be hesitant to lower stack heights at their facilities when replacing a stack because plant officials have experience with that stack height and its ability to help protect against downwash. An official from one company that builds stacks told us this practice has sometimes occurred because utilities do not want the moisture-rich emissions from the replacement stack to hasten the deterioration of the old stacks, which are usually left in place and must be maintained. In addition, this moisture can create large icicles on the older stacks, which can present a danger to staff working at the power plant. Other stakeholders highlighted factors that may play a role in making stack height decisions. Some federal and state officials reported that generally there is little incentive to build a stack above GEP because a facility will not receive dispersion credit for the stack's height above GEP. Other stakeholders acknowledged that a stack could be built above GEP for site-specific reasons, such as helping emissions clear nearby terrain features. Some of these officials also noted that cost was another factor considered when making stack height decisions, as it is generally more costly to build a higher stack. For example, one utility official told us that two replacement stacks that were recently built below their original heights could meet their emissions limitations with these lower stack heights because the utility was installing pollution control equipment and did not want to incur the additional cost of building a taller stack. We found that stacks built above GEP since 1988 generally were attached to boilers that had controls in place for SO, and particulate matter, as shown in table 3. We found similar results for stacks that were built at or below their GEP heights. We were unable to obtain GEP height information for an additional 25 stacks that were built since 1988 for two reasons. First, some of these stacks replaced stacks that were exempt from the GEP regulations, according to state officials. Section 123 of the Clean Air Act exempts stack heights that were in existence on or before December 31, 1970, from the GEP regulations; because the exemption applies to stack heights rather than to stacks themselves, it covers both original and replacement stacks. Second, states did not have GEP information readily available for some stacks. According to state officials, they did not set new emissions limits at the time these replacement stacks were built because they were part of pollution control projects and emissions from these plants did not increase. For example, one state reported that GEP could have been calculated decades earlier for the original stacks when emissions limitations were set, and they were unable to locate this information in response to our request. According to EPA staff we spoke with about this issue, states are not required to conduct a GEP analysis in these instances. While we were unable to obtain GEP information for these stacks, our analysis of the pollution controls installed at boilers connected to these stacks yielded similar results to those stacks for which we did obtain GEP information. Specifically, all of these boilers had controls for SO. We provided a draft of this report to EPA and DOE for review and comment. Both EPA and DOE stated they had no comments. 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 appropriate congressional committees, Secretary of Energy, Administrator of EPA, and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To identify the number and location of smokestacks at coal power plants that were 500 feet or higher as of December 31, 2010, we analyzed data on power plants from the Department of Energy's (DOE) Energy Information Administration (EIA). We also used these data to determine when these stacks began operating. To determine the reliability of these data, we reviewed documentation from EIA, interviewed relevant officials who were involved in collecting and compiling the data, conducted electronic testing of the data, and we determined that the data were sufficiently reliable for our purposes. Because the EIA data were collected in 2008, we contacted all 50 states and the District of Columbia to determine if they had tall stacks and developed and administered a survey to those 38 states with tall stacks to update the relevant EIA data and determine if any changes had taken place in the number or operating status of stacks since that time. We received e-mail addresses for each state from the Web site of the National Association of Clean Air Agencies, which represents air pollution control agencies in 53 states and territories, and developed a survey that we sent to respondents as an e-mail attachment. Prior to sending out this survey, we pretested the survey with officials from 2 states and revised some of the survey questions based on their input. We received responses to our survey from all 38 states and we sent follow-up questions based on their survey responses to clarify certain responses or to ask for additional information. We updated the relevant EIA data with these survey results to include the most recent information available on tall stacks. We did not include tall stacks that were used as bypass stacks only in times of maintenance or emergencies in our count of tall stacks. State officials reported that bypass stacks are rarely used and would not be used at the same time as plants' fully operating stacks. Additionally, we defined multi-flue stacks--those with multiple flues running within a single casing--as one stack, as opposed to counting each flue as a separate stack. A state modeling official told us they consider multi-flue stacks as single stacks when conducting dispersion modeling. For the purposes of this report, we defined tall smokestacks to be those that were 500 feet or higher. In our interviews with stakeholders, several told us they considered 500 feet to be a "tall" stack. Some stakeholders said that a typical boiler building at a coal power plant is about 200 feet high. Given that the original formula for good engineering practice (GEP) was 2.5 times height of nearby structures, this would equal about 500 feet. Other stakeholders reported that they considered a stack built above GEP to be "tall." To determine what is known about tall stacks' contribution to the interstate transport of air pollution, we reviewed reports from the Environmental Protection Agency (EPA) and academics and spoke with stakeholders with expertise on this topic. We conducted a literature search of engineering and other relevant journals on the topic of stack height and interstate transport of air pollution, and we reviewed the limited amount of literature we identified. The stakeholders we interviewed included EPA officials involved in modeling interstate transport of air pollution from power plants, officials from utilities and construction firms that design and build power plants, atmospheric scientists who conduct research on this topic, and state officials who are involved in permitting power plants and complying with federal regulations governing the interstate transport of air pollution. We also analyzed the EIA data and our survey results to determine the pollution control equipment installed at coal power plants with stacks 500 feet or higher. Specifically, we identified the control equipment that was associated with boilers that were attached to tall stacks. Pollution control equipment is not installed on stacks themselves; rather it is installed in the boilers or the ductwork that connect the boiler to a stack. We also interviewed stakeholders to learn about trends in installing pollution control equipment and reviewed relevant reports on this topic. To determine the number of tall stacks that have been built above their GEP height since 1988, we used our survey to obtain information from state officials about the GEP height for these stacks. Twenty-two states had stacks that were over 500 feet that were built since 1988, and we received survey responses from all of them. In our survey, we also asked for reasons that a stack was built above GEP, when applicable. In cases where state officials could not provide specific reasons, we contacted the utilities that operate the plants with these stacks to obtain this information. Specifically, we contacted utilities that were involved in operating 15 of the 17 stacks that were built since 1988 and exceed GEP height, and we were able to interview utilities operating 12 of these stacks. We did not contact the utilities that operate the other 2 stacks, because the stacks are each less than 2 feet above GEP. We also interviewed companies that design and build power plants to ask about some of the general factors that are considered when deciding on stack height. We focused on stacks built since 1988, because that was the year that EPA's regulations for determining GEP height were largely affirmed by the District of Columbia Court of Appeals. EPA began the process of developing these regulations in the late 1970s, but the final regulations were not issued until 1985. The regulations were then challenged in court and were largely affirmed in 1988. Finally, we conducted site visits to two coal power plants in Ohio. We selected this state because it contained several coal power plants with tall stacks, including some stacks that were built in 1988 or later. During this visit, we interviewed utility officials that operated these plants, along with state and local officials involved in permitting these plants. We conducted this work from July 2010 through May 2011 in accordance with all sections of GAO's quality assurance framework that are relevant to our objectives. This framework requires that we plan and perform the engagement to obtain sufficient, appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. Table 4 provides counts of the number of stacks 500 feet or higher--tall stacks--by state. In addition, the table provides information on the generating capacity of the boilers attached to these stacks. In addition to the individual named above, key contributors to this report include Barbara Patterson (Assistant Director), Scott Heacock, Beth Reed Fritts, and Jerome Sandau. Important assistance was also provided by Antoinette Capaccio, Cindy Gilbert, Alison O'Neill, Madhav Panwar, and Katherine Raheb.

Tall smokestacks--stacks of 500 feet or higher, which are primarily used at coal power plants--release air pollutants such as sulfur dioxide (SO2) and nitrogen oxides (NOx) high into the atmosphere to help limit the impact of these emissions on local air quality. Tall stacks can also increase the distance these pollutants travel in the atmosphere and harm air quality and the environment in downwind communities. The 1977 amendments to the Clean Air Act encourage the use of pollution control equipment over dispersion techniques, such as tall stacks, to meet national air standards. Section 123 of the Act does not limit stack height, but prohibits sources of emissions from using the dispersion effects of stack heights in excess of a stack's good engineering practice (GEP) height to meet emissions limitations. GAO was asked to report on (1) the number and location of tall stacks of 500 feet or higher at coal power plants and when they began operating; (2) what is known about such stacks' contribution to the interstate transport of air pollution and the pollution controls installed at plants with these stacks; and (3) the number of stacks that were built above GEP height since 1988 and the reasons for this. GAO analyzed Energy Information Administration (EIA) data on power plants, surveyed states with tall stacks, and interviewed experts on the transport of air pollution. GAO is not making recommendations in this report. The Environmental Protection Agency and the Department of Energy stated they had no comments on this report According to analysis of EIA data, which were updated with GAO's survey results, a total of 284 tall smokestacks were operating at 172 coal power plants in 34 states, as of December 31, 2010. Of these stacks, 207 are 500 to 699 feet tall, 63 are 700 to 999 feet tall, and the remaining 14 are 1,000 feet tall or higher. About one-third of these stacks are concentrated in 5 states along the Ohio River Valley. While about half of tall stacks began operating more than 30 years ago, there has been an increase in the number of tall stacks that began operating in the last 4 years, which air and utility officials attributed to the need for new stacks when plants installed pollution control equipment. Stack height is one of several factors that contribute to the interstate transport of air pollution. According to reports and stakeholders with expertise on this topic, tall stacks generally disperse pollutants over greater distances than shorter stacks and provide pollutants greater time to react in the atmosphere to form ozone and particulate matter. However, stakeholders had difficulty isolating the exact contribution of stack height to the transport of air pollution because this is a complex process that involves several other variables, including total emissions from a stack, the temperature and velocity of the emissions, and weather. The use of pollution controls, which are generally installed in boilers or the duct work that connects a boiler to a stack, has increased in recent years at coal power plants. However, GAO found that many boilers remain uncontrolled for certain pollutants, including several connected to tall stacks. For example, GAO found that 56 percent of boilers attached to tall stacks lacked scrubbers to control SO2 and 63 percent lacked post-combustion controls to capture NOx emissions. In general, GAO found that boilers without these controls tended to be older, with in-service dates prior to 1980. GAO identified 48 tall stacks built since 1988--when GEP regulations were largely affirmed in court--that states reported are subject to the GEP provisions of the Clean Air Act and for which states could provide GEP height information. Of these 48 stacks, 17 exceed their GEP height, 19 are at their GEP height, and 12 are below their GEP height. Section 123 of the Clean Air Act defines GEP as the height needed to prevent excessive downwash, a phenomenon that occurs when nearby structures disrupt airflow and produce high local concentrations of pollutants. Officials reported that a variety of factors can influence stack height decisions. For example, some utility officials reported that stacks were built above GEP to provide greater protection against downwash or to help a plant's emissions clear local geographic features, such as valley walls. GAO was unable to obtain GEP height information for an additional 25 stacks that were built since 1988 for two reasons: (1) some of these stacks were exempt from GEP regulations, and (2) states did not have GEP information readily available for some replacement stacks because the GEP calculation was sometimes made decades earlier and a recalculation was not required at the time the replacement stack was built.

The mission of IRS, a bureau within the Department of the Treasury, is to provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the federal tax laws with integrity and fairness to all. In carrying out its mission, IRS annually collects over $2 trillion in taxes from millions of individual taxpayers and numerous other types of taxpayers and manages the distribution of over $300 billion in refunds. To guide its future direction, the agency has two strategic goals: (1) deliver high quality and timely service to reduce taxpayer burden and encourage voluntary compliance; and (2) effectively enforce the law to ensure compliance with tax responsibilities and combat fraud. IRS has established seven overarching priorities to accomplish its mission: facilitate voluntary compliance by empowering taxpayers with secure and innovative services, tools, and support; understand non-compliant taxpayer behavior, and develop approaches to deter and change it; leverage and collaborate with external stakeholders; cultivate a well-equipped, diverse, skilled, and flexible workforce; select highest value work using data analytics and a robust feedback loop; drive more agility, efficiency, and effectiveness in IRS operations; and strengthen cyber defense and prevent identity theft. The mission of IRS's Information Technology organization is to deliver IT services and solutions that drive effective tax administration to ensure public confidence. It is led by the Chief Technology Officer, who reports to the Deputy Commissioner for Operations Support of the IRS. Several subordinate offices report to the Chief Technology Officer. Figure 1 shows the structure of IRS's Information Technology organization. IT plays a critical role in enabling IRS to carry out its mission and responsibilities. For example, the agency relies on information systems to process tax returns, account for tax revenues collected, send bills for taxes owed, issue refunds, assist in the selection of tax returns for audit, and provide telecommunications services for all business activities, including the public's toll-free access to tax information. For fiscal year 2016, IRS is pursuing 23 major and 114 non-major IT investments to carry out its mission. These investments generally support (1) day-to-day operations (which include operations and maintenance, as well as development, modernization, and enhancements to existing systems), and (2) modernization efforts in support of IRS's future goals. The day-to-day operations are primarily funded via the operations support appropriation account, user fees and other supplemental funding. The modernization efforts are funded via the business systems modernization appropriation account. IRS expects to spend about $2.7 billion for IT, including $2.2 billion in appropriated funds, $391.9 million in user fees, and $108.2 million in other supplemental funding. Approximately $1.4 billion of IRS's IT funding for fiscal year 2016 supports the two operational investments (TSS and MSSS), and four development investments (FATCA, ACA, CADE 2, and RRP) that we selected for review. TSS supports IRS's network infrastructure services such as network equipment, video conference service, enterprise fax service, and voice service for over 85,000 IRS employees at about 1,000 IRS locations. According to IRS, the investment continues delivery of services and products to employees which translates into service to taxpayers. IRS allocated approximately $366.6 million to activities supporting the TSS investment. Table 1 identifies the fiscal year 2016 funding allocation for the TSS investment, as well as the types of activities being funded. MSSS provides for the design, development, and deployment of server, middleware, and large systems as well as enterprise storage infrastructures, including systems software products, databases, and operating systems for these platforms. For fiscal year 2016, IRS allocated approximately $454.2 million for activities supporting the MSSS investment. Table 2 identifies the fiscal year 2016 funding allocation for the MSSS investment, as well as the types of activities being funded. FATCA is intended to improve tax compliance by identifying U.S. taxpayers that attempt to shield or divert assets by depositing funds in foreign accounts. A law enacted in 2010 requires foreign financial institutions to report to the IRS information regarding financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers have a substantial ownership interest. IRS allocated $89.1 million to FATCA for fiscal year 2016. ACA encompasses the planning, development, and implementation of IT systems needed to support IRS's tax administration responsibilities associated with parts of the Patient Protection and Affordable Care Act. IRS allocated $311.2 million to ACA for fiscal year 2016. CADE 2 is intended to provide daily processing of taxpayer accounts. A major component of the program is a modernized database for all individual taxpayers that is intended to provide the foundation for more efficient and effective tax administration. In Transition State 2 of the initiative, the modernized database will become IRS's authoritative source for taxpayer account data, as it begins to address core financial material weakness requirements for individual taxpayer accounts. Existing financial reports will be modified to take into account the increased level of detail and accuracy of data in the database. CADE 2 data will also be made available for access by downstream systems such as the Integrated Data Retrieval System for online transaction processing by IRS customer service representatives. IRS allocated $129.9 million to CADE 2 for fiscal year 2016. RRP is intended to deliver an integrated and unified system that enhances IRS's capabilities to detect, resolve, and prevent criminal and civil tax noncompliance. In addition, it is intended to allow analysis and support of complex case processing requirements for compliance and criminal investigation programs during prosecution, revenue protection, accounts management, and taxpayer communications processes. IRS allocated $91.7 million to RRP for fiscal year 2016. Over the past several years, we have issued a series of reports which have identified opportunities for IRS to improve the management of its major IT investments. We reported in June 2012 that while IRS reported on the cost and schedule of its major IT investments and provided chief information officer ratings for them, the agency did not have a quantitative measure of scope-a measure that shows functionality delivered. We noted that having such a measure is a good practice as it provides information about whether an investment has delivered the functionality that was paid for. We recommended that IRS develop a quantitative measure of scope, at a minimum for its major IT investments, to have more complete information on the performance of these investments. In December 2015, IRS officials told us that they were exploring options to report scope and proposed an option in a December 2015 quarterly report on IT to Congress. We examined the suitability of proposed solutions for a quantitative measure of scope as part of this review. Further, in April 2013 we reported that the majority of IRS's major IT investments were reportedly within 10 percent of cost and schedule estimates and eight major IT investments reported significant cost and/or schedule variances. We also reported that weaknesses existed, to varying degrees, in the reliability of reported cost and schedule variances, and key risks and mitigation strategies were identified. As a result, we made recommendations for IRS to improve the reliability of reported cost and schedule information by addressing the identified weaknesses in future updates of estimates. We also recommended that IRS ensure projects consistently follow guidance for updating performance information 60 days after completion of an activity and develop and implement guidance that specifies best practices to consider when determining projected amounts. IRS agreed with three of our four recommendations and partially disagreed with the fourth recommendation. The agency specifically disagreed with the use of earned value management data as a best practice to determine projected cost and schedule amounts, stating that the technique was not part of IRS's current program management processes and the cost and burden to use it outweighed the value added. While we disagreed with IRS's view of earned value management because best practices have found that the value generally outweighs the cost and burden of implementing it, we provided it as one of several examples of practices that could be used to determine projected amounts. We also noted that implementing our recommendation would help improve the reliability of reported cost and schedule variance information, and that IRS had flexibility in determining which best practices to use to calculate projected amounts. Finally, our February 2015 report found that most of IRS's major IT investments reported meeting cost and schedule goals; however, selected investments experienced variances from initial cost, schedule, and scope plans that were not transparent in reports to Congress because IRS had yet to address our prior recommendations. Specifically, IRS had not addressed our recommendation to report on how delivered scope compares to what was planned, and also did not address guidance for determining projected cost and schedule amounts, or the reporting of cumulative cost and schedule performance information. IRS has identified priorities for operations and modernization but does not have a structured process for prioritizing among modernization efforts. Specifically, IRS has developed eight priority groups for operations, such as the delivering essential tax administration and taxpayer services group, and identified eight priority projects for modernization, including CADE 2 and RRP, to help reach IRS's future state vision. In addition, IRS has developed a structured process for allocating funding to its operations support activities which is consistent with best practices. However, IRS has not fully documented this process. In addition, IRS does not have a similar structured process for prioritizing funding among its modernization activities, stating it does not have such a process because there are fewer competing activities than for operations support. A documented process for both operations support and modernization activities that is consistent with best practices would provide transparency into the process and provide greater assurance it is consistently applied. IRS has identified eight priorities--referred to as repeatable priority groupings--for its operations support activities. Officials told us that these priorities evolved from lessons learned in using priorities established the prior year and noted that they will continue to be refined over time. For example, in fiscal year 2015, activities associated with the tax filing season were identified as IRS's top priority; however, in fiscal year 2016, IRS decided that infrastructure (i.e., telephones and computer servers) was essential in supporting tax processing and should thus be classified as IRS's top priority. Each of the priority groupings includes several supporting business activities associated with major and non-major investments that IRS allocates funding to. Examples of such business activities include enterprise video conferencing service, and print support for taxpayer notices. These priorities and information related to these priorities are identified in order of importance, as determined by IRS, in table 3. IRS has also identified eight priority projects for modernization. These projects, as well as their descriptions and associated funding allocations are identified in table 4. According to GAO's Information Technology Investment Management Framework, an organization should document policies and procedures for selecting new and reselecting ongoing IT investments. These policies and procedures should include criteria for making selection and prioritization decisions. A policy-driven, structured method for reselecting ongoing projects provides the organization's investment board with a common understanding of how ongoing projects will be reselected for continued funding. In addition, executives funding decisions should be aligned with the selection decision. Specifically, the organization's executives have discretion in making the final funding decisions on IT proposals. However, their decisions should be based upon the analysis that has taken place in the previous activities. Further, the Office of Management and Budget's (OMB) Capital Programming Guide requires, among other things, that agencies have a disciplined capital programming process that addresses project prioritization and comparison of assets against one another to create a prioritized portfolio. In 2015, IRS developed and implemented a process known as the Portfolio Investment Planning process to prioritize its operations support activities. This process addresses (1) prioritization and comparison of IT assets against each other and (2) criteria for making selection and prioritization decisions. Further, senior IRS executives stated that the final funding decisions on IT proposals are based on IRS's prioritization process. IRS uses priority groupings it has defined as criteria for making prioritized selections. Specifically, a consideration in determining if an activity (i.e., request for funding) will be selected is to determine the extent to which it supports any of eight priority groupings. If the activity is found to support one of the eight priorities, it is further assigned one of four priority levels: must do, high, medium, or low. IRS has defined the criteria that must be met in order to classify a funding activity at a particular priority level. Table 5 provides an example of the criteria used to make these decisions for the legislative provisions for the FATCA and ACA priority group. IRS prioritizes and compares IT assets against each other. Specifically, IRS business units identify line item activities for which they are requesting funding. For each activity, business units address, among other things, placement within IRS's established priorities; proposed high-level capabilities and a cost estimate; a 1-year usable segment; and the date funding is needed and subsequent mitigation strategy if funding is not received by the specified date. Further, several meetings are held to review requested funding activities. According to IRS, the purpose of these meetings is to provide a cross- organization review and evaluation of IT-related demands. Stakeholders include Associate Chief Information Officers, business unit representatives, and staff from IRS's IT Financial Management Service. Finally, IRS senior executives stated that its final funding decisions on IT proposals are based on IRS's prioritization process. According to these officials, when the agency receives its appropriation, it evaluates prioritized activities--starting with the highest priority demands--until the total estimate of appropriated funding is allocated. Officials have discussions relative to the items that will not be funded and then engage the Office of the Chief Financial Officer to determine the extent to which user fees and other sources of funding are available to support priorities that exceed the appropriated amount. Prioritized activities, which have been allocated funding for the upcoming fiscal year, are presented to the Chief Technology Officer for approval. IRS's Senior Executive Team approves the Chief Technology Officer's funding recommendations and submits the recommendations to the Commissioner and Deputy Commissioners for final funding approval. Despite these strengths, IRS has not fully documented its process for prioritizing operations support activities. Specifically, while several documents describe aspects of the operations support prioritization process, including the criteria used and the meetings to review and evaluate IT related demands, none fully describe the procedures associated with the process. IRS officials stated this is because it is relatively new and not yet stabilized. IRS officials who are stakeholders in this process stated that documentation would have reduced the uncertainty they faced during implementation and would have helped them to better prepare the required data for the process. IRS senior executives stated they plan to fully document this process; however, they did not identify a time frame for when this would be done. Fully documenting IRS's portfolio investment process for operational activities would help ensure consistent implementation of the process by all stakeholders and provide transparency regarding how such prioritization decisions are made. In contrast with operations support, IRS does not have a structured process for prioritizing funding among its modernization investments. Specifically, IRS officials stated that discussions are held to determine the modernization efforts that are the highest priority to meet IRS's future state vision and technology roadmap. Officials reported that staffing resources and lifecycle stage are considered but there are no formal criteria for making final determinations. Senior IRS officials stated that they do not have a structured process for selection and prioritization of business systems modernization activities because the projects are set and there are fewer competing activities than for operations support. While there may be fewer competing activities, a structured, albeit simpler, process that is documented and consistent with best practices would provide transparency into IRS's needs and priorities for appropriated funds. Such a process would better assist Congress and other decision makers in carrying out their oversight responsibilities. Of the six selected investments in our review, two development investments--FATCA and RRP--performed under cost, with varying schedule performance, and delivered most of the scope that was planned; however, performance information for these investments could be improved by implementing best practices for determining actual work performed. For portions of the two other development investments (CADE 2 and ACA) for which performance information was available, IRS reported completing work under planned cost and on time. However, neither investment reported information on planned versus actual delivery of scope, in accordance with best practices. Further, ACA did not report timely information on planned versus actual costs. Finally, one of the two investments in operations and maintenance (MSSS) met all operational performance goals, while the other investment in operations and maintenance (TSS) met six out of eight goals. Best practices highlight the importance of timely reporting on performance relative to cost, schedule, and scope (both planned and actual). According to these practices, one way to measure benefits of development work is to approximate by measuring a project's actual cost and schedule progression (i.e., evaluating earned value), which is a measure of the amount of planned work that is actually performed in relation to the funds expended. IRS reported metrics for FATCA and RRP, which allowed us to determine these investments' performance. The agency did not use such metrics or consistently develop planned and actual cost, schedule, and scope information for all CADE 2 and ACA projects and activities that were completed or ongoing during fiscal year 2015 and the first quarter of fiscal year 2016. As a result, we could only determine the performance of portions of these investments. FATCA and RRP: During fiscal year 2015 and the first quarter of fiscal year 2016, IRS reported quarterly cost, schedule, and scope performance information for each of the FATCA and RRP projects it was working on. Specifically, it reported metrics for these investments via its Investment Performance Tool. Table 6 summarizes the performance of the FATCA and RRP investments (see appendix II for detailed analyses). As shown in table 6, FATCA and RRP performed under cost, with varying schedule performance, and delivered most of the scope that was planned. Specifically, IRS was developing 10 projects to support the FATCA investment during fiscal year 2015 and the first quarter of 2016. IRS reported completing work at $12.4 million less than budgeted and delivering 91.7 percent of planned scope with an 8 percent schedule overrun for these projects. IRS stated that the reasons for these variances include, among other things, issues with the requirements management process; an overestimation of costs; and a reduction in the amount of work completed versus what was planned. IRS was developing three projects to support the RRP investment during fiscal year 2015 and the first quarter of 2016. IRS reported completing work at $24.5 million less than budgeted and delivering 99.9 percent of planned scope with a minor schedule overrun for these projects. IRS stated that the reasons for these variances include, among other things, overestimation of costs (including IRS labor) and unplanned work that needed to be completed. While the scope metric used for FATCA and RRP provides an indication of performance, this metric would be more reliable if it incorporated best practices for determining the amount of work completed for all activities. Specifically, IRS uses a level of effort method beyond the amount generally accepted by best practices to determine the amount of work completed by its own staff. Our Cost Estimating and Assessment Guide states that the level of effort method should be used sparingly (15 percent of the budget or less); however, the work performed by IRS staff ranged from 22 to 100 percent of the work completed for the FATCA and RRP projects that were ongoing during the time frame of our review. IRS officials stated that measuring value for government work is a vague concept to pursue. Nevertheless, revising the method for determining the amount of work completed by IRS staff for these investments would improve the reliability of the performance information. CADE 2 and ACA: For the CADE 2 projects that were completed during fiscal year 2015 and the first quarter of fiscal year 2016, IRS reported that CADE 2 performed on time and $1.7 million under planned cost. According to IRS, the positive cost variance for the CADE 2 investment is the result of overestimation of costs and the ability to reuse existing code. For the ACA activities that reported actual costs during fiscal year 2015 and the first quarter of 2016, IRS reported that ACA performed on time and $10.3 million under planned costs. IRS stated that this variance was primarily due to an overestimation of the labor needed to complete the planned work. Table 7 shows the reported cost and schedule performance for CADE 2 and ACA. With respect to CADE 2, IRS does not report timely information on planned versus actual delivery of scope. Specifically, a senior CADE 2 program official stated that, due to the nature of the methodology being used to implement the projects, progress in delivering planned scope cannot be determined until the end--after the testing phase. For CADE 2, projects can be 16 to 60 months long. We requested information from IRS regarding delivery of planned scope for those projects that completed during the time frame of our review; however, IRS was unable to provide this information. Regarding ACA, IRS does not report timely cost or scope information. A senior IRS official stated that the investment is being developed using an iterative approach, the goal of which is to deliver functionality in short increments. However, the agency does not report actual costs for the activities comprising the projects until the activities are completed; this delay in reporting could be as long as 9 months. Instead, ACA calculates a cost projection, which provides an estimate of cost to complete rather than cost of work completed, with which we have previously identified weaknesses. In addition, IRS only provided information on delivery of planned scope for one of the ACA projects it was developing during the timeframe of our review. Reporting of performance for the CADE 2 and ACA investments could be improved by incorporating best practices for timely reporting of cost, schedule, and scope performance information. As a result of the lack of timely and complete performance information, Congress and other external parties do not have pertinent information about CADE 2 and ACA with which to make oversight decisions. According to OMB's Fiscal Year 2016 Capital Planning Guidance, ongoing performance of operational investments is monitored to ensure the investments are meeting the needs of the agency, delivering expected value, and/or modernized and replaced consistent with the agency's enterprise architecture. To this end, OMB requires agencies to report on at least five operational metrics for major IT investments and agencies are specifically required to report on planned and actual operational performance. The two operations and maintenance investments in our review reported on operational performance metrics, as required. MSSS met its five operational performance goals during fiscal year 2015; however, TSS consistently underperformed on two of its eight metrics. Table 9 identifies the MSSS operational performance metrics, their descriptions, and the performance against these metrics during fiscal year 2015. IRS reported planned and actual performance for eight operational performance metrics for TSS during fiscal year 2015. However, as previously mentioned, TSS consistently missed operational performance goals for two of the eight metrics. The two TSS metrics that were not met illustrate pervasive challenges meeting its goals in deploying new telecommunications capabilities. Specifically, IRS missed every monthly target in fiscal year 2015 for deploying voice, video, and data technologies. As a result, TSS did not deploy such technologies to approximately 4,300 users that were originally included in the planned deployment. According to IRS officials, the operational performance goals for the two metrics that were not met should have been updated to better reflect the limited funding the agency intended to allocate to these activities. Table 10 identifies the TSS operational performance metrics, their descriptions, and the performance against these metrics during fiscal year 2015. While IRS has developed a process for prioritizing funding for operations support activities that adheres to best practices, it is not fully documented. Further, IRS has not developed a priority setting process for modernization activities for which the agency allocated nearly $300 million to for fiscal year 2016. Until IRS documents its process for operations support activities and develops a process for modernization activities, the agency will lack the transparency needed by Congress and others to assist in carrying out their oversight responsibilities. IRS has developed performance metrics for two investments--FATCA and RRP--which include a measure of progress in delivering scope, a measure we have been reporting on and recommending IRS address since 2012. While these metrics represent an important step, their reliability could be improved by incorporating best practices for measuring the work performed by IRS staff by using the level of effort measure sparingly. In addition, only partial performance information was available for CADE 2 and ACA because IRS did not use the metrics it is positioned to develop for these investments or consistently have cost, schedule, and scope information for these investments. Continued efforts in this area would substantially improve the performance reporting for the CADE 2 and ACA investments, and potentially for all major development efforts. To help IRS improve its process for determining IT funding priorities and to provide timely information on the progress of its investments, we recommend that the Commissioner of IRS direct the Chief Technology Officer to take the following four actions: document IRS's process for selecting and prioritizing operations establish, document, and implement policies and procedures for selecting new and reselecting ongoing business systems modernization activities, consistent with IRS's process for prioritizing operations support priorities, which addresses (1) prioritization and comparison of IT assets against each other, (2) criteria for making selection and prioritization decisions, and (3) ensuring IRS executives' final funding decisions on IT proposals are based on IRS's prioritization process; modify existing processes for FATCA and RRP for measuring work performed by IRS staff to incorporate best practices, including accounting for actual work performed and using the level of effort measure sparingly; and report on actual costs and scope delivery at least quarterly for CADE 2 and ACA. For these investments, IRS should develop metrics similar to FATCA and RRP. We provided a draft of this product to IRS for comment. In its written comments, reproduced in appendix III, IRS agreed with two recommendations, did not agree nor disagree with one, and disagreed with one. Specifically, IRS agreed with our recommendations to better document its prioritization process for operations support activities and extend that process to its business systems modernization activities. With respect to our recommendation to report on actual costs and scope delivery at least quarterly for CADE 2 and ACA, IRS did not agree nor disagree, but noted that IRS is continuing to try to improve its processes in reporting investment performance. Regarding our recommendation to modify existing processes for FATCA and RRP for measuring work performed by IRS staff to incorporate best practices, including accounting for actual work performed and using the level of effort measure sparingly, IRS disagreed and stated that modifying the use of the level of effort measure would equate to a certified earned value management system, which would add immense burden on IRS's programs on various fronts and would outweigh the value it provides. However, we did not specify the use of an earned value management system in our report and believe other methods could be used to more reliably measure work performed. As noted in our report, 22 to 100 percent of the work for selected projects was performed by IRS staff. As a result, we believe that it is a reasonable expectation for IRS to reliably determine the actual work completed, as opposed to assuming that work is always completed as planned. Accordingly, we maintain our recommendation is still warranted. We are sending copies of this report to interested congressional committees, the Commissioner of IRS, and other interested parties. This report will also be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions on matters discussed in this report, please contact me at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to (1) describe the Internal Revenue Service's (IRS) current information technology (IT) investment priorities and assess IRS's process for determining these priorities, and (2) determine IRS's progress in implementing key IT investments. To address our first objective, we reviewed documentation, such as IRS's fiscal year 2016 Business Systems Modernization Operating Plan, as well as financial reports to determine IRS's IT funding priorities and funding allocations. In addition, we reviewed artifacts from IRS's Portfolio Investment Planning process, such as slide decks describing key stages of the process, memorandums distributed to stakeholders, prioritized listings of investment activities, and criteria for establishing priorities, to identify and describe IRS's process for determining its IT investment priorities. Further, we interviewed officials in IRS's Office of Strategy and Planning, as well as stakeholders of the Portfolio Investment Planning process from IRS business units. We then analyzed IRS's processes against best practices in our IT Investment Management Framework and the Office of Management and Budget's Capital Programming Guide to determine the extent to which the processes met best practices and requirements. Lastly, we met with officials at the Department of the Treasury who are responsible for IT capital planning, including the Treasury Chief Information Officer, to determine the department's role in IRS's process for prioritizing IT funding. For our second objective, we analyzed the performance of four key development investments--Customer Account Data Engine 2 (CADE 2), Return Review Program (RRP), Foreign Account Tax Compliance Act (FATCA), and the Affordable Care Act Administration (ACA). Further, we analyzed two key operational investments --Telecommunications Systems and Support (TSS) and Mainframes and Servers Services and Support (MSSS). We chose these investments because they represented IRS's most significant expenditures on development and operations for fiscal year 2015 ($496.5 million and $777.8 million, respectively). A tailored approach was necessary for analyzing the development investments given the varying types and extent to which performance information was available for these investments. To determine the progress in implementing FATCA and RRP, we compiled and analyzed quarterly output from IRS's Investment Performance Tool for the period of fiscal year 2015 through the first quarter of 2016. IRS does not consider this tool to be a formal Earned Value Management System. As a result, we did not evaluate the extent to which the tool was compliant with the American National Standards Institute's guidelines for an Earned Value Management System. For CADE 2, we analyzed IRS's quarterly reporting of planned and actual costs, as well as requirements reports and schedule reporting. For ACA, we analyzed IRS's financial reporting via the ACA business case submissions, as well as performance reporting to management and schedule reporting. In addition, we held multiple meetings with IRS officials, including officials in the CADE 2, FATCA, ACA, and RRP program offices. To determine the progress in implementing TSS and MSSS, we reviewed operational performance information reported for the selected investments from October 2014 to September 2015; this information included, where reported, the performance target and actual results for each metric. In addition, we reviewed documentation describing the performance metrics and interviewed IRS officials regarding the process for reporting such metrics. To determine the reliability of data used for our review, we obtained and reviewed IRS's guidance for its Investment Performance Tool, which identifies, among other things, how data are to be entered within this tool, sources of such data, and explanations of the methods used to calculate performance metrics generated from the tool. Further, we held meetings with officials responsible for overseeing the use of IRS's Investment Performance Tool. In addition, we relied on extensive work we previously completed on IRS's financial management system for relevant data used for this review. In determining the reliability of the data supporting this review, we determined that data regarding the delivery of planned scope for the FATCA and RRP investments could be more reliable by incorporating best practices. While these data were sufficiently reliable for our purposes, we made recommendations to improve their reliability. We conducted this performance audit from September 2015 to June 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. This appendix illustrates the potential for reporting complete performance information via IRS's Investment Performance Tool. Specifically, the following tables provide a detailed evaluation of cost, schedule, and scope performance for Return Review Program and Foreign Account Tax Compliance Act projects that were being developed by IRS during fiscal year 2015 and the first quarter of fiscal year 2016. IRS reported working on three projects in support of Return Review Program during fiscal year 2015 and the first quarter of fiscal year 2016. The following tables identify the performance information reported via IRS's Investment Performance Tool; positive cost variances indicate that the project was performing under planned cost and positive schedule variances indicate that the project was performing ahead of schedule. IRS reported working on 10 projects in support of Foreign Account Tax Compliance Act during fiscal year 2015 and the first quarter of fiscal year 2016. The following tables identify the performance information reported via IRS's Investment Performance Tool; positive cost variances indicate that the project was performing under planned cost, and positive schedule variances indicate that the project was performing ahead of schedule. In addition to the individual named above, the following staff made key contributions to this report: Sabine Paul (Assistant Director), Bradley Roach (Analyst in Charge), Rebecca Eyler, Charles Hubbard III, Paul Middleton, Karl Seifert, and Marshall Williams, Jr.

IRS relies extensively on IT systems to annually collect more than $2 trillion in taxes, distribute more than $300 billion in refunds, and carry out its mission of providing service to America's taxpayers in meeting their tax obligations. For fiscal year 2016, IRS planned to spend approximately $2.7 billion for IT investments. Given the size and significance of these expenditures, it is important that Congress be provided information on agency funding priorities, the process for determining these priorities, and progress in completing key IT investments. Accordingly, GAO's objectives were to (1) describe IRS's current IT investment priorities and assess IRS's process for determining these priorities, and (2) determine IRS's progress in implementing key IT investments. To do so, GAO analyzed IRS's process for determining its fiscal year 2016 funding priorities, interviewed program officials, and analyzed performance information for six selected investments for fiscal year 2015 and the first quarter of 2016. The Internal Revenue Service (IRS) has developed information technology (IT) investment priorities for fiscal year 2016, which support two types of activities--operations and modernization. For example, it has developed priority groups for operations such as: (1) critical business operations, infrastructure operations, and maintenance; and (2) delivery of essential tax administration/taxpayer services. It has identified priorities for modernization, such as web applications, to help reach IRS's future state vision. However, while IRS has developed a structured process for allocating funding to its operations activities consistent with best practices, it has not fully documented this process. IRS officials stated this is because the process is relatively new and not yet stabilized. In addition, IRS does not have a structured process for its modernization activities, because, according to officials, there are fewer competing activities than for operations activities. Fully documenting a process for both operations support and modernization activities that is consistent with best practices would provide transparency and greater assurance it is consistently applied. Of the six investments GAO reviewed, two investments--Foreign Account Tax Compliance Act and Return Review Program--provided complete and timely performance information for GAO's analyses. These investments performed under cost, with varying schedule performance, and delivered most planned scope (see table). However, IRS did not always use best practices for determining scope delivered. Specifically, IRS used a method inconsistent with best practices for determining the amount of work completed by its own staff. Two other investments reported completing portions of their work on time and $1.7 million under planned costs (for the Customer Account Data Engine 2), and on time and $10.3 million under planned costs (for Affordable Care Act Administration). However, neither investment reported information on planned versus actual delivery of scope in accordance with best practices. The remaining two investments--Mainframes and Servers Services and Support and Telecommunications Systems and Support--generally met performance goals. GAO is recommending that IRS develop and document its processes for prioritizing IT funding and improve the calculation and reporting of investment performance information. IRS agreed with two recommendations regarding its prioritization processes, disagreed with one related to the calculation of performance information, and did not comment on one recommendation. GAO maintains all of the recommendations are warranted.

ACF's Children's Bureau administers and oversees federal funding to states for child welfare services under Titles IV-B and IV-E of the Social Security Act, and states and counties provide these child welfare services, either directly or indirectly through contracts with private agencies. Among other activities, ACF staff are responsible for developing appropriate policies and procedures for states to follow to obtain and use federal child welfare funds, reviewing states' planning documents required by Title IV-B, conducting states' data system reviews, assessing states' use of Title IV-E funds, and providing technical assistance to states through all phases of the CFSR process. In addition, ACF staff coordinate the work of the 10 resource centers to provide additional support and assistance to the states. Spurred by the passage of the 1997 Adoption and Safe Families Act (ASFA), ACF launched the CFSR in 2001 to improve its existing monitoring efforts, which had once been criticized for focusing exclusively on states' compliance with regulations rather than on their performance over a full range of child welfare services. The CFSR process combines a statewide self-assessment, an on-site case file review that is coupled with stakeholder interviews, and the development and implementation of a 2- year PIP with performance benchmarks to measure progress in improving noted deficiencies. In assessing performance through the CFSR, ACF relies, in part, on its own data systems, known as NCANDS and AFCARS, which were designed prior to CFSR implementation to capture, report, and analyze the child welfare information collected by the states. Today, these systems provide the national data necessary for ACF to calculate national standards for key performance items against which all states are measured and to determine, in part, whether or not states are in substantial conformity on CFSR outcomes and systemic factors. Once ACF approves the PIP, states are required to submit quarterly progress reports. Pursuant to CFSR regulations, federal child welfare funds can be withheld if states do not show adequate PIP progress, but these penalties are suspended during the 2-year PIP implementation term. In preparation for the next round of CFSRs, ACF officials have formed a Consultation Work Group of ACF staff, child welfare administrators, data experts, and researchers who will propose recommendations on the CFSR measures and processes. The group's resulting proposals for change, if any, are not yet available. ACF and many state officials perceive the CFSR as a valuable process-- highlighting many areas needing improvement--and a substantial undertaking, but some state officials and child welfare experts told us that data enhancements could improve its reliability. ACF staff in 8 of the 10 regions considered the CFSR a helpful tool to improve outcomes for children. Further, 26 of the 36 states responding to a relevant question in our survey commented that they generally or completely agreed with the results of the final CFSR report, even though none of the 41 states with final CFSR reports released through 2003 has achieved substantial conformity on all 14 outcomes and systemic factors. In addition, both ACF and the states have dedicated substantial financial and staff resources to the process. However, several state officials and child welfare experts we interviewed questioned the accuracy of the data used to compile state profiles and establish the national standards. While ACF officials in the central office contend that stakeholder interviews and case reviews compliment the data profiles, many state officials and experts reported that additional data from the statewide assessment could bolster the evaluation of state performance. ACF and state officials support the objectives of the review, especially in focusing on children's outcomes and strengthening relationships with stakeholders, and told us they perceive the process as valuable. For example, ACF officials from 8 regional offices noted that the CFSRs were more intensive and more comprehensive than the other types of reviews they had conducted in the past, creating a valuable tool for regional officials to monitor states' performance. In addition, state officials from every state we visited told us that the CFSR process helped to improve collaboration with community stakeholders. Furthermore, state staff from 4 of the 5 states we visited told us the CFSR led to increased public and legislative attention to critical issues in child welfare. For example, caseworkers in Wyoming told us that without the CFSR they doubted whether their state agency's administration would have focused on needed reforms. They added that the agency used the CFSR findings to request legislative support for the hiring of additional caseworkers. Along with the value associated with improved stakeholder relations, the ACF officials we talked to and many state officials reported that the process has been helpful in highlighting the outcomes and systemic factors, as well as other key performance items that need improvement. According to our survey, 26 of the 36 states that commented on the findings of the final CFSR report indicated that they generally or completely agreed with the findings, even though performance across the states was low in certain key outcomes and performance items. For example, not one of the 41 states with final reports released through 2003 was found to be in substantial conformity with either the outcome measure that assesses the permanency and stability of children's living situations or with the outcome measure that assesses whether states had enhanced families' capacity to provide for their children's needs. Moreover, across all 14 outcomes and systemic factors, state performance ranged from achieving substantial conformity on as few as 2 outcomes and systemic factors to as many as 9. As figure 1 illustrates, the majority of states were determined to be in substantial conformity with half or fewer of the 14 outcomes and systemic factors assessed. States' performance on the outcomes related to safety, permanency, and well-being--as well as the systemic factors--is determined by their performance on an array of items, such as establishing permanency goals, ensuring worker visits with parents and children, and providing accessible services to families. The CFSR showed that many states need improvement in the same areas. For example, across all 41 states reviewed through 2003, the 10 items most frequently rated as needing improvement included assessing the needs and services of children, parents, and foster parents (40 states); assessing the mental health of children (37 states); and establishing the most appropriate permanency goal for the child (36 states). Given the value that ACF and the states have assigned to the CFSR process, both have spent substantial financial resources and staff time to prepare for and implement the reviews. In fiscal years 2001-03, when most reviews were scheduled, ACF budgeted an additional $300,000 annually for CFSR-related travel. In fiscal year 2004, when fewer reviews were scheduled, ACF budgeted about $225,000. To further enhance its capacity to conduct the reviews, and to obtain additional logistical and technical assistance, ACF spent approximately $6.6 million annually to hire contractors. Specifically, ACF has let three contracts to assist with CFSR- related activities, including training reviewers to conduct the on-site reviews, tracking final reports and PIP documents, and, as of 2002, writing the CFSR final reports. Additionally, ACF hired 22 new staff to build central and regional office capacity and dedicated 4 full-time staff and 2 state government staff temporarily on assignment with ACF to assist with the CFSR process. To build a core group of staff with CFSR expertise, ACF created the National Review Team, composed of central and regional office staff with additional training in and experience with the review process. In addition, to provide more technical assistance to the states, ACF reordered the priorities of the national resource centers to focus their efforts primarily on helping states with the review process. Like ACF, states also spent financial resources on the review. While some states did not track CFSR expenses--such as staff salaries, training, or administrative costs--of the 25 states that reported such information in our survey, the median expense to date was $60,550, although states reported spending as little as $1,092 and as much as $1,000,000 on the CFSR process. Although ACF officials told us that states can use Title IV- E funds to pay for some of their CFSR expenses, only one state official addressed the use of these funds in our survey, commenting that it was not until after the on-site review occurred that the state learned these funds could have been used to offset states' expenses. States also reported that they dedicated staff time to prepare for the statewide assessment and to conduct the on-site review, which sometimes had a negative impact on some staffs' regular duties. According to our survey, 45 states reported dedicating up to 200 full-time staff equivalents (FTE), with an average of 47 FTEs, to the statewide assessment process. Similarly, 42 states responded that they dedicated between 3 and 130 FTEs, with an average of 45 FTEs, to the on-site review process. For some caseworkers, dedicating time to the CFSR meant that they were unable or limited in their ability to manage their typical workload. For example, Wyoming caseworkers whose case files were selected for the on-site review told us that they needed to be available to answer reviewers' questions all day every day during the on-site review, which they said prevented them from conducting necessary child abuse investigations or home visits. Child welfare-related stakeholders--such as judges, lawyers, and foster parents--also contributed time to the CFSR. State officials in the 5 states we visited, as well as child welfare experts, reported on several data improvements that could enhance the reliability of CFSR findings. In particular, they highlighted inaccuracies with the AFCARS and NCANDS data that are used for establishing the national standards and creating the statewide data profiles, which are then used to determine if states are in substantial conformity. These concerns echoed the findings of a prior GAO study on the reliability of these data sources, which found that states are concerned that the national standards used in the CFSR are based on unreliable information and should not be used as a basis for comparison and potential financial penalty. Furthermore, many states needed to resubmit their statewide data after finding errors in the data profiles ACF would have used to measure compliance with the national standards. According to our national survey, of the 37 states that reported on resubmitting data for the statewide data profile, 23 needed to resubmit their statewide data at least once, with one state needing to resubmit as many as five times to accurately reflect revised data. Four states reported in our survey that they did not resubmit their data profiles because they did not know they had this option or they did not have enough time to resubmit before the review. In addition to expressing these data concerns, child welfare experts as well as officials in all of the states we visited commented that existing practices that benefit children might conflict with actions needed to attain the national standards. For example, officials in New York said that they recently implemented an initiative to facilitate adoptions. Because these efforts focus on the backlog of children who have been in foster care for several years, New York officials predict that their performance on the national standard for adoption will be lower since many of the children in the initiative have already been in care for more than 2 years. Experts and officials from multiple states also commented that they believe the on-site review case sample of 50 cases is too small to provide an accurate picture of statewide performance, although ACF officials stated that the case sampling is supplemented with additional information. For example, Oklahoma officials we visited commented that they felt the case sample size was too small, especially since they annually assess more than 800 of their own cases--using a procedure that models the federal CFSR--and obtain higher performance results than the state received on its CFSR. Furthermore, because not every case in the states' sample is applicable to each item measured in the on-site review, we found that sometimes as few as 1 or 2 cases were being used to evaluate states' performance on an item. For example, Wyoming had only 2 on-site review cases applicable for the item measuring the length of time to achieve a permanency goal of adoption, but for 1 of these cases, reviewers determined that appropriate and timely efforts had not been taken to achieve finalized adoptions within 24 months, resulting in the item being assigned a rating of area needing improvement. While ACF officials acknowledged the insufficiency of the sample size, they contend that the case sampling is augmented by stakeholder interviews for all items and applicable statewide data for the five CFSR items with corresponding national standards, therefore providing sufficient evidence for determining states' conformity. All of the states we visited experienced discrepant findings between the aggregate data from the statewide assessment and the information obtained from the on-site review. We also found that in these 5 states, ACF had assigned an overall rating of area needing improvement for 10 of the 11 instances in which discrepancies occurred. ACF officials acknowledged the challenge of resolving data discrepancies, noting that such complications can delay the release of the final report and increase or decrease the number of items that states must address in their PIPs. While states have the opportunity to resolve discrepancies by submitting additional information explaining the discrepancy or by requesting an additional case review, only 1 state to date has decided to pursue the additional case review. Further, several state officials and experts also told us that additional data from the statewide assessments--or other data sources compiled by the states--could bolster the evaluation of states' performance, but they found this information to be missing or insufficiently used in the final reports. For example, child welfare experts and state officials from California and New York--who are using alternative data sources to AFCARS and NCANDS, such as longitudinal data that track children's placements over time--told us that the inclusion of this more detailed information would provide a more accurate picture of states' performance nationwide. An HHS official told us that alternative data are used only to assess state performance in situations in which a state does not have NCANDS data, since states are not mandated to have these systems. Given their concerns with the data used in the review process, state officials in 4 of the 5 states believed that the threshold for achieving substantial conformity was difficult to achieve. While an ACF official told us that different thresholds for the national standards had been considered, ACF policy makers ultimately concluded that a threshold at the 75th percentile of the nationwide data would be used. ACF officials recognize that they have set a high standard. However, they believe it is attainable and supportive of their overall approach to move states to the standard through continuous improvement. Forty-one states are engaged in program improvement planning, but many uncertainties, such as those related to federal guidance and monitoring and the availability of state resources, have affected the development, implementation, and funding of the PIPs. State PIPs include strategies such as revising or developing policies, training caseworkers, and engaging stakeholders, and ACF has issued regulations and guidance to help states develop and implement their plans. Nevertheless, states reported uncertainty about how to develop their PIPs and commented on the challenges they faced during implementation. For example, officials from 2 of the states we visited told us that ACF had rejected their PIPs before final approval, even though these officials said that the plans were based on examples of approved PIPs that regional officials had provided. Further, at least 9 of the 25 states responding to a question in our survey on PIP implementation indicated that insufficient time, funding, and staff, as well as high caseloads, were the greatest challenges they faced. As states progress in PIP implementation, some ACF officials expressed a need for more guidance on how to monitor state accomplishments, and both ACF and state officials were uncertain about how the estimated financial penalties would be applied if states fail to achieve the goals described in their plans. State plans include a variety of strategies to address weaknesses identified in the CFSR review process. However, because most states had not completed PIP implementation by the time of our analysis, the extent to which states have improved outcomes for children has not been determined. While state PIPs varied in their detail, design, and scope, according to our analysis of 31 available PIPs, these state plans have focused to some extent on revising or developing policies; reviewing and reporting on agency performance; improving information systems; and engaging stakeholders such as courts, advocates, foster parents, private providers, or sister agencies in the public sector. Table 1 shows the number of states that included each of the six categories and subcategories of strategies we developed for the purposes of this study. Our analysis also showed that many states approached PIP development by building on state initiatives in place prior to the on-site review. Of the 42 surveyed states reporting in our survey on this topic, 30 said that their state identified strategies for the PIP by examining ongoing state initiatives. For example, local officials in New York City and state officials in California told us that state reform efforts--borne in part from legal settlements--have become the foundation for the PIP. State officials in California informed us that reform efforts initiated prior to the CFSR, such as implementing a new system for receiving and investigating reports of abuse and neglect and developing more early intervention programs, became integral elements in the PIP. ACF has provided states with regulations and guidance to facilitate PIP development, but some states believe the requirements have been unclear. For example, several states commented in our survey that multiple aspects of the PIP approval process were unclear, such as how much detail and specificity the agency expects the plan to include; what type of feedback states could expect to receive; when states could expect to receive such feedback; and whether a specific format was required. Officials in the states we visited echoed survey respondents' concerns with officials from 3 of the 5 states informing us that ACF had given states different instructions regarding acceptable PIP format and content. For example, California and Florida officials told us that their program improvement plans had been rejected prior to final approval, even though they were based on examples of approved plans that regional officials had provided. In addition, California officials told us that they did not originally know how much detail the regional office expected in the PIP and believed that the level of detail the regional office staff ultimately required was too high. Specifically, officials in California said that the version of their plan that the region accepted included 2,932 action steps--a number these officials believe is too high given their state's limited resources and the 2-year time frame to implement the PIP. ACF officials have undertaken several steps to clarify their expectations for states and to improve technical assistance. For example, in 2002, 2 years after ACF released the CFSR regulations and a procedures manual, ACF offered states additional guidance and provided a matrix format to help state officials prepare their plans. ACF officials told us the agency sends a team of staff from ACF and resource centers to the state to provide intensive on-site technical assistance, when it determines that a state is slow in developing its PIP. Further, ACF has sent resource center staff to states to provide training almost immediately after the completion of the on-site review to encourage state officials to begin PIP development before the final report is released. Our survey results indicate that increasing numbers of states are developing their PIPs early in the CFSR process, which may reflect ACF's emphasis on PIP development. According to our analysis, of the 18 states reviewed in 2001, only 2 started developing their PIPs before or during the statewide assessment phase. Among states reviewed in 2003, this share increased to 5 of 9. Evidence suggests that lengthy time frames for PIP approval have not necessarily delayed PIP implementation, and ACF has made efforts to reduce the time the agency takes to approve states' PIPs. For example, officials in 3 of the 5 states we visited told us they began implementing new action steps before ACF officially approved their plans because many of the actions in their PIPs were already under way. In addition, according to our survey, of the 28 states reporting on this topic, 24 reported that they had started implementing their PIP before ACF approved it. Further, our analysis shows that the length of time between the PIP due date, which statute sets at 90 days after the release of the final CFSR report, and final ACF PIP approval has ranged considerably--from 45 to 349 business days. For almost half of the plans, ACF's approval occurred 91 to 179 business days after the PIP was due. Our analysis indicated that ACF has recently reduced the time lapse by 46 business days. This shorter time lapse for PIP approval may be due, in part, to the ACF's emphasis on PIP development. According to one official, ACF has directed states to concentrate on submitting a plan that can be quickly approved. Another ACF official added that because of ACF's assistance with PIP development, states are now submitting higher-quality PIPs that require fewer revisions. Program improvement planning has been ongoing, but uncertainties have made it difficult for states to implement their plans and ACF to monitor state performance. Such uncertainties include not knowing whether state resources are adequate to implement the plans and how best to monitor state reforms. In answering a survey question about PIP implementation challenges, a number of states identified insufficient funding, staff, and time--as well as high caseloads--as their greatest obstacles. Figure 2 depicts these results. One official from Pennsylvania commented that because of the state's budget shortfall, no additional funds were available for the state to implement its improvement plan, so most counties must improve outcomes with little or no additional resources. A Massachusetts official reported that fiscal problems in his state likely would lead the state to lay off attorneys and caseworkers and to cut funding for family support programs. While state officials acknowledged that they do not have specific estimates of PIP implementation expenses because they have not tracked this information in their state financial systems, many states indicated that to cope with financial difficulties, they had to be creative and use resources more efficiently to fund PIP strategies. Of the 26 states responding to a question in our survey on PIP financing, 12 said that they were financing the PIP strategies by redistributing current funding, and 7 said that they were using no-cost methods. In an example of the latter, Oklahoma officials reported pursuing in-kind donations from a greeting card company so that they could send thank-you notes to foster parents, believing this could increase foster parent retention and engagement. Aside from funding challenges, states also reported that PIP implementation has been affected by staff workloads, but these comments were mixed. In Wyoming, for example, caseworkers told us that their high caseloads would prevent them from implementing many of the positive action steps included in their improvement plan. In contrast, Oklahoma caseworkers told us that the improvement plan priorities in their state-- such as finding permanent homes for children--have helped them become more motivated, more organized, and more effective with time management. ACF officials expressed uncertainty about how best to monitor states' progress and apply estimated financial penalties when progress was slow or absent, and 3 of the 5 states we visited reported frustration with the limited guidance ACF had provided on the PIPs quarterly reporting process. For example, 4 regional offices told us that they did not have enough guidance on or experience with evaluating state quarterly reports. Some regional offices told us they require states to submit evidence of each PIP action step's completion, such as training curricula or revised policies, but one ACF official acknowledged that this is not yet standard procedure, although the agency is considering efforts to make the quarterly report submission procedures more uniform. Moreover, ACF staff from 1 region told us that because PIP monitoring varies by region, they were concerned about enforcing penalties. Shortly before California's quarterly report was due, state officials told us they still did not know how much detail to provide; how to demonstrate whether they had completed certain activities; or what would happen if they did not reach the level of improvement specified in the plan. Based on data from the states that have been reviewed to date, the estimated financial penalties range from a total of $91,492 for North Dakota to $18,244,430 for California, but the impact of these potential penalties remains unclear. While ACF staff from most regional offices told us that potential financial penalties are not the driving force behind state reform efforts, some contend that the estimated penalties affect how aggressively states pursue reform in their PIPs. For example, regional office staff noted that 1 state's separate strategic plan included more aggressive action steps than those in its PIP because the state did not want to be liable for penalties if it did not meet its benchmarks for improvement. State officials also had mixed responses as to how the financial penalties would affect PIP implementation. An official in Wyoming said that incurring the penalties was equivalent to shutting down social service operations in 1 local office for a month, while other officials in the same state thought it would cost more to implement PIP strategies than it would to incur financial penalties if benchmarks were unmet. Nevertheless, these officials also said that while penalties are a consideration, they have used the CFSR as an opportunity to provide better services. One official in another state agreed that it would cost more to implement the PIP than to face financial penalties, but this official was emphatic in the state's commitment to program improvement. To implement the CFSRs, ACF has focused its activities almost entirely on the CFSR review process, and regional staff report limitations in providing assistance to states in helping them to meet key federal goals. ACF officials told us the CFSR has become the agency's primary mechanism for monitoring states and facilitating program improvement, but they acknowledged that regional office staff might not have realized the full utility of the CFSR as a tool to integrate all existing training and technical assistance efforts. Further, according to ACF officials, meetings to discuss a new system of training and technical assistance are ongoing, though recommendations were not available at the time of publication of our April 2004 report. Levels of resource center funding, the scope and objectives of the resource centers' work, and the contractors who operate the resource centers are all subject to change before the current cooperative agreements expire at the close of fiscal year 2004. ACF officials told us that the learning opportunities in the Children's Bureau are intentionally targeted at the CFSR, but staff in 3 regions told us that this training should cover a wider range of subjects--including topics outside of the CFSR process--so that regional officials could better meet states' needs. All 18 of the courses that ACF has provided to its staff since 2001 have focused on such topics as writing final CFSR reports and using data for program improvement, and while ACF officials in the central office said that the course selection reflects both the agency's prioritization of the CFSR process and staff needs, our interviews with regional staff suggest that some of them wish to obtain additional non- CFSR training. In addition, although ACF organizes biennial conferences for state and federal child welfare officials, staff from 5 regions told us that they wanted more substantive interaction with their ACF colleagues, such as networking at conferences, to increase their overall child welfare expertise. Further, staff from 6 of the 10 regions told us that their participation in conferences is limited because of funding constraints. ACF staff in all 10 regions provide ongoing assistance or ad hoc counseling to states, either through phone, e-mail, or on-site support, but staff from 6 regions told us they would like to conduct site visits with states more regularly to improve their relationships with state officials and provide more targeted assistance. Further, staff in 4 regions felt their travel funds were constrained and explained that they try to stretch their travel dollars by addressing states' non-CFSR needs, such as court improvements, during CFSR-related visits. While an ACF senior official from the central office confirmed that CFSR-related travel constituted 60 percent of its 2002 child welfare-monitoring budget, this official added that CFSR spending represents an infusion of funding rather than a reprioritization of existing dollars, and stated that regional administrators have discretion over how the funds are allocated within their regions. In addition, the same official stated that he knew of no instance in which a region requested more money for travel than it received. Concerns from state officials in all 5 of the states we visited echoed those of regional office staff and confirmed the need for improvements to the overall training and technical assistance structure. For example, state officials in New York and Wyoming commented that ACF staff from their respective regional offices did not have sufficient time to spend with them on CFSR matters because regional staff were simultaneously occupied conducting reviews in other states. However, our survey results revealed that states reviewed in 2003 had much higher levels of satisfaction with regional office assistance than those states reviewed in 2001, which suggests improvements to regional office training and technical assistance as the process evolved. ACF and the states have devoted considerable resources to the CFSR process, but to date, no state has passed the threshold for substantial conformity on all CFSR measures, and concerns remain regarding the validity of some data sources and the limited use of all available information to determine substantial conformity. The majority of states surveyed agreed that CFSR results are similar to their own evaluation of areas needing improvement. However, without using more reliable data-- and in some cases, additional data from state self-assessments--to determine substantial conformity, ACF may be over- or under-estimating the extent to which states are actually meeting the needs of the children and families in their care. These over- or under-estimates can, in turn, affect the scope and content of the PIPs that states must develop in response. In addition, the PIP development, approval, and monitoring processes remain unclear to some, potentially reducing states' credibility with their stakeholders and straining the federal/state partnership. Similarly, regional officials are unclear as to how they can accomplish their various training and technical assistance responsibilities, including the CFSR. Without clear guidance on how to systematically prepare and monitor PIP-related documents, and how regional officials can integrate their many oversight responsibilities, ACF has left state officials unsure of how their progress over time will be judged and potentially complicated its own monitoring efforts. To ensure that ACF uses the best available data in measuring state performance, we recommended in our April 2004 report that the Secretary of HHS expand the use of additional data states may provide in their statewide assessments and consider alternative data sources when available, such as longitudinal data that track children's placements over time, before making final CFSR determinations. In addition, to ensure that ACF regional offices and states fully understand the PIP development, approval, and monitoring processes, and that regional offices fully understand ACF's prioritization of the CFSR as the primary mechanism for child welfare oversight, we recommended that the Secretary of HHS issue clarifying guidance on the PIP process and evaluate states' and regional offices' adherence to this instruction and provide guidance to regional offices explaining how to better integrate the many training and technical assistance activities for which they are responsible, such as participation in state planning meetings and the provision of counsel to states on various topics, with their new CFSR responsibilities. In response to the first recommendation, HHS acknowledged that the CFSR is a new process that continues to evolve, and also noted several steps it has taken to address the data quality concerns we raise in our report. We believe that our findings from the April 2004 report, as well as a previous report on child welfare data and states' information systems, fully address HHS's initial actions, as well as the substantial resources the agency has already dedicated to the review process. However, to improve its oversight of state performance, our recommendation was meant to encourage HHS to take additional actions to improve its use of data in conducting these reviews. In response to the second recommendation, HHS said that it has continued to provide technical assistance and training to states and regional offices, when appropriate. HHS noted that it is committed to continually assessing and addressing training and technical assistance needs. In this context, our recommendation was intended to encourage HHS to enhance existing training efforts and focus both on state and on regional officials' understanding of how to incorporate the CFSR process into their overall improvement and oversight efforts. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have. For further contacts regarding this testimony, please call Cornelia M. Ashby at (202) 512-8403. Individuals making key contributions to this testimony include Diana Pietrowiak and Joy Gambino. D.C. Family Court: Operations and Case Management Have Improved, but Critical Issues Remain. GAO-04-685T. Washington, D.C.: April 23, 2004. Child and Family Services Reviews: Better Use of Data and Improved Guidance Could Enhance HHS's Oversight of State Performance. GAO- 04-333 Washington, D.C.: April 20, 2004. Child Welfare: Improved Federal Oversight Could Assist States in Overcoming Key Challenges. GAO-04-418T. Washington, D.C.: January 28, 2004. D.C. Family Court: Progress Has Been Made in Implementing Its Transition. GAO-04-234. Washington, D.C.: January 6, 2004. Child Welfare: States Face Challenges in Developing Information Systems and Reporting Reliable Child Welfare Data. GAO-04-267T. Washington, D.C.: November 19, 2003. Child Welfare: Enhanced Federal Oversight of Title IV-B Could Provide States Additional Information to Improve Services. GAO-03-956. Washington, D.C.: September 12, 2003. Child Welfare: Most States Are Developing Statewide Information Systems, but the Reliability of Child Welfare Data Could be Improved. GAO-03-809. Washington, D.C.: July 31, 2003. D.C. Child and Family Services: Key Issues Affecting the Management of Its Foster Care Cases. GAO-03-758T. Washington, D.C.: May 16, 2003. Child Welfare and Juvenile Justice: Federal Agencies Could Play a Stronger Role in Helping States Reduce the Number of Children Placed Solely to Obtain Mental Health Services. GAO-03-397. Washington, D.C.: April 21, 2003. Foster Care: States Focusing on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-03-626T. Washington, D.C.: April 8, 2003. Child Welfare: HHS Could Play a Greater Role in Helping Child Welfare Agencies Recruit and Retain Staff. GAO-03-357. Washington, D.C.: March 31, 2003. Foster Care: Recent Legislation Helps States Focus on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-02-585. Washington, D.C.: June 28, 2002. District of Columbia Child Welfare: Long-Term Challenges to Ensuring Children's Well- Being. GAO-01-191. Washington, D.C.: December 29, 2000. Child Welfare: New Financing and Service Strategies Hold Promise, but Effects Unknown. GAO/T-HEHS-00-158. Washington, D.C.: July 20, 2000. Foster Care: States' Early Experiences Implementing the Adoption and Safe Families Act. GAO/HEHS-00-1. Washington, D.C.: December 22, 1999. Foster Care: HHS Could Better Facilitate the Interjurisdictional Adoption Process. GAO/HEHS-00-12. Washington, D.C.: November 19, 1999. Foster Care: Effectiveness of Independent Living Services Unknown. GAO/HEHS-00-13. Washington, D.C.: November 10, 1999. Foster Care: Kinship Care Quality and Permanency Issues. GAO/HEHS- 99-32. Washington, D.C.: May 6, 1999. Juvenile Courts: Reforms Aim to Better Serve Maltreated Children. GAO/HEHS-99-13. Washington, D.C.: January 11, 1999. Child Welfare: Early Experiences Implementing a Managed Care Approach. GAO/HEHS-99-8. Washington, D.C.: October 21, 1998. Foster Care: Agencies Face Challenges Securing Stable Homes for Children of Substance Abusers. GAO/HEHS-98-182. Washington, D.C.: September 30, 1998. 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, the Department of Health and Human Services' (HHS) Administration for Children and Families (ACF) implemented the Child and Family Services Reviews (CFSR) to increase states' accountability. The CFSR uses states' data profiles and statewide assessments, as well as interviews and an on-site case review, to measure state performance on 14 outcomes and systemic factors, including child well-being and the provision of caseworker training. The CFSR also requires progress on a program improvement plan (PIP); otherwise ACF may apply financial penalties. This testimony is based on our April 2004 report and addresses (1) ACF's and the states' experiences preparing for and conducting the statewide assessments and on-site reviews; (2) ACF's and the states' experiences developing, funding, and implementing items in PIPs; and (3) any additional efforts that ACF has taken beyond the CFSR to improve state performance. For the April 2004 report, we surveyed all 50 states, the District of Columbia, and Puerto Rico regarding their experiences throughout the CFSR process, visited 5 states to obtain first-hand information, and conducted a content analysis of all 31 available PIPs as of January 1, 2004. We also interviewed HHS officials--including those in all 10 regional offices--and key child welfare experts. ACF and many state officials perceive the CFSR as a valuable process and a substantial undertaking, but some data enhancements could improve its reliability. ACF staff in 8 of the 10 regions considered the CFSR a helpful tool to improve outcomes for children. Further, 26 of 36 states responding to a relevant question in our survey commented that they generally or completely agreed with the results of the final CFSR report, even though none of the 41 states with final CFSR reports released through 2003 has achieved substantial conformity on all 14 outcomes and systemic factors. Additionally, both ACF and the states have dedicated substantial financial and staff resources to the process. Nevertheless, several state officials and child welfare experts we interviewed questioned the accuracy of the data used in the review process. While ACF officials contend that stakeholder interviews and case reviews complement the data profiles, many state officials and experts reported that additional data from the statewide assessment could bolster the evaluation of state performance. Program improvement planning is under way, but uncertainties have affected the development, funding, and implementation of state PIPs. Officials from 3 of the 5 states we visited said ACF's PIP-related instructions were unclear, and at least 9 states reported in our survey that challenges to implementing their plans include insufficient funding, staff, and time. While ACF has provided some guidance, ACF and state officials remain uncertain about PIP monitoring efforts and how ACF will apply financial penalties if states fail to achieve their stated PIP objectives. Since 2001, ACF's focus has been almost exclusively on the CFSRs and regional staff report limitations in providing assistance to states in helping them to meet key federal goals. While staff from half of ACF's regions told us they would like to provide more targeted assistance to states, and state officials in all 5 of the states we visited said that ACF's existing technical assistance efforts could be improved, ACF officials acknowledged that regional staff might still be adjusting to the new way ACF oversees child welfare programs. In the April 2004 report, we recommended that the Secretary of HHS ensure that ACF uses the best available data to measure state performance. We also recommended that the Secretary clarify PIP guidance and provide guidance to regional officials on how to better integrate their many oversight responsibilities. In commenting on a draft of the April 2004 report, HHS acknowledged that the CFSR is a new process that continues to evolve, and noted several steps it has taken to address the data quality concerns we raised in that report.

Although the sanctions curbed the Iraq regime's ability to advance its military and weapons of mass destruction programs, the UN established a weak control environment for the Oil for Food program at its beginning due to compromises it made with the Iraq government and neighboring states. For example, the UN allowed Iraq to control contract negotiations for imported commodities with little oversight, allowing the regime to obtain illicit funds through contract surcharges and kickbacks. Several countries in the region depended on Iraqi trade, but no provisions were made to address the economic impact of the sanctions on these countries. This undermined international support for sanctions and allowed Iraq to smuggle oil outside the Oil for Food program. The sanctions helped prevent the Iraq regime from obtaining prohibited military and dual-use items, but little attention was given to oversight of the economic activities related to the Oil for Food program, such as monitoring the price and value of Iraq's contracts. Allowing Iraq to obtain revenues outside the Oil for Food program undermined the goals of containing the regime and using its oil revenues for UN-managed assistance to benefit the Iraqi people. When the UN first proposed the Oil for Food program in 1991, it recognized the vulnerability inherent in allowing Iraq control over the contracting process. At that time, the Secretary General proposed that the UN, an independent agent, or the Iraqi government be given the responsibility to negotiate contracts with oil purchasers and commodity suppliers. However, the Secretary General subsequently concluded that it would be highly unusual or impractical for the UN or an independent agent to trade Iraq's oil or purchase commodities and recommended that Iraq negotiate the contracts and select the contractors. Nonetheless, he stated that the UN and Security Council must ensure that Iraq's contracting did not circumvent the sanctions and was not fraudulent. Accordingly, the Security Council proposed that UN agents review the contracts and compliance at the oil ministry. Iraq refused these conditions. By the mid-1990s, the humanitarian conditions had worsened. The UN reported that the average Iraqi's food intake was about 1,275 calories per day, compared with the standard requirement of 2,100 calories. In April 1995, the Security Council passed resolution 986 to permit Iraq to use its oil sales to finance humanitarian assistance. Against a backdrop of pressure to maintain sanctions while addressing emergency humanitarian needs, the UN conceded to Iraq's demand that it retain independent control over contract negotiations. Accordingly, a May 1996 memorandum of understanding between the UN and Iraq allowed Iraq to directly tender and negotiate contracts without UN oversight and to distribute imported goods to the intended recipients. When the Oil for Food program began, the UN was responsible for confirming the equitable distribution of commodities, ensuring the effectiveness of program operations, and determining Iraq's humanitarian needs. According to the memorandum of understanding, the Iraqi government was to provide UN observers with full cooperation and access to distribution activities. However, observers faced intimidation and restrictions from Iraqi regime officials in carrying out their duties. According to a former UN official, observers could not conduct random spot checks and had to rely on distribution information provided by ministry officials, who then steered them to specific locations. The Independent Inquiry Committee reported that observers were required to have government escorts and cited various instances of intimidation and interference by Iraqi officials. The committee concluded that the limits placed on the observers' ability to ask questions and gather information affected the UN Secretariat's ability to provide complete field reports to the sanctions committee. Under Security Council resolutions, all member states had the responsibility for enforcing sanctions. For Iraq, the UN depended on neighboring countries to deter the importation of illicit commodities and smuggling. However, concessions to regional trade activity affected the sanctions environment and allowed the Iraqi regime to obtain revenues outside the Oil for Food program. Although oil sales outside the program were prohibited, the Security Council's Iraq sanctions committee did not address pre-existing trade between Iraq and other member states, and no provisions were made for countries that relied heavily on trade with Iraq. Illicit oil sales were primarily conducted on the basis of formal trade agreements. For example, trade agreements with Iraq allowed Jordan--a U.S. ally dependent on Iraqi trade--to purchase heavily discounted oil in exchange for up to $300 million in Jordanian goods. Members of the sanctions committee, including the United States, took note of Iraq's illicit oil sales to its neighbors, but took no direct action to halt the sales or take steps against the states or entities engaged in them. In addition, successive U.S. administrations issued annual waivers to Congress exempting Turkey and Jordan from unilateral U.S. sanctions for violating the UN sanctions against Iraq. According to U.S. government officials and oil industry experts, Iraq smuggled oil through several routes. Oil entered Syria by pipeline, crossed the borders of Jordan and Turkey by truck, and was smuggled through the Persian Gulf by ship. Syria received up to 200,000 barrels of Iraqi oil a day in violation of the sanctions. Oil smuggling also occurred through Iran. The Security Council authorized the Multinational Interception Force in the Persian Gulf, but, according to the Department of Defense, it interdicted only about 25 percent of the oil smuggled through the Gulf. The UN's focus on screening military and dual-use items was largely effective in constraining Iraq's ability to import these goods through the Oil for Food program. Each member of the Security Council's Iraq sanctions committee had authority to approve, hold, or block any contract for goods exported to Iraq. The United States, as a member of the committee, devoted resources to conducting a review of each commodity contract. As a result, the United States was the Security Council member that most frequently placed holds on proposed sales to Iraq; as of May 2002, it was responsible for about 90 percent of the holds placed by the Security Council. U.S. technical experts assessed each item in a contract to determine its potential military application and whether the item was appropriate for the intended end user. These experts also examined the end user's track record with such commodities. An estimated 60 U.S. government personnel within the Departments of State, Defense, Energy, and other agencies examined all proposed sales of items that could be used to assist the Iraqi military or develop weapons of mass destruction. In addition, the Department of the Treasury was responsible for issuing U.S. export licenses to Iraq. It compiled the results of the review by U.S. agencies under the UN approval process and obtained input from the Department of Commerce on whether a contract included any items found on a list of goods prohibited for export to Iraq for reasons of national security or nuclear, chemical, and biological weapons proliferation. In addition to screening items imported by Iraq, the UN conducted weapons inspections inside Iraq until 1998, when international inspectors were forced to withdraw. Sanctions also may have constrained Iraq's purchases of conventional weapons, as we reported in 2002. In 2004, the Iraq Survey Group reported that sanctions had curbed Iraq's ability to import weapons and finance its military, intelligence, and security forces. The UN's neglect of Iraq's illicit revenue streams from smuggling and kickbacks facilitated unauthorized revenue for a sanctioned regime and undermined the program's goal of using Iraqi oil revenues to benefit the Iraqi people. According to a report by Department of Defense contract experts, in a typical contract pricing environment, fair and reasonable commodity prices are generally based on prevailing world market conditions or competitive bids among multiple suppliers. Ensuring a fair and reasonable price for goods can mitigate the possibility of overpricing and kickbacks. The Security Council's Iraq sanctions committee and the Secretariat's Office of the Iraq Program (OIP) were responsible for reviewing commodity contracts under the Oil for Food program, but neither entity conducted sufficient reviews of commodity pricing and value. As a result, Iraq was able to levy illicit contract commissions and kickbacks ranging from about $1.5 billion to about $3.5 billion. The UN did not adequately address other key internal control elements as it implemented the Oil for Food program: (1) establishing clear authorities, (2) identifying and addressing program risks, and (3) ensuring adequate monitoring and oversight. UN entities and contractors responsible for implementing and monitoring the program lacked clear lines of authority. For example, the Office of the Iraq Program lacked clear authority to reject commodity contracts based on pricing concerns. In addition, the UN contractor at Iraq's border did not have the authority to evaluate imports for price and quality, and no provisions were made to stop imports that were not purchased through the Oil for Food program. Moreover, the UN did not assess emerging risks as the Oil for Food program expanded from a 6-month emergency measure to deliver food and medicine to a 6-year program that provided more than $31 billion to 24 economic sectors. Some monitoring activities constrained the ability of the regime to obtain illicit contract surcharges, but smuggling continued despite the presence of inspectors. Finally, the UN's internal audit office examined some aspects of the Oil for Food program and identified hundreds of weaknesses and irregularities. However, it lacked the resources and independence to provide effective oversight of this ambitious and complex UN effort. A good internal control environment requires that the agency clearly define and delegate key areas of authority and responsibility. Both OIP, as an office in the UN Secretariat, and the Security Council's Iraq sanctions committee were responsible for the management and oversight of the Iraq sanctions and Oil for Food program. The Iraq government, other UN agencies, UN member states, the interdiction force in the Persian Gulf, inspection contractors, and internal and external audit offices also played specific roles (see figure 1). However, no single entity was accountable for the program in its entirety. In 2005, the Independent Inquiry Committee reported that the Security Council had failed to clearly define the program's broad parameters, policies, and administrative responsibilities and that neither the Security Council nor the Secretariat had control over the entire program. The absence of clear lines of authority and responsibility were important structural weaknesses that further undermined the management and oversight of the Oil for Food program. For example, OIP was to examine each commodity contract for price and value before submitting it to the sanctions committee for approval. However, the Independent Inquiry Committee found that OIP lacked clear authority to reject contracts on pricing grounds and did not hire customs experts with the requisite expertise to conduct thorough pricing evaluations. In addition, UN inspectors did not have the authority to inspect goods imported into Iraq to verify price and quality. These inspectors mostly verified the arrival of goods in the country for the purpose of paying the contractor. The Secretariat's contract for inspecting imports at three entry points in Iraq required inspection agents to "authenticate" goods, but the agents' responsibilities fell short of a more rigorous review of the imports' price and quality. Under the Oil for Food program, inspection agents compared appropriate documentation, including UN approval letters, with the commodities arriving in Iraq; visually inspected about 7 to 10 percent of the goods; and tested food items to ensure that they were "fit for human consumption." However, inspection agents were not required to (1) verify that food items were of the quality contracted, (2) assess the value of goods shipped, (3) inspect goods that were not voluntarily presented by transporters, or (4) select the items and suppliers or negotiate contracts. In addition, no provisions were made to interdict prohibited goods arriving at the border. According to Cotecna, the inspections contractor from 1999 to 2004, "authentication" is not a standard customs term or function. The UN created the term for the Oil for Food program and did not include traditional customs inspection activities, such as price verification and quality inspection. In anticipation of an oil for food program, the UN selected Cotecna in 1992 for a program that was never implemented. Under that proposal, Cotecna would have verified fair pricing and inspected the quality of the items to help ensure that they conformed to contract requirements. Finally, limited authority for contractors overseeing oil exports facilitated Iraq's ability to obtain illicit revenues from smuggling that ranged from $5.7 billion to $8.4 billion over the course of the Oil for Food program. In 1996, the Secretariat contracted with Saybolt to oversee the export of oil from Iraq through selected export points. The inspectors were to monitor the amount of oil leaving Iraq under the Oil for Food program at these locations and to stop shipments if they found irregularities. The inspectors worked at two locations--the Ceyhan-Zakho pipeline between Iraq and Turkey and the Mina al-Bakr loading platform in southern Iraq. In 2005, a Saybolt official testified that its mandate did not include monitoring all oil exports leaving Iraq from other locations or acting as a police force. As a result, the contractors did not monitor oil that was exported outside the Oil for Food program. Risk assessments can identify and manage the internal and external challenges affecting a program's outcomes and accountability, including those risks that emerge as conditions change. The Oil for Food program expanded rapidly as it evolved from an emergency 6-month measure to provide humanitarian needs to a 6-year program that delivered about $31 billion in commodities and services in 24 sectors. Beginning in 1998, when the international community was not satisfied with Iraq's compliance with weapons inspections, the Security Council continued the sanctions and expanded its initial emphasis on food and medicines to include infrastructure rehabilitation and activities in 14 sectors. These sectors included food, food handling, health, nutrition, electricity, agriculture and irrigation, education, transport and telecommunications, water and sanitation, housing, settlement rehabilitation for internally displaced persons, demining, a special allocation for vulnerable groups, and oil industry spare parts and equipment. In June 2002, the Iraqi government introduced another 10 sectors, including construction, industry, labor and social affairs, youth and sports, information, culture, religious affairs, justice, finance, and the Central Bank of Iraq. The Security Council and UN Secretariat did not assess the risks posed by this expansion, particularly in light of the fact that they had allowed the Iraqi government to tender and negotiate its contracts. The UN Office of Internal Oversight Services (OIOS) was the only entity that attempted to assess the enormous risks in the Oil for Food program, but OIP blocked that attempt. In August 2000, the Under Secretary General for OIOS proposed an overall risk assessment to the Deputy Secretary General to improve the program by identifying the factors that could prevent management from fulfilling the program's objectives. The proposal noted that this assessment could be a model for other UN departments and activities. OIOS considered the Oil for Food program a high-risk activity and decided to focus on an assessment of OIP's Program Management Division. This unit was responsible for providing policy and management advice to OIP's executive director and for supporting OIP's field implementation and observation duties. In May 2001, OIP's executive director refused to fund the risk assessment, citing financial reasons and uncertainty over the program's future. In July 2003, OIOS issued an assessment of OIP's Program Analysis, Monitoring, and Support Division--formerly the Program Management Division--that identified a number of organizational, management, and administrative problems, including poor communication and coordination, unclear reporting lines among OIP headquarters units and the field, and the lack of approved work plans. However, by this date, the UN was preparing for the November 2003 transfer of the program to the Coalition Provisional Authority in Iraq, and the report was of limited usefulness for addressing high-risk areas. Comprehensive and timely risk assessments might have identified the internal control weaknesses--such as inadequate contract pricing reviews--that facilitated Iraq's ability to levy illicit contract revenues. These assessments also might have identified the structural management weaknesses that led to ineffective communication and coordination within the program. Ongoing monitoring and specific control activities should meet the management and oversight needs of the agency or program. However, during the Oil for Food program, the lack of functioning oil meters enabled the Iraqi government to smuggle oil undetected by inspectors. A Saybolt employee testified that the company notified UN officials of the problems posed by the lack of functioning meters at the beginning of the program. He also testified that the lack of metering equipment allowed the two "topping off" incidents involving the oil tanker Essex, in which the tanker loaded additional oil after the inspectors had certified the loading and left the vessel. In November 2001, a Saybolt representative noted that Iraq's distribution plans for that period provided for the installation of a meter at the Mina al-Bakr port. A U.S. official called for OIP to develop a plan to prevent unauthorized oil sales that would include installing a meter at the port. However, Iraq did not tender a contract for the meter. As of March 2006, the Iraqi government has not yet installed oil meters at Mina al-Bakr. In addition, the sanctions committee relied on the advice of independent oil overseers to approve oil sales contracts. The overseers reviewed Iraq's oil sales contracts to determine compliance with program requirements and whether the prices that Iraq negotiated for its oil were fair and reflected market pricing. However, the inadequate number of overseers monitoring Iraq's oil pricing over a 14-month period may have been a factor in Iraq's ability to levy illicit surcharges on oil contracts. From June 1999 to August 2000, only one oil overseer was responsible for monitoring billions in Iraq's oil transactions, contrary to the sanctions committee's requirements for at least four overseers. Four overseers were hired at the beginning of the program but three resigned by June 1999. Political disputes among sanctions committee members prevented the committee from agreeing on replacements. According to the Independent Inquiry Committee, the sanctions committee demonstrated weak program oversight in its inability to fill the vacant positions. In contrast, in October 2001, the Security Council's sanctions committee imposed a positive control activity--retroactive oil pricing--to prevent Iraqi officials from adding illegal oil surcharges to contracts. In November 2000, UN oil overseers reported that Iraq's oil prices were low and did not reflect the fair market value. The overseers also reported in December 2000 that Iraq had asked oil purchasers to pay surcharges. In early 2001, the United States informed the sanctions committee about its concerns regarding allegations that Iraqi government officials were receiving illegal surcharges on oil contracts. The United States delayed oil pricing until after the Iraq government signed contracts with oil purchasers but without knowing the price it would have to pay until delivery. Setting the price at the time the oil was delivered helped to ensure a fair market price. This practice, known as retroactive pricing, curbed the ability of the Iraqi government to levy illicit surcharges on its oil sales contracts. Prior to retroactive pricing, estimates of Iraq's illicit revenues from surcharges on exported oil ranged from about $230 million to almost $900 million. Ongoing monitoring of internal control should include activities to help ensure that the findings of audits and other evaluations are promptly resolved. Although OIOS conducted dozens of audits of the Oil for Food program, the office did not review key aspects of the Oil for Food program and had insufficient staff. OIOS did not review whether OIP was adequately monitoring and coordinating the Oil for Food program, including OIP's role in assessing commodity pricing. OIOS did not examine OIP's oversight of the commodity contracts for central and southern Iraq, which accounted for 59 percent of Oil for Food proceeds. According to the Independent Inquiry Committee, the internal auditors believed that they did not have the authority to audit humanitarian contracts because the sanctions committee was responsible for contract approval. OIP management mostly supported OIOS audits for program activities in northern Iraq managed by other UN agencies; however, these northern programs constituted only 13 percent of the Oil for Food program. Because OIOS did not review commodity contracts, it was difficult to quantify the extent to which the Iraqi people received the humanitarian assistance funded by its government's oil sales. The Independent Inquiry Commission noted that the practice of allowing the heads of programs the right to fund internal audit activities led to excluding high-risk areas from internal audit examination. We also found that UN funding arrangements constrain OIOS's ability to operate independently as mandated by the General Assembly and as required by the international auditing standards to which OIOS subscribes. The UN must support budgetary independence for the internal auditors. In addition, the number of OIOS staff assigned to the Oil for Food program was low. OIOS had only 2 to 6 auditors assigned to cover the Oil for Food program. The UN Board of Auditors indicated that the UN needed 12 auditors for every $1 billion in expenditures. The Independent Inquiry Committee concluded that the Oil for Food program should have had more than 160 auditors at its height in 2000. However, the committee found no instances in which OIOS communicated broad concerns about insufficient staff to UN management. OIOS also encountered problems in its efforts to widen the distribution of its reporting beyond the head of the agency audited. In August 2000, OIOS proposed sending its reports to the Security Council. However, the OIP director opposed this proposal, stating that it would compromise the division of responsibility between internal and external audit. In addition, the UN Deputy Secretary General denied the request, and OIOS subsequently abandoned any efforts to report directly to the Security Council. Timely reporting on audit findings would have assisted the Security Council in its oversight of Iraq sanctions and the Oil for Food program. Our findings on UN management of Iraq sanctions and the Oil for Food program reveal a number of lessons that can apply to future sanctions and should be considered during the ongoing debate on UN reform. These lessons demonstrate the importance of establishing a good control environment at the outset. In addition, fundamental internal control activities must be applied throughout the life of UN programs. Specifically, When establishing the program, assess the roles and authorities of the sanctioned country. If political pressures and emergency conditions dictate significant authority and responsibilities for the sanctioned country, assess the risks posed by these authorities and take steps to mitigate potential problems. A comprehensive risk assessment following the decision to allow Iraqi control over contracting and monitoring might have revealed the need for more rigorous activities to review the prices the regime charged and the quality of goods it contracted to prevent or help lessen the opportunity for illicit charges. Consider the impact that the loss of trade might have on surrounding countries. For example, Jordan, a U.S. ally, was allowed to continue buying Iraqi oil outside the Oil for Food program, which facilitated the revenue that Iraq could obtain beyond UN control. Other provisions for obtaining discounted oil might have prevented this trade. Ensure that monitoring and oversight equally address all program goals. Although the UN focus on screening military and dual-use items was largely effective in constraining Iraq's ability to import these goods through the Oil for Food program, the UN's neglect of Iraq's illicit revenue streams from smuggling and kickbacks undermined the program's goal of using Iraqi oil revenues to benefit the Iraqi people. Establish clear authorities for key management, oversight, and monitoring activities. The Oil for Food program had unclear lines of authority for rejecting contracts based on price and value concerns and for inspecting imported goods and exported oil. These important structural weaknesses allowed the sanctioned Iraq regime significant control over program activities. As programs and funding expand, continuously assess the risks caused by this expansion and take steps to ensure that resources are safeguarded. The UN did not assess risks as the Oil for Food program grew in size and complexity, particularly in light of the fact that it had relegated responsibility for the contracting process to Iraq. Timely risk assessments might have identified the internal control weaknesses that facilitated Iraq's ability to levy illicit contract revenues and thereby undermine the UN's goal of using Iraq's oil proceeds for humanitarian assistance to the Iraqi people. Assess the role of internal audit and evaluation units and take steps to ensure that these entities have the resources and independence needed for effective oversight. Although the UN's internal audit office audited some aspects of the Oil for Food program and identified hundreds of irregularities, it lacked the resources and independence to provide effective oversight of this costly and complex UN effort. In our report on the Oil for Food program's internal controls, we recommend that the Secretary of State and the Permanent Representative of the United States to the UN work with other member states to encourage the Secretary General to ensure that UN programs with considerable financial risks establish, apply, and enforce the principles of internationally accepted internal control standards, with particular attention to comprehensive and timely risk assessments; and strengthen internal controls throughout the UN system, based in part on the lessons learned from the Oil for Food program. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For questions regarding this testimony, please call Joseph Christoff at (202) 512-8979. Other key contributors to this statement were Lynn Cothern, Jeanette Espinola, Tetsuo Miyabara, Valerie Nowak, and Audrey Solis. 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 1996, the United Nations (UN) and Iraq began the Oil for Food program after sanctions were imposed in 1990. The program was intended to allow the Iraqi government to sell oil to pay for humanitarian goods and prevent it from obtaining goods for military purposes. More than $67 billion in oil revenue was obtained through the program, with $31 billion in assistance delivered to Iraq. Internal controls serve as the first line of defense in preventing fraud, waste, and abuse and in helping agencies achieve desired outcomes. GAO assesses (1) the control environment the UN established for managing the sanctions and Oil for Food program and (2) other key internal control elements. In addition, we provide observations on the lessons learned from the program. The UN--the Security Council, the Secretariat, and member states--established a weak control environment for the Oil for Food program at the beginning. The UN allowed Iraq to control contract negotiations for imported commodities with little oversight, enabling the regime to obtain illicit funds through surcharges and kickbacks. The UN did not take steps to address the economic impact that the sanctions had on countries that depended on Iraqi trade, which undermined international support for sanctions and allowed Iraq to smuggle oil outside the Oil for Food program. Overall, the sanctions were effective in helping to prevent the Iraq regime from obtaining military items, but the UN was less rigorous in overseeing economic activities such as monitoring the price and value of Iraq's contracts. The UN's neglect of Iraq's illicit revenue streams helped support a sanctioned regime and undermined the goals of using oil revenues to benefit the Iraqi people. The UN did not adequately address key internal control elements as it implemented the Oil for Food program. First, UN entities lacked clear lines of authority. For example, the Office of the Iraq Program lacked clear authority for rejecting commodity contracts based on pricing concerns. In addition, the customs contractor at Iraq's border was not authorized to evaluate imports for price and quality. Second, the UN did not assess emerging risks as the Oil for Food program expanded from a 6-month emergency measure to deliver food and medicine to a 6-year program providing more than $31 billion to 24 economic sectors. Third, some monitoring activities constrained Iraq's ability to obtain illicit oil surcharges, but smuggling continued despite the presence of inspectors. In addition, the UN's internal audit office identified hundreds of weaknesses and irregularities in its reports. However, it lacked the resources and independence to provide effective oversight of this costly and complex UN effort. The Oil for Food program offers several lessons for designing future sanctions and strengthening existing UN programs: assess whether the sanctions program gives undue control to the sanctioned country; consider the economic impact that sanctions have on neighboring countries; ensure that all aspects of sanctions are equally enforced; establish clear authority and responsibility for management, oversight, and monitoring activities; assess and mitigate risk as programs and funding expand; and assess the role of internal oversight units and ensure that they have the resources and independence needed for effective oversight.

SPAWAR is one of the Navy's three major acquisition commands. SPAWAR provides information technology systems to naval forces on land, at sea, and in space and integrates all information products, including those developed by other systems commands and agencies outside the Navy. The SPAWAR workforce is over 7,300 personnel, and the fiscal year 2000 budget was $3.7 billion--about $2.7 billion to develop and procure systems and about $1.0 billion to operate and maintain them. Specifically, SPAWAR develops, acquires, and manages battle management systems (for example, software applications and undersea, terrestrial, and space sensors (for example, underwater sensors, navigation and weather systems, and satellites); information transfer systems (for example, communications systems, radios, antennas, and switches); and information management systems (for example, local area networks and routers). As of October 2000, SPAWAR was managing 21 programs that involved low-rate initial production. These programs had cumulative low-rate initial procurements ranging from 5 to 100 percent of the total inventory objective--7 systems were above 50 percent. The estimated total production costs for the eight systems we analyzed in detail ranged from $31 million to $525 million. As weapon system programs move through the phases of the acquisition process, they are subject to review at major decision points called milestones. Major defense acquisition programs, known as acquisition category I, and major systems programs, known as acquisition category II,as well as non-major systems programs, known as acquisition category III and IV, follow the same general process. DOD and Navy acquisition policies state that program risks shall be assessed at each milestone decision point before approval is granted for the next phase. The policies add that test and evaluation shall be used to determine system maturity and identify areas of technical risk. Major milestones in DOD's systems acquisition process include Milestone 0, when the determination is made about whether an identified mission need warrants a study of alternative concepts to satisfy the need. If warranted, the program is approved to begin the concept exploration and definition phase. Milestone I, when the determination is made about whether a new acquisition program is warranted. If so, initial cost, schedule, and performance goals are established for the program, and authorization is given to start the demonstration and validation phase. Milestone II, when the determination is made about whether continuation of development, testing, and preparation for production is warranted. If so, authorization is given to start the engineering and manufacturing development phase. Approval of this phase will often involve a commitment to low-rate initial production, which is defined as the minimum quantity needed to (1) provide production- representative articles for operational testing and evaluation, (2) establish an initial production base, and (3) permit orderly ramp-up to full-rate production upon completion of operational testing and evaluation. Operational test and evaluation is a key internal control to ensure that decisionmakers have objective information available on a weapon system's performance to minimize risks of procuring costly and ineffective systems. Operational testing and evaluation uses field tests under realistic conditions to determine the operational effectiveness and suitability of a system for use in combat. DOD acquisition regulations generally provide that programs successfully complete these tests before starting full-rate production. Milestone III, when operational test and evaluation has been completed, a determination is made about whether to proceed to full- rate production and field the system. Over the years, we have found instances in which DOD used the low-rate initial production decision phase to purchase significant numbers of major and non-major systems without successfully completing operational testing and evaluation. Often, these systems later experienced significant effectiveness and/or suitability problems. In 1994, we reported that DOD had made large buys of weapon systems during the low-rate initial production phase and prior to completion of operational test and evaluation, which resulted in operational problems. For example, we reported that the Navy procured 100 percent of a system's inventory objective during low-rate initial production and later found that the system lacked critical hardware and software capabilities. In another case, the Navy procured 100 percent of a system's inventory objective during low- rate initial production and later terminated the program when it failed operational testing and evaluation. A recent Defense Science Board report found that weapons systems are still being fielded without adequate testing to assure their effectiveness and utility to operating units. We conducted this review because buying systems before completing operational testing has inherent risks, and SPAWAR's practice of buying high percentages of a system's total inventory objective during low-rate initial production raised these risk concerns. SPAWAR officials cited three primary reasons for high-percentage buys during low-rate initial production. First, to meet Navy initiatives, SPAWAR must provide the fleet with large quantities of information technology systems as quickly as possible. Second, many information systems consist of evolving technology that quickly becomes obsolete. Third, additional low-rate initial production buys are approved due to delays in conducting the operational test and evaluation. The main reason that SPAWAR officials cited for high-percentage buys during low-rate initial production is the need to provide as many information technology systems to the fleet as quickly as possible to meet several Navy initiatives. The Navy's current vision for the 21st century, Forward From The Sea, involves innovations in technology to rapidly transform the Navy into a 21st century force. SPAWAR provides or contributes to many of the operational capabilities that support the vision. Officials in the Chief of Naval Operations' Fleet and Allied Requirements Division stated that the fleets put pressure on SPAWAR to provide information systems faster. These officials, as well as SPAWAR officials, contend that if SPAWAR does not provide systems to the fleet quickly, then the fleet will bypass the Chief of Naval Operations and SPAWAR and procure some systems with fleet funding. If the fleet buys the systems, SPAWAR cannot control the configuration of these systems, which can eventually result in interoperability problems with systems that SPAWAR procures. An official in the Office of the Deputy Assistant Secretary of the Navy responsible for communications and space systems also agreed that there is pressure on SPAWAR to meet fleet demands. He said that the Under Secretary of Defense for Acquisition, Technology, and Logistics stated about 3 years ago that the pace of developing systems was too slow and called for shortening the development cycle by incorporating evolutionary development and acquisition. Through evolutionary development and acquisition, systems are continuously improved, as new technology becomes available. According to the SPAWAR commander, another reason for quickly providing systems to the fleet is that information systems consist of rapidly advancing technology, which can become obsolete within 18 months. He said that procuring and fielding a large percentage of a system's inventory objective while still in low-rate initial production quickly provide the fleet with better information systems and provide important operational data so that any system performance problems can be quickly fixed. Officials in the Navy Fleet and Allied Requirements Division said that the 18-month obsolescence cycle is the main reason that the fleet would rather have a system now with 75 to 80 percent of its full capability as opposed to waiting until the system has all of its capability. However, officials in the Chief of Naval Operations' Office of Test, Evaluation, and Technology Requirements disputed that rapidly advancing technology is a legitimate reason for making high-percentage buys during low-rate initial production and before completing operational testing. These officials concluded that making high-percentage buys during low- rate initial production circumvents the operational testing and evaluation process and increases the risk that systems will not work as intended when fielded. High-percentage buys during low-rate initial production also were the result of delays in conducting the operational test and evaluation. According to the SPAWAR commander, the pass or fail nature of operational testing contributed to delays. Rather than fail a test and risk program reduction or termination, operational tests were delayed until there was a good probability that the system would pass the tests. As tests were delayed, additional low-rate initial production buys were approved. Six of the eight systems we analyzed had additions to the original low-rate initial production quantities. The SPAWAR commander said that making high-percentage buys of a system while still in low-rate initial production is low risk when proven commercial technology items are being procured and they are relatively low-cost items--when compared to the cost of ships and aircraft. Further, if problems arise after the low-rate initial production systems are fielded, the cost to fix them is not significant. However, SPAWAR officials agreed that none of the eight systems we analyzed are entirely commercial and that all of them have military requirements that must be tested in a realistic operational environment. The DOD Director of Operational Test and Evaluation agreed that low-rate initial production items can be used in an operational environment to learn about problems and fix them, but he said that procuring large quantities of a system before operational test and evaluation is a risky strategy. We analyzed eight SPAWAR systems and found seven of them had a combination of problems that adversely affected fleet operations--all had performance problems, all had interoperability problems, and six had suitability problems. A performance problem is the inability of a system to effectively and efficiently perform its assigned mission. An interoperability problem is the inability of systems to work together effectively to provide services to and accept services from other systems. A suitability problem involves a system not satisfactorily meeting one or more requirements, including reliability, maintainability, logistics support, or training. These problems may delay progress in achieving the Navy's vision for using information technology to attain and maintain network-centric warfighting knowledge and decision-making superiority. The last of the eight systems had not been installed when we analyzed the eight systems. Table 1 illustrates the types of problems identified for seven of the eight systems. Two of the systems--the Digital Wideband Transmission System and the Command and Control Processor--illustrate how interoperability, performance, and suitability problems impact fleet operations. The Digital Wideband Transmission System is a radio transmission system supporting voice, video, and data communications. It is required on all aircraft carriers and amphibious ships and at training facilities. SPAWAR approved 100 percent of the total inventory objective to be bought under low-rate initial production; however, the system does not work due to a number of problems with the antenna, power amplifier, and radio frequency control. The system also created, and was affected by, electromagnetic interference, which caused severe interoperability problems. For example, the interference caused a complete loss of Global Positioning System navigation capability. Furthermore, in order for the digital system to work, an air-search radar had to be shut down. Consequently, the Navy turned off the system the first time it was used during an amphibious ready group deployment in the Pacific, replaced it with a legacy system, and placed the digital system in an inoperative status for 9 months. By November 2000, SPAWAR had installed 78 percent of the systems in the fleet, but it will cost $4.3 million to fix the problems for this $40-million program-- $1.2 million for engineering work and $3.1 million for retrofit costs. SPAWAR is currently developing and testing improvements to system performance. The Command and Control Processor acquires information from other communications systems, stores the information, and reformats it for use by the Aegis combat system on aircraft carriers and naval combat surface ships. Although SPAWAR originally approved a small purchase of the processor during the low-rate initial production, three subsequent low-rate initial production increases bought the total to 41 percent of the inventory objective. From 1995 to 2000, there were 263 problems noted with the system, mostly involving software, during battle group system integration tests. The processor has severe suitability problems because it breaks down unpredictably up to 12 hours at a time (due to software problems) and freezes up, which eliminates the system's capability to provide current situational awareness. Also, on an aircraft carrier that we visited, operators said that the processor would not integrate with other systems, even though it is designed to do so. To prevent the breakdowns, SPAWAR developed a workaround procedure, which involves resetting the system every 2 hours instead of every 24 hours. In addition, the breakdowns and workarounds put more pressure on operators and maintainers during combat or hostile situations. Some of SPAWAR's 13 other systems with a high percentage of low-rate initial production buys also had operational effectiveness and suitability problems. The Pacific Fleet experienced 46 problems with the Navy Extremely High Frequency Satellite Communications System from 1995 to 2000. The problems involved hardware and software, interoperability, and training. For example, in February 2000, system performance was degraded due to a part failure. In April 2000, SPAWAR reported that the problem had been solved. However, about a month later, the system had problems again, resulting in no response from the satellite and time- tracking errors being returned. The system was again placed in a degraded status and, as of August 2000, the problem was still unresolved. The Pacific Fleet also experienced problems with the High Frequency Radio Group, mainly due to system performance problems and training shortfalls. For example, on a ship visit in October 2000, ship communications personnel said that the system had broken down several times for a duration of 1 week to 1 month at a time. They said that, when it breaks down, the operators must tune in the radio frequency manually, but ship operators have not been trained to do this because they were used to relying on the system to tune into a particular frequency automatically. The Pacific Fleet also identified several other problems with the radio group, including a ship that experienced 15 failures of a system switch within 11 months. The SPAWAR commander said that the Command did not have adequate controls and oversight, at the time of most of these low-rate initial production decisions, to either mitigate or manage risks associated with procuring and fielding large percentages of systems during low-rate initial production. He said the need for more discipline in the acquisition process contributed to the interoperability, performance, and suitability deficiencies we identified. He further noted, however, that some problems are part of the cost of doing business with new systems and are worth the risk to provide systems to the fleet quickly. According to the SPAWAR commander, the most meaningful measure of success is whether the systems are meeting their operational requirements, and he said that SPAWAR's systems are meeting theirs based on a performance parameter called operational availability. However, according to the DOD Director of Operational Test and Evaluation and the Chief of Naval Operations' Office of Test, Evaluation, and Technology Requirements, operational availability is only one of a number of key performance measures, and an overall assessment of system performance should not be based solely on that parameter. The Navy and SPAWAR have taken or plan to take a number steps to mitigate the risks of large low-rate initial production procurements. To add more discipline and rigor to the low-rate initial production decision process, the Command now requires program managers to use a standardized checklist and report template as part of reviewing and approving low-rate initial production purchase requests. SPAWAR has also established an Acquisition Reform Office to serve as a focal point and command-wide disseminator of lessons learned and process improvements. The reform office is currently developing a "Rules of the Road" Acquisition Guidebook for SPAWAR program managers. Further, in discussions of our findings and observations during this review, the commander called for the development of risk management guidance for information systems and agreed to suggested improvements in documenting and justifying low-rate initial production decisions. The SPAWAR commander said better risk management guidance would improve low-rate initial production decisions on information systems, especially when milestone decision authorities and program managers rotate in and out over time. The commander stated that he and the program managers primarily use their acquisition knowledge, wisdom, and experience when making risk management decisions. In discussions with Navy and SPAWAR officials, we noted that the Acquisition Decision Memorandums, used to document and support milestone decisions, did not always include the low-rate initial production quantity being approved, the cumulative number of low-rate initial production items that had been approved, or the cumulative low-rate initial production percentage. We also noted that, at SPAWAR, the justification for approving low-rate initial production purchases was not always documented. The Navy and SPAWAR officials agreed to document in the Acquisition Decision Memorandum the justification for all low-rate initial production approvals, as well as the current inventory objective and the cumulative number of units bought under low-rate initial production. SPAWAR also agreed to include in its quarterly program status report when cumulative low-rate initial production approvals reach 50 percent or more of the current inventory objective. Recognizing that other Navy activities can benefit from the low-rate initial production decision checklist and report template, we recommended that this guidance be distributed throughout the Navy. The Navy subsequently distributed the guidance DOD-wide. Finally, the Navy and SPAWAR agreed to supplement acquisition training for program managers and staff by incorporating risk management tools into existing courses. In seeking to provide new information systems to the fleet as quickly as possible, SPAWAR officials procured and fielded relatively large quantities of systems during low-rate initial production and before completing operational testing. Our subsequent review of seven of these systems found that six had experienced operational problems that negatively impacted the fleet. The SPAWAR commander noted that controls and oversight, at the time of most of these decisions, were not adequate to either mitigate or manage risks associated with procuring and fielding large percentages of systems during low-rate initial production. He said the need for more discipline in the acquisition process contributed to deficiencies we identified. Since that time, Navy and SPAWAR officials have taken or have plans to take a number steps to mitigate the risks of large low-rate initial production procurements. In addition, they have agreed to implement, and in one case have already implemented, process improvements we suggested during the course of this review. Given these actions, we are not making any recommendations in this report. In commenting on our draft report, the Navy agreed and stated that the actions taken and planned by it and the SPAWAR Command are expected to improve the Navy's low-rate initial production decision process. The Navy's comments appear in appendix I. To acquire information about the number and status of SPAWAR low-rate initial production programs, we interviewed officials and obtained documentation from the SPAWAR Acquisition Reform Office; selected SPAWAR program offices; the Office of the Assistant Secretary of the Navy (Research, Development, and Acquisition); the Office of the Deputy Assistant Secretary of the Navy (Command, Control, Communications, Computers, and Information/Electronic Warfare/Space); the Office of the Deputy Director Defense Procurement Strategies; the Office of the Under Secretary of Defense (Acquisition and Technology); and the Office of the Chief of Naval Operations. To obtain detailed information about the impact of the high percentage of SPAWAR low-rate initial production procurements, we selected and reviewed 14 programs, representing 70 percent of all SPAWAR low-rate initial production programs. Of these 14 programs, we examined 8 programs in detail looking at operational, logistic, interoperability, and training issues to determine how well these programs were performing. To obtain information about the operational testing, evaluation, interoperability, and fielding of low-rate initial production systems, we interviewed officials and obtained documentation from the Office of the Director of Navy Test, Evaluation, and Technology Requirements; the Office of the Navy Commander Operational Testing and Evaluation Force; the Office of the Program Manager for Battle Group Systems Integration Testing; and the Office of the Director of Operational Test and Evaluation, Office of the Assistant Secretary of Defense. To obtain information about the operation, performance, interoperability, maintenance, repair, retrofit, suitability, and training regarding low-rate initial production systems in the fleet, we visited the Naval Surface Force Command, Pacific; the Naval Air Command, Pacific; and the Naval Submarine Command, Pacific, Squadron Eleven. We also visited specific ships in each command, including the U.S.S. Benfold (DDG-65), the U.S.S. Pearl Harbor (LSD-52), the U.S.S. John C. Stennis (CVN-74), and the U.S.S. Salt Lake City (SSN-716). In addition, we held discussions with SPAWAR program officials and officials from SPAWAR's In-Service Engineering Activity, Fleet Support Engineering Team, and Installations and Logistics Directorate. To obtain information about the laws, regulations, procedures, and guidance governing the procurement of information technology systems in low-rate initial production, we interviewed officials and obtained documentation from the Office of the Commander, Space and Naval Warfare Systems Command; the Office of the Chairman Deskbook Working Group (DOD 5000 Rewrite); the Assistant Secretary of the Navy (Research, Development and Acquisition); and the Office of the Assistant Deputy Under Secretary of Defense (Systems Acquisition). We also reviewed selected laws and regulations governing low-rate initial production, including title 10 of the U.S. Code, the DOD 5000 series acquisition regulations (the1996 and revised 2000 version), and Secretary of the Navy Instruction 5000-2B governing acquisition and procurement of low-rate initial production and commercial-off-the-shelf technology. We conducted our review from June 2000 through May 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the Honorable Donald H. Rumsfeld, Secretary of Defense; and the Honorable Mitchell E. Daniels Jr., Director of the Office of Management and Budget. Copies will be made available to others upon request. Please contact me at (202) 512-4821 if you have any questions regarding this report. Key contributors to this report were Cristina Chaplain, Joe Dewechter, Dorian Dunbar, Stephanie May, Gary Middleton, Sarah Prehoda, Richard Price, and William Woods.

During its review of the Navy's Space and Naval Warfare (SPAWAR) Systems Command's fiscal year 2001 budget request, GAO found that many information technology systems were being procured and fielded in relatively large quantities--sometimes exceeding 50 percent of the total--during low-rate initial production and before completion of operational testing. The primary purpose of low-rate initial production is to produce enough units for operational testing and evaluation and to establish production capabilities to prepare for full-rate production. Commercial and Department of Defense (DOD) best practices have shown that completing a system's testing before producing significant quantities substantially lowers the risk of costly fixes and retrofits. For major weapons systems, statutory provisions limit the quantities of systems produced during low-rate initial production to the minimum quantity necessary. These statutory provisions also require justification for quantities exceeding 10 percent of total production. Although these provisions do not apply to non-major systems, DOD and Navy acquisition regulations encourage these programs to make use of the low-rate initial production concept. This report reviews (1) information systems being procured and fielded for SPAWAR in large numbers before operational testing, (2) what effects this practice was having on SPAWAR and the fleet, and (3) what the Navy is doing to mitigate the risks associated with this practice. GAO found that the main reason for the high percentage of low-rate initial production quantities is to more quickly respond to fleet demands for information systems improvements. Many information technology systems purchased and fielded during low-rate initial production and prior to completing operational testing experienced problems that negatively impacted fleet operations and capabilities. SPAWAR has taken several steps to mitigate the risks of high percentage low-rate initial production procurements, such as requiring program managers to use a standardized checklist and establishing an Acquisition Reform Office to serve as a focal point and command-wide disseminator of lessons learned and process improvements.

VBA's business environment encompasses many difficult challenges. These include a backlog of disability claims, improving a number of relationships with other organizations that affect how VBA does its work, and responding to its customers who are frustrated about the long-standing need to improve the accuracy and timeliness of processing claims. To deal with these issues, as well as cope with today's constrained budgetary climate, the agency is undertaking a number of major initiatives, including beginning a business process reengineering effort for its compensation and pension programs, restructuring its regional office responsibilities, and consolidating its data centers. VBA has, however, been proceeding without an overall business strategy clearly setting forth how it will improve its performance and tackle entrenched service-delivery problems. For example, the reported backlog of original and reopened disability claims increased from 378,000 in fiscal year 1990 to a high of 571,000 at the end of December 1993. This rise was due to several factors, including increasing complexity in claims processing and the use of inexperienced regional claims raters. VBA instituted several conventional stopgap measures to deal with this backlog. It authorized extensive overtime, shifted workloads among regional offices, purchased information technology equipment, increased the number of claims raters by about one third (from 667 to 897), and relaxed some paperwork requirements, such as accepting photocopies of certain documents. As a result the backlog has been reduced, but it is now still about 380,000--similar to the 1990 level. Similar trends have been experienced in the processing times for original disability compensation claims, which rose from an average of 151 days in fiscal year 1990 to 213 days in fiscal year 1994. The stopgap measures used to decrease the backlog have also reduced the average processing time in fiscal year 1995 to 161--10 days more than the level in fiscal year 1990. VBA officials acknowledge that these measures cannot be sustained over a prolonged period of time. VBA must, therefore, find other solutions to achieve greater service-delivery breakthroughs. Other entities also affect the speed with which VBA processes claims and the agency's overall direction. For example, VBA relies on the Veterans Health Administration for most medical information needed to substantiate a disability claim, and the Department of Defense for information relating to a veteran's service time and conditions of discharge, as well as medical information from the veteran's tour of active duty. Delays by either of these organizations can have a significant impact on the timeliness of VBA's claims processing. Judicial review organizations also affect VBA's workload and backlog. For example, the Board of Veterans' Appeals returns almost half of its cases to VBA regional offices for additional development and reconsideration each year. The Board itself also has a significant and increasing backlog of cases; its appeals grew from about 19,500 in fiscal year 1990 to more than 50,000 in fiscal year 1995--an increase of more than 150 percent. It takes the Board about 2 years to render a decision from the date it receives an appeal. In addition, VBA--like most federal agencies--must deal with constrained resource levels and, at the same time, maintain existing levels of service and operations. VBA is in the process of restructuring its regional offices in an effort to cope with declining resources. At the same time, funding for VBA's information technology initiatives is discretionary and, as such, comes under close budgetary scrutiny by the Congress and the Office of Management and Budget (OMB). A comprehensive business strategy is needed--one that includes developing strategic and information resources management plans, setting performance goals and measures, and incorporating the results of major agency initiatives, such as business process reengineering. VBA is moving in this direction; currently, however, it has no clearly articulated business strategy. Recent legislative changes provide the framework for VBA to develop such a strategy and identify the tools needed to implement it. For example, the Government Performance and Results Act of 1993 requires agency heads to submit to OMB and the Congress a strategic plan for program activities, including a mission statement, goals and objectives, and a description of how these will be achieved and what key factors could affect their achievement. The act also requires that agencies prepare annual performance plans for each program--performance indicators that will allow measurement of outputs and service levels. In addition, the Information Technology Management Reform Act of 1996 requires agency heads to establish goals for improving the efficiency and effectiveness of agency operations and, as appropriate, the delivery of services to the public, through more effective use of information technology and business process reengineering. VBA's weaknesses in planning have been well documented since 1987. VBA's planning process has been cited by us and others for (1) not having specific, measurable goals and objectives against which progress can be assessed and (2) not analyzing the costs and benefits of alternative approaches to modernization. According to VBA officials, they are in the process of developing strategic and information resources management plans and will have them ready to use in preparing the agency's budget submission for fiscal year 1998. Assistance in this area could come from the National Academy of Public Administration, which has recently been commissioned by the Senate Appropriations Committee. In the Committee's September 1995 report on the 1996 appropriations bill, the Committee provided $1 million to the Academy for a comprehensive assessment of VBA, with particular emphasis on the specific steps required to make claims processing more efficient and less time-consuming. The Academy will evaluate the modernization initiative and its link to strategic goals and priorities, efforts to reengineer VBA's claims-processing methodology, performance measures for restructuring, and the roles of the Board of Veterans' Appeals and the Court of Veterans Appeals. As of a few weeks ago, VBA was still working out the details of this study with the Academy. VBA also needs to develop a full set of performance goals or measures. At present, processing timeliness is the primary performance measure that VBA uses. Customer-focused goals, aimed at improving the quality of service, are needed. For example, a VBA survey of "stakeholders"indicated that , in their view, an emphasis on quality over productivity alone would be the key to service excellence at VBA. These stakeholders defined quality as making the correct award decision the first time, which would improve the timeliness of claims processing and reduce the number of appeals filed. VBA's current goal for claims processing was set without the benefit of any clear plan. For example, its goal is to reduce average original compensation claims processing time to 106 days by 1998; this goal was set as part of a 1993 agreement with OMB to establish outcome-oriented performance goals. The performance goal is not linked to a business strategy or plan that explains how the agency intends to achieve this goal. Reengineering is key to achieving major performance improvements that VBA establishes as business goals. As our 1994 study pointed out,organizations that successfully develop information systems do so only after thoroughly analyzing and redesigning their current business processes. Information system projects that do not first consider business process redesign typically fail, or reach only a fraction of their full potential. In response to concerns raised by us and others over the past 3 years, VBA is preparing to reengineer its compensation and pension claims-processing operations, and has taken several positive steps. In November 1995 the agency established a Business Process Reengineering Office, and subsequently adopted a business process reengineering methodology. It also hired a consultant to assist with reengineering. By the end of this month, a business process reengineering team comprised of VBA staff and the consultant is expected to have completed a key step in the process by developing a proposal for changing the compensation and pension business processes. This proposal will be submitted to VBA management for review and approval before implementation. VBA also plans to begin a different business analysis project each year for its other four business areas. The next area planned for such an analysis is educational assistance. It is still too early to judge whether the current business process reengineering effort will help VBA achieve its goals, but we continue to have some concerns about VBA's current business process reengineering focus and approach. For example, VBA has not yet set quantifiable performance measures using the experiences and performance of other leading claims-processing organizations. Also, the scope of VBA's analysis and reengineering of its business processes in the compensation and pension area does not address the claims appeal process, which has a significant impact on the timeliness and quality of some claims-processing decisions. Finally, as I will discuss later, we are concerned that reengineering is not the driver behind all of VBA's information technology initiatives. To solve entrenched problems and sustain long-term improvements in service delivery and operations, VBA must first know exactly what it needs to pay attention to and where it wants to go. A business strategy containing specific goals and performance measures is absolutely essential. By effectively using the framework established in recent legislation to develop the business strategy and complete its strategic and information resources management plans, VBA will go a long way toward setting out a clear path to be followed. VBA's investment in modernization activities has yielded some improvement in hardware and software applications. However, it is difficult to measure return on any of these investments. As shown in attachment 1, between fiscal years 1986 and 1995, VBA reported that it obligated about $688 million for information technology, of which about $284 million, or about 40 percent, was for systems modernization. In December 1992 VBA awarded the first contract in its planned three-stage procurement. During stage I, VBA acquired a number of personal computers, local area networks, minicomputers, and commercial off-the-shelf software for its 58 regional offices; during stage II, VBA procured imaging equipment and associated software. Stage III was suspended in 1994; during this stage, VBA was to procure mainframe computers for its data centers in Hines, IL, and Philadelphia. VBA has also realized some limited benefits from the development of several short-term, targeted software applications that are being used on equipment acquired during stage I. These projects include the following: Control of Veterans Records--used to track the location of veterans' claims folders containing application-related information; Rating Board Automation--used to generate letters to veterans regarding Personal Computer-Generated Letters--used to prepare general letters to disability claimants. To help manage its information technology investments in a way that will lead to major returns, VBA must now meet the challenges of new information technology legislation that has been modeled after the best practices of leading private and public organizations. For example, the Information Technology Management and Reform Act and the Paperwork Reduction Act require agency heads to analyze the agency's mission and, on the basis of this analysis, revise business processes as appropriate; design and implement a process for maximizing the value and assessing and managing the risks of information technology acquisitions; integrate budgetary, financial, and program management decisions in this process; and use this process to select, control, and evaluate the results of information technology initiatives. VBA needs to make major improvements in the way it manages its information technology investments to meet these legislative requirements. Our analysis of past and current VBA information technology initiatives shows that VBA lacks the critical cost, benefit, and risk information necessary to determine whether it has made worthwhile investments. Our analysis also shows that these initiatives preceded VBA's business process reengineering effort, which increases the risk that they may need to be substantially changed or abandoned once reengineering results become available. For example: Between fiscal years 1993 and 1995, VBA purchased 24 minicomputers without having a clear understanding of the software applications to be placed on the equipment or the benefits to be derived from this investment. Although VBA expected to use these minicomputers in processing claims, they were not put into use until recently, when VBA began testing its software application to track claims folders. This was done at four sites: Baltimore; St. Petersburg; San Juan, Puerto Rico; and Winston-Salem, NC. At VBA's educational assistance processing sites in Atlanta and St. Louis, the agency has acquired and is in the process of installing imaging equipment to scan all documents in the chapter 30 education claims folders, which contain an average of 30 documents each. VBA has not, however, performed any reengineering analysis for the educational assistance area to assess how the imaging equipment could be used to improve education claims processing. In addition, while VBA has begun to collect baseline information to compare against post-implementation data in order to determine what impact the equipment will have on its operations at the Atlanta site, such information has not been collected for St. Louis, which has been using such equipment since 1987. Also, this past March VBA embarked on a 2-year effort at its St. Petersburg regional office to replace its current benefits payment system. The objectives of this replacement system were to (1) permit more timely updating of master benefit files through on-line access, (2) provide national access to service organizations that must respond to veterans' questions about the status of their claims, and (3) address the potential effects of processing benefits payments and other critical information after the turn of the century. This recent project has several inherent risks that must be assessed before VBA can determine if this initiative will be worth the investment. First, the project team, comprised of VBA staff and contractor personnel, will be using a new software development language and a rapid application development methodology. While this methodology is used more frequently in the private sector, it has not been previously used at VBA. When it is used, highly skilled and experienced people are a necessity. Given both VBA's and the contractor's unfamiliarity with using this methodology, the staff and contractor must learn the new tools and become proficient with them so as not to jeopardize the implementation of the replacement payment system, scheduled for 1998. We believe that this initiative is high risk because the payment replacement system timetable was based on unrealistic assumptions about the productivity and skills of newly-trained, inexperienced people, and the level of complexity of the task. Further, as I will discuss in more detail in a few moments, although VBA is in the process of developing software for its replacement system, our evaluation found that VBA is very weak in its ability to develop software and manage software-development contracts. This factor substantially increases the risks associated with this project. Another risk is that this project was not following sound systems-development practices. For example, VBA's system development guidelines--policies and procedures used to design and develop computer software and systems--call for verification and validation of the system requirements before proceeding from one phase of system development to the next phase. VBA's implementation of the standard systems-development process consists of four phases: planning, analysis, design, and construction. It has been demonstrated that proceeding to a subsequent phase without reviewing the work done in the current phase for correctness, consistency, and completeness will almost always adversely impact on the project's cost, its performance, and the delivery schedule. VBA directed the project team to proceed into the system design phase, however, without completing this important first step. Further, the data model that is being used to develop the replacement payment system has not been completed, although this should have been done prior to proceeding into the system design phase. The incomplete requirements verification and validation and incomplete data model increases the risk that the system will be designed incorrectly. Also, VBA does not have cost-benefit information with which to assess its return on this investment. For example, it has not estimated the total amount of software that must be developed, or its cost. In addition to lacking the information to determine whether or not specific projects will pay off, VBA also lacks a process that ranks and prioritizes its investments in information technology as a consolidated portfolio. VBA is undertaking several projects simultaneously, without a full consideration of the resources required, costs, risks, and potential impact on agency operations. Current system-development activities--including addressing the year-2000 issue, data-center consolidation and related software conversion, and replacement of the benefits payment system--are all examples of investments that have not been ranked or prioritized. Year 2000. Like all other federal agencies--and private businesses--VBA must address the effects of processing information in light of the change of century. Most of the computer software in use today employs 2-digit date fields. Consequently, at the turn of the century, computer software will be unable to distinguish between the years 1900 and 2000, since both would be designated "00." Industry and government experts have already gone on record saying that the effort to correct this problem will become extremely costly and time-consuming, and requires early and detailed planning. If the year-2000 problem is not addressed, it will render the vast majority of date-sensitive computer information unusable or obsolete. For example, calculations based on incorrect dates in service could result in errors in processing benefit checks in the compensation and pension programs. In VBA's educational assistance program, VBA could send threatening debt-collection letters to veterans who do not actually owe money; charge incorrect interest rates to veterans or charge interest to veterans who do not owe money; or send debtor information to the Internal Revenue Service for refund withholding, to the federal government for wage garnishment, or to private credit firms to go on a veteran's credit report. In our opinion, the year-2000 issue is an absolutely critical challenge that VBA faces over the next 2-3 years. Some of the computer code was developed more than 20 years ago, using nonstandard coding techniques. In some cases, the software documentation may be incomplete or nonexistent. It is essential that VBA develop and implement a strategy to address the inherent risks that accompany the year-2000 change. First, a sufficient number of experienced staff must be devoted to this task, especially since VBA must maintain its current software and service levels at the same time that it is correcting date-sensitive code. Second, it will need to complete the programming by 1998, since industry experts recommend that 1999 be reserved for thoroughly testing the year-2000 changes. Third, VBA must have a contingency plan that outlines alternatives for processing claims if systems are not corrected. Data-Center Consolidation and Related Software Conversion. In response to a request from OMB, VA and VBA are in the process of developing a strategy paper to reduce operational costs by consolidating their data centers. However, critical information in terms of costs and benefits is missing--information needed to determine how and when this should be done and how this effort ranks in terms of priority with competing demands, such as the year-2000 activities. Currently, VA's data center is in Austin, Texas, and uses IBM computer equipment to process the Department's accounting and financial management information related to administrative operations. VBA's two data centers--Hines and Philadelphia--use mostly Honeywell equipment; the Hines facility primarily processes disability (compensation and pension) claims, while Philadelphia processes insurance claims. The joint VA/VBA data-center consolidation strategy paper is due to OMB in July. Because the data-center consolidation approach must also consider converting the current software to run on more modern computer equipment, added risks must be considered. Specifically, VBA is considering converting the Benefits Delivery Networksoftware--currently in use at Hines--to more modern computer equipment. The cost and time frames for this conversion will depend upon which of the three data centers is chosen as the site for Benefits Delivery Network processing. To date, two studies have been commissioned to evaluate the software conversion. The first, commissioned by VA, estimated the cost and time frames for moving the current Benefits Delivery Network to IBM equipment; the second, commissioned by VBA, assessed the feasibility of converting the Benefits Delivery Network software. The finding was that such a conversion is feasible, and could likely take 2-3 years to complete. Neither study, in our view, provides enough information on all three sites to adequately assess the investment needed, nor do they fully address General Services Administration (GSA) criteria for making software conversion decisions. Neither contains an analysis of alternative approaches or a full description of the cost, benefits, and risks of conversion. We have discussed our analysis with VA and VBA officials, and they agree with our assessment of these studies. VA has since hired another consultant to analyze the costs and benefits and to develop a strategy for data-center consolidation. Until the results of this study are available, VBA will not be able to identify the best approach to take. The conversion of the Benefits Delivery Network software must be carried out correctly in order to realize the potential benefits of data-center consolidation. This conversion will require much work and a dedicated staff with in-depth knowledge of the existing network software. In-depth knowledge of the Benefits Delivery Network software currently resides at VBA's Hines data center. It will also be necessary, despite limitations on personnel and funding, to maintain the current network software and service level of operations while converting the software. The conversion risk will be further compounded by VBA's need to address the year-2000 issue. Replacement of the Payment System. In addition to the previously mentioned risks associated with the replacement of the payment system, we believe that VBA did not adequately consider alternative approaches for achieving the reliability and additional functionality expected in the replacement. The Federal Information Resources Management Regulations require that agencies use their systems requirements as the basis for analyzing alternatives, commensurate with the size and complexity of the agency's business needs. The regulation stipulates that agencies should calculate the total estimated cost of each feasible alternative, and assess the risks. Further, VBA recently acquired excess computing equipment from GSA to replace some of the equipment at Hines and Philadelphia. According to staff at both centers, the excess equipment is more reliable, has greater capacity, and is less expensive to maintain. This newer equipment allows VBA more time to analyze and assess alternatives because it makes the computing environment more stable. Lastly, critical to VBA's ability to identify the true return on any of these information technology initiatives is the need for accurate and reliable cost information. Our analysis of VBA's modernization obligations to date shows that the cost of these activities may be understated because VBA lacks a managerial cost-accounting system to track payroll benefits and indirect costs associated with modernization. VBA also appears to have miscategorized some items in its information technology budget as nonmodernization items when, in our opinion, they were modernization-related and should have been categorized in that way. In addition, VBA has not updated its modernization life-cycle cost estimate of $478 million in over 3 years. Therefore, precisely how much VBA's systems modernization effort will ultimately cost taxpayers remains uncertain. VBA's chief financial officer is currently in the process of developing guidance for implementing a cost-accounting methodology. Our work indicates that VBA has much to do to develop an investment strategy that can assure the Congress that scarce information technology dollars are being spent on the highest priority projects with the greatest potential for a substantial return on investment. The recent acquisition of excess equipment now provides VBA with an opportunity to effectively develop this kind of approach. VBA must expeditiously develop an effective investment process for selecting, controlling, and evaluating information technology initiatives in terms of cost, capability of the system to meet requirements, risk, timeliness, and quality; give top priority to addressing the year-2000 problem; and improve its accounting of obligations and costs associated with the modernization. Once technology investment processes have identified the most beneficial information technology projects in terms of cost, benefit, and return, the focus then shifts to the technical capabilities necessary to make the projects a reality. The agency must be able to quickly determine if it has the necessary in-house capability to develop the software for the new system or whether this development should be performed by an experienced contractor. In order to mitigate any risk of not being able to deliver high-quality software within schedule and budget, agencies must have a disciplined and consistent software-development process. Software development has been identified by many experts as one of the most risky and costly components of systems development. To evaluate VBA's software development processes, we applied the Software Engineering Institute's software capability evaluation methodology to those projects identified by VBA as using the best development processes. This evaluation compares agencies' and contractors' software development processes against the Institute's five-level software capability maturity model, with 5 being the highest level of maturity and 1 being the lowest. As shown in attachment 2, these levels--and the key process areas described within each--define an organization's ability to develop software, and can be used to measure improvements in this area. On the basis of our analysis, we determined that VBA is operating at a level-1 capability, defined as ad hoc and chaotic. At this level, VBA cannot reliably develop and maintain high-quality software on any major project within existing cost and schedule constraints, placing VBA modernization at significant risk. In this context, VBA relies solely on the various capabilities of individuals rather than on an institutional process that will yield repeatable, or level-2, results. VBA does not satisfy any of the criteria for a level-2 capability, the minimum level necessary to be able to significantly improve productivity and return on investment. For example, VBA is weak in the requirements management, software project planning, and software subcontract management areas, with no identifiable strengths or planned improvement activities. However, VBA can build upon its strengths in the software configuration-management and software quality-assurance areas. Our report on this matter is being issued soon and will contain recommendations to better position VBA to develop and maintain its software successfully and to protect its software investments. Specifically, we recommend in that report that VBA obtain expert advice to improve its ability to develop high-quality software and expeditiously implement a plan that describes a strategy for reaching the repeatable (i.e., level 2) level of process maturity, delay any major investment in new software development--beyond what is needed to sustain critical day-to-day operations--until the repeatable level of process maturity is attained, and ensure that any future contracts for software development require the contractor to have a software development capability of at least a level 2. VBA agreed with all but one recommendation. VBA agreed that a repeatable level of process maturity is a goal that must be attained, but disagreed that "all software development beyond that which is day-to-day critical must be curtailed." VBA stated that the payment system replacement projects and other activities to address the change of century must continue. We agree that the software conversion and development activities required to address issues such as the year 2000 must continue; we would, in fact, characterize these as sustaining critical day-to-day operations. However, systems-development initiatives in support of major new projects, such as the replacement of the payment system, should be reassessed for the risk of potential delays, cost overruns, and shortfalls in anticipated system functions and features. We are pleased to see that VBA is already initiating positive actions relating to our other recommendations, including acquiring expert advice to assist it in improving its ability to develop high-quality software, consistent with criteria set forth by the Software Engineering Institute. The business and operational problems facing VBA are complex and not easy to resolve. VBA has begun to take action to improve agency operations and service delivery, but it has not yet implemented enough of the right kinds of actions--actions that involve developing a sound business strategy and the supporting plans, approaches, and measures to guide them into the next century. The need for more rigorous management and technical methods is critical if VBA is to successfully develop modern, efficient, and cost-effective business processes and computer systems that will allow them to deliver truly improved services to veterans. Mr. Chairman, this completes my testimony this morning. I would be pleased to respond to any questions you or other members of the Subcommittee 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. 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GAO discussed the Veterans Benefits Administration's (VBA) efforts to modernize and streamline its business processes. GAO noted that: (1) VBA is experiencing information technology acquisition problems and serious management and technical weaknesses; (2) VBA needs to adopt a clearly articulated business strategy to solve its service-delivery problems, coordinate its reengineering efforts, and cope with constrained resources; (3) VBA is developing strategic and information resources management plans that it will use in preparing its fiscal year 1998 budget request; (4) the National Academy of Public Administration will assess ways to make VBA claims processing more efficient; (5) VBA needs to develop performance goals and measures aimed at improving the quality of service; (6) VBA is reengineering its compensation and pension business processes, but it must improve its management of its information technology investments by developing critical cost, benefit, and risk information; (7) VBA has acquired some computer equipment before completing its reengineering analysis and may have to discard the equipment; and (8) VBA is not following sound software and systems development practices.

In response to concerns about the nation's dependence on imported oil, Congress enacted the RFS program as part of the Energy Policy Act of 2005. This initial RFS required that a minimum of 4 billion gallons of biofuels be used in 2006, rising to 7.5 billion gallons by 2012. Two years later, the Energy Independence and Security Act of 2007 (EISA) expanded the biofuel target volumes and extended the ramp-up through 2022 establishing overall target volumes for biofuels that increase from 9 billion gallons in 2008 to 36 billion gallons in 2022. The EISA volumes can be thought of in terms of two broad categories: conventional and advanced biofuels: Conventional biofuel: Biofuels from new facilities must achieve at least a 20-percent reduction in greenhouse gas emissions, relative to 2005 baseline petroleum-based fuels. The dominant biofuel produced to date is conventional corn-starch ethanol, although recently some conventional biodiesel has entered the fuel supply. Advanced biofuel: Biofuels, other than ethanol derived from corn starch must achieve at least a 50-percent reduction in life-cycle greenhouse gas emissions, as compared with 2005 baseline petroleum-based fuels. This is a catch-all category that may include a number of fuels, including fuels made from any qualified renewable feedstock that achieves at least a 50- percent reduction in lifecycle greenhouse gas emissions, such as ethanol derived from cellulose, sugar, or waste material. This category also includes the following: Biomass-based diesel: Advanced biomass-based diesel must have life-cycle greenhouse gas emissions at least 50 percent lower than traditional petroleum-based diesel fuels. Cellulosic biofuel: Advanced biofuel derived from any cellulose, hemicellulose, or lignin that is derived from renewable biomass must have life-cycle greenhouse gas emissions at least 60 percent lower than traditional petroleum-based fuels. This category of fuel may include cellulosic ethanol, renewable gasoline, cellulosic diesel, and renewable natural gas from landfills that can be used to generate electricity for electric vehicles or used in vehicles designed to run on liquefied or compressed natural gas. The RFS required the annual use of 4 billion gallons of overall biofuels in 2006, rising to 36 billion gallons in 2022, with at least 21 billion gallons from advanced biofuels, effectively capping the volume of biofuels (primarily conventional, or corn-starch, ethanol) that may be counted toward the overall 2022 target of 15 billion gallons. EPA administers the RFS in consultation with DOE and USDA. EPA's responsibilities for implementing the RFS include setting annual volume requirements and, in doing so, using its waiver authority to reduce statutory volume targets, if warranted. As figure 1 shows, the structure of the volume targets allowed for blending of conventional corn-starch ethanol in the early years covered by the statute while providing lead time for the development and commercialization of advanced, and especially cellulosic, biofuels. However, these fuels have not been produced in sufficient quantities to meet statutory targets through 2016. As a result, since 2010, EPA has used its waiver authority to deviate from the statutory target volumes and has reduced the volume requirement for cellulosic biofuel every year, citing inadequate domestic supply, among other things (see fig.2). In December 2015--when EPA finalized the volume requirements for 2014, 2015, and 2016--the agency reduced the total renewable fuel requirement for those years. Effectively, this meant that EPA reduced the amount of conventional biofuels required under the program relative to statutory targets for those years. Similarly, in the volume requirement proposed in May 2016, EPA also proposed reducing the total renewable fuel requirement for 2017 compared with the target volumes in the statute: from 24 to 18.8 billion gallons (see fig.3). In both cases, EPA cited constraints in the fuel market's ability to accommodate increasing volumes of ethanol. EPA's use of this waiver authority has been controversial among some RFS stakeholders, and EPA's 2015 requirement currently faces legal challenges from multiple parties. EPA's responsibilities for the RFS also include determining companies' compliance with the RFS. EPA regulates compliance with the RFS using a credit system. Companies in the United States that refine or import transportation fuel must submit credits--called renewable identification numbers (RIN)--to EPA. Companies with such an obligation are known as "obligated parties." The number of RINs that an obligated party must submit to EPA is proportional to the volume of gasoline and diesel fuel that the obligated party produces or imports and depends on the total volume requirement EPA sets for the year in question. In accordance with EPA guidelines, a biofuel producer or importer assigns a unique RIN to a gallon of biofuel at the point of production or importation. When biofuels change ownership (e.g., are sold by a producer to a blender), the RINs generally transfer with the fuels. When a gallon of biofuel is blended or supplied for retail sale, the RIN is separated from the fuel and may be used for compliance or traded, sold, or held for use in the following year. Since biofuels supply and demand can vary over time and across regions, a market has developed for trading RINs. If a supplier has already met its required share and has supplied surplus biofuels for a particular biofuel category, it can sell the extra RINs to another entity or it can hold onto the RINs for future use. An obligated party that faces a RIN deficit can purchase RINs to meet its obligation. Since the establishment of the RFS, conventional corn-starch ethanol is the biofuel that has most often been blended with gasoline. After production, ethanol is blended into the gasoline either by the wholesale distributor or at the retail pump, with both requiring specialized tanks and pumping equipment. Retailers sell specific blends of gasoline and ethanol: E10 (up to 10 percent ethanol); E85 (51 to 85 percent ethanol); and, less typically, E15 (15 percent ethanol). E10 is the most widely used blend, representing the overwhelming majority of gasoline sales in the United States. The E85 blend is specifically used by flex fuel vehicles. Currently, there are relatively few of these automobiles in the United States, and E85 stations are located primarily in the Midwest. The sale of E15 blend is even less common than that of E85. For both E85 and E15, developing retail pump infrastructure has been a focus of USDA's Biofuel Infrastructure Partnership which, beginning in 2015, has made $100 million available in matching grants in 21 states to install nearly 5,000 new retail pumps. In the years since the RFS was established, U.S. oil imports have decreased. Several factors contributed to the decrease in reliance on imported oil, including the use of E10 brought about by the RFS. However, other factors contributed more significantly to the decrease. According to an April 2015 DOE report, at the same time that U.S. oil production was growing, U.S. oil consumption, and particularly consumption of gasoline, was falling. A number of factors led to the decrease in consumption, including historic fuel economy standards for light and heavy vehicles in recent years. It is unlikely that the goals of the RFS will be met as envisioned because there is limited production of advanced biofuels to be blended into domestic transportation fuels and limited potential for expanded production by 2022. In the absence of advanced biofuels, most of the biofuel blended under the RFS to date has been conventional corn-starch ethanol, which achieves smaller greenhouse gas emission reductions compared with advanced biofuels. In addition, further reliance on ethanol to meet expanding RFS requirements is limited by incompatibility of ethanol blends above E10 with existing vehicle fleet and fueling infrastructure. It is unlikely that the goals of the RFS--to reduce greenhouse gas emissions and expand the nation's renewable fuels sector--will be met as envisioned because there is limited production of advanced biofuels to be blended into domestic transportation fuels and limited potential for expanded production by 2022. As we report in GAO-17-108, advanced biofuels are technologically well understood, but current production is far below the volume needed to meet the statutory targets for these fuels. For example, the cellulosic biofuel blended into transportation fuel in 2015 was less than 5 percent of the statutory target of 3 billion gallons. Given current production levels, most experts we interviewed told us that advanced biofuel production cannot achieve the statutory targets of 21 billion gallons by 2022. The shortfall of advanced biofuels is the result of high production costs, despite years of federal and private research and development efforts. The RFS was designed to bring about reductions in greenhouse gas emissions by blending targeted volumes of advanced and, in particular, cellulosic, biofuels, because those fuels achieve greater greenhouse gas reductions than conventional corn-starch ethanol and petroleum-based fuel. However, because advanced biofuel production is not meeting the RFS's targets, the RFS is limited in its ability to meet its greenhouse gas reduction goals as envisioned. According to several experts we interviewed, the investments and development required to make these fuels more cost-effective, even in the longer run, are unlikely in the current investment climate, in part because of the magnitude of investment and the expected long time frames required to make advanced biofuels cost-competitive with petroleum-based fuels. In the absence of advanced biofuels, most of the biofuel blended under the RFS to date has been conventional corn-starch ethanol, which achieves smaller greenhouse gas emission reductions than advanced biofuels. As stated above, the use of corn-starch ethanol has been effectively capped at 15 billion gallons. As a result, further expansion of biofuels use will require increasing cellulosic biofuels and, according to report's companion report (GAO-17-108), the most likely cellulosic biofuel to be commercially produced in the near- to midterm will be cellulosic ethanol. However, reliance on adding more ethanol to the transportation fuel market to meet expanding RFS requirements is limited by the incompatibility of ethanol blends above E10 with the existing vehicle fleet and fueling infrastructure. Many experts and stakeholders refer to this infrastructure limitation as the "blend wall." If ethanol continues to be the primary biofuel produced to meet the RFS, these infrastructure limitations will have to be addressed. Specifically with regard to the existing vehicle fleet, some experts told us that for most vehicles sold in the United States before 2015, the owner's manuals and warranties indicate that the vehicles should not use ethanol blends above 10 percent because of concerns about engine performance. Since 2011, EPA has issued waivers to the Clean Air Act allowing automobiles and light-duty trucks from model year 2001 and after to run on E15. However, many auto manufacturers contest this waiver, stating that automobile owners should follow their owner's manuals. The possibility that using higher blends of ethanol than E10 will cause vehicle warrantees to be void may be reducing demand for these higher blends of ethanol. Flex fuel vehicles, which can run on ethanol blends up to E85, have entered the vehicle fleet but, as of 2016, were less than 10 percent of the total vehicle fleet, which may also limit the potential demand for higher blends of ethanol. Further, several experts told us there is little demand from the public for E85 because the fuel offers lower gas mileage than E10 or E15 and prices of E85 do not reflect the need to refuel more frequently. Some experts told us that the demand for E85 has not been truly tested because the public (including owners of flex fuel vehicles) is largely undereducated about E85. With regard to the fueling infrastructure, some experts stated that ethanol blends higher than E10 are largely incompatible with existing distribution and retail fueling tanks and pumps in the United States and that there are few incentives for fuel distributors and retailers to make the changes that would be needed to accommodate higher blends. Retail sale of these higher blends faces three key challenges: Compatibility. Ethanol blends higher than E10 may degrade or damage some materials used in existing underground storage tank systems and dispensing equipment such as pumps, potentially causing leaks. Cost. Because of concerns over compatibility, new storage and dispensing equipment may be needed to sell intermediate blends at retail outlets. The cost of installing a single-tank underground storage system compatible with intermediate blends is more than $100,000. In addition, the cost of installing a single compatible fuel dispenser is over $20,000. Liability. Since EPA has authorized E15 for use in model year 2001 and newer automobiles--but not for pre-2001 vehicles or nonroad engines--many fuel retailers are concerned about potential liability issues if consumers mistakenly use e15 in their older automobiles or nonroad engines. Several experts raised concerns about the extent to which the RFS is achieving its targeted greenhouse gas emissions reductions, given that most biofuel blended under the RFS is corn-starch ethanol. More specifically, some experts were critical of the life-cycle analysis EPA used to determine the greenhouse gas emissions reductions for corn-starch ethanol. This criticism focuses on whether the model accurately accounts for all greenhouse gas emissions in the corn-starch ethanol production process. Some experts said that EPA's life-cycle analysis is flawed because it does not sufficiently include indirect land use change. Further, as previously stated in this report, corn-starch ethanol plants that were in operation or under construction before December 19, 2007, were not subject to the requirement to reduce greenhouse gas emissions by at least 20 percent. According to an August 2016 EPA Inspector General report, grandfathered production that is not subject to any greenhouse gas reduction requirements was estimated to be at least 15 billion gallons, or over 80 percent of today's RFS blending volume. Moreover, some experts noted that under the RFS, because these facilities are grandfathered, they have no incentive to lower their greenhouse gas emissions. Some experts told us that the RFS creates a perverse incentive to import Brazilian sugarcane ethanol. Specifically, because sugarcane ethanol qualifies as an advanced biofuel, it is more profitable to import this fuel than to domestically produce advanced biofuels. According to these experts, the import of sugarcane ethanol, which occurs to meet RFS requirements, causes significant greenhouse gas emissions as a result of fuel burned during shipping. While advanced biofuels are not likely to be produced in sufficient quantities to meet the statutory targets, experts identified actions that they suggested could incrementally improve investment in advanced biofuels and may lead to greater volumes of these fuels being produced and used in the longer term. In addition, experts identified actions to increase compatibility of infrastructure with higher ethanol blends. Experts identified actions that they suggested could incrementally improve the investment climate for advanced biofuels and possibly encourage the large investments and rapid development required to make these fuels more cost-effective. Addressing uncertainty about the future of the RFS: Many experts told us that uncertainty about the future of the RFS is limiting investment in advanced biofuels. In particular, some experts stated that the possibility of a repeal of the RFS has caused potential investors to question whether the RFS will continue to exist until 2022 and beyond. According to these experts, however, in the current political climate little can be done to address the threat of a repeal of the RFS. EPA may be able to improve the investment climate for advanced biofuels by clarifying its plans for managing the program in upcoming years. Specifically, statutory volume targets have been set through 2022. After that, EPA will be responsible for setting these volumes. One expert said that if EPA provided more insight into its plans for setting post-2022 volume targets, it could reduce some of this investment uncertainty. Further, the annual requirement that EPA finalized in 2015 triggered what is commonly referred to as the "reset provision" of the RFS for the advanced biofuel and cellulosic biofuel categories. The reset provision requires EPA to modify the statutory volume targets for future years if certain conditions are met (see sidebar). Although the statute provides factors for EPA to consider when modifying these volumes, EPA has not specified how it will approach setting volumes under this reset provision. As a result, several experts thought that uncertainty about the volumes of advanced and cellulosic biofuels affected by the reset may be limiting investments in these fuels. Some experts thought that EPA should clarify how it will implement the reset to reduce negative impacts on investments in advanced biofuels. EPA officials told us that recent annual volume requirements make EPA's intent clear in the near term. Providing more consistent subsidies to advanced biofuel producers. Some experts stated that the Second Generation Biofuel Producer Tax Credit--an incentive to accelerate commercialization of fuels in the advanced and cellulosic biofuels categories--has expired and been reinstated (sometimes retroactively) about every 2 years, contributing to uncertainty among cellulosic fuel producers and investors. These experts told us that investment in cellulosic biofuels could be encouraged, in part, by maintaining the Second Generation Biofuel Producer Tax Credit consistently, rather than allowing it to periodically lapse and be reinstated. Specifically, one expert suggested three major changes to the advanced biofuel tax credits: Extending the tax credit long term (e.g., 10 years) to provide investors sufficient investment return certainty for the large investment of building a biofuel plant until a cumulative level of second generation biofuel has been produced and costs have fallen. Making the producer tax credit refundable to guarantee that biofuel producers receive the subsidy in the early years when they are carrying losses. Coupling the producer tax credit with an investment tax credit to decrease capital costs and improve the financial incentives for building cellulosic biofuel plants. Expanding the types of fuel that qualify for the RFS. The current RFS framework specifies that qualifying biofuels must be derived from biomass-based feedstocks. According to some experts, this excludes some types of low carbon fuels from qualifying under the RFS. One example provided by experts is a process that uses microbes that capture carbon from industrial sources--such as the waste gas emitted from steel production--to produce a biofuel with lower greenhouse gas emissions than petroleum-based fuels. However, because this fuel is not derived from renewable biomass, it does not qualify for any RFS category. According to these experts, expanding the RFS to include fuel types such as this would better incentivize investment in innovative technologies. Reducing RIN fraud and price volatility. Some experts said that a lack of transparency in the RIN trading market has led to an increased risk of fraud and increased volatility of RIN prices. This has caused uncertainty among potential investors. RIN fraud. From the beginning of the RFS program, there have been concerns surrounding RIN generation and the RIN market. Because RINs are essentially numbers in a computerized account, there have been errors and opportunities for fraud, such as double counting RINs or generating RINs for biofuels that do not exist. To address concerns over these issues, EPA established an in-house trading system called the EPA Moderated Transaction System (EMTS). However, EPA has maintained that verifying the authenticity of RINs is the duty of obligated parties. Under this "buyer beware" system, those purchasing or receiving RINs must verify the RINs' validity on their own, and they are responsible for any fraudulent RINs they sell or submit to EPA for compliance. However, fraud cases in the last few years have raised questions about whether this "buyer beware" system is sufficient to deter fraud. Furthermore, obligated parties that inadvertently purchase fraudulent RINs lose the money spent to purchase them, must purchase additional RINs to meet their obligations, and face additional costs. This has a disproportionate effect on small refiners: whereas large obligated parties--in particular, vertically integrated refiners that typically own blending operations-- can generate RINs by blending fuel, small refiners do not blend fuel and must purchase their RINs on the market to meet their obligations and are therefore more likely to be adversely affected by fraudulent RINs. RIN price volatility. Further, according to some experts, price volatility in RIN markets adversely affects small refiners in particular and leads to uncertainty among investors. While most RINs are bought and sold through private contracts registered with the EMTS, there are also spot markets for RINs. Some experts told us that price volatility may be due, in part, to nonobligated parties speculating in these spot markets. According to one expert, the current system leaves small refiners disproportionately exposed to RIN price fluctuations because they must purchase their RINs on the market, as previously discussed. Such price fluctuations introduce uncertainty for small refiners about the costs of compliance with the RFS. These concerns about RIN fraud and price volatility have led to uncertainty among potential investors. Some experts told us that EPA should make RIN market trading more open and transparent like other commodity markets, which could reduce the potential for fraudulent RIN activities and reduce RIN price volatility. EPA officials told us that EPA has recently begun to publish aggregated data on RIN transactions and biofuel volume production on its website in an effort to make the RIN market more transparent. However, it is too early to know how effective this will be in addressing fraud and price volatility. Several experts suggested that expanding grants to encourage infrastructure improvements, such as USDA's Biofuel Infrastructure Partnership, could increase both the availability and competitiveness of higher blends at retail stations nationwide. Currently through this partnership, USDA is investing $100 million to install nearly 5,000 pumps offering high ethanol blends in 21 states. Some experts also said that blender pumps are not being installed with the density required to test demand. One expert suggested that, instead of installing blender pumps at all the stations of a certain brand in a region, blender pumps should be installed at all the stations at a specific road intersection. That way, these stations would be forced to compete with each other, which this expert told us would result in more competitive prices at the pump and increased incentives to make improvements to fueling infrastructure. Further, one expert suggested that dealers educate consumers about flex fuel vehicle features when the vehicles are delivered, as dealers previously did when on-board diagnostic, check engine light, and Bluetooth synchronizing features were introduced. Under these conditions, demand for higher ethanol blends--and E85, in particular--could be better tested. In response to these concerns and suggestions, a USDA official told us that, while it is not mandatory that installations meet a required geographic density, many of the blender pumps could be installed on highway corridors, which could encourage competition. This official also told us that, in addition to expanding infrastructure for higher ethanol blends, the Biofuel Infrastructure Partnership will be able to provide data associated with testing demand for E85, including pricing, consumer education, and next steps for the program. In addition, in October 2016, EPA proposed an update to fuel regulations to allow expanded availability of high ethanol fuel blends for use in flex fuel vehicles. EPA is proposing revisions to its gasoline regulations to make it clear that E16 through E83 fuel blends are not gasoline, and hence not fully subject to gasoline quality standards. EPA believes these revisions will increase demand for higher ethanol blends. Some experts said that blenders should be the obligated parties, instead of importers and refiners, because that would lead to more rapid investments in infrastructure for higher ethanol blends. According to some experts, when EPA designed the RFS, it placed the obligation for compliance on the relatively small number of refiners and importers rather than on the relatively large number of downstream blenders in order to minimize the number of obligated parties to be regulated and make the program easier to administer. However, these experts told us that obligating refiners and importers has not worked to incentivize investors to expand infrastructure for higher ethanol blends. Specifically, increasing consumer demand for biofuels--and the corresponding incentives to invest in biofuel infrastructure--requires the value of the RIN be "passed through" to consumers. More specifically, because the RIN that accompanies the gallon of biofuel has value for demonstrating compliance with the RFS or when sold in the market, it can be used to offset the higher cost of the biofuel and make it more competitive with petroleum-based fuels. By making biofuels more competitive, retailers are incentivized to build the infrastructure required to sell more of these fuels (i.e., higher ethanol blends). According to some experts and industry stakeholders, this pass-through has not been occurring as envisioned with refiners and importers as the obligated parties. One expert stated that, because blenders are either retailers or sell to retailers, blenders would be better situated to pass RIN savings along to consumers. This in turn might encourage demand for higher ethanol blends and incentivize infrastructure expansion. EPA officials told us they have received several petitions requesting that they consider changing the point of obligation and are evaluating those petitions. Several experts stated that the RFS is not the most efficient way to achieve the program's goal of reducing greenhouse gas emissions, and they suggested policy alternatives--in particular, a carbon tax and a low carbon fuel standard (LCFS). Some experts stated that the design of the RFS may undermine its ability to achieve the greatest greenhouse gas emissions reductions. Specifically, some experts said that the RFS does not incentivize the production of advanced biofuels, which achieve the greatest greenhouse gas emission reductions. For example, a cellulosic fuel that reduces greenhouse gas emissions by 80 percent receives no more credit under the RFS than one that reduces greenhouse gas emissions by 60 percent, the baseline for the cellulosic category. As a result, fuels that may be slightly more costly to produce but achieve far greater greenhouse gas reductions may not be developed and brought to the market. Further, one expert stated that the RFS design creates a market rebound effect. That is, increasing the supply of biofuels tends to lower energy prices, which encourages additional fuel consumption that may actually result in increased greenhouse gas emissions. Several experts suggested that a carbon tax or an LCFS would be more efficient at reducing greenhouse gas emissions. Specifically, some experts said that, whereas the RFS creates disincentives for the production of cellulosic fuels that achieve the greatest greenhouse gas emission reductions, a carbon tax or LCFS would incentivize the technologies that achieve the greatest reductions in greenhouse gas emissions at the lowest cost. According to one expert, a carbon tax would eliminate the need for annual volume requirements and the accompanying program management and oversight. Under a carbon tax, each fossil fuel would be taxed in proportion to the amount of greenhouse gas (carbon dioxide) released in its combustion. In addition, one expert stated that a carbon tax is preferable to the RFS because it allows market effects to increase the price of emission-causing activities, which decreases demand for those activities. As a result, it could sustain consumers' interest in fuel-saving vehicles and would result in a wide range of fuel-saving responses from all consumers (rather than just those purchasing a new vehicle). However, some experts also noted that a carbon tax would force further electrification for light-duty transportation because the electric power sector is the cheapest sector from which to obtain greenhouse gas reductions. According to one expert, this electrification of the light-duty fleet might further limit research and development of biofuels, in effect undermining the RFS goal to expand that sector. In light of this, several experts said that an LCFS would be more flexible and efficient than the RFS at developing biofuels that achieve the greatest greenhouse gas reductions. Specifically, an LCFS compares cost with greenhouse gas intensity (by accounting for carbon on a cost per unit of carbon intensity), thereby supporting incremental carbon reductions. An LCFS can be implemented in one of two ways. The first involves switching to direct fuel substitutes (e.g., drop-in fuels) or blending biofuels with lower greenhouse gas emissions directly into gasoline and diesel fuel. The second involves switching from petroleum-based fuels to other alternatives, such as natural gas, hydrogen, or electricity, because a low carbon fuel standard would allow a wider array of fuel pathways than the RFS. Under the first scenario, an LCFS would promote biofuel usage, rather than incentivizing electrification of the light-duty vehicle fleet. As a result, according to some experts, an LCFS is preferable to a carbon tax because it more efficiently reduces greenhouse gas emissions and promotes the expansion of the biofuel sector. However, other experts we spoke with critiqued an LCFS as being uneconomical. Specifically, one expert stated that, while an LCFS such as the one in California could force technology and create greenhouse gas reductions in the fuel market, the costs of implementing an LCFS are much higher than its benefits. We provided a draft of this product to EPA for comment. In its written comments, reproduced in appendix III, EPA generally concurred. EPA also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time we will send copies to the appropriate congressional committees and to the Administrator of the EPA. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of this report were to provide information on (1) whether the Renewable Fuel Standard (RFS) is expected to meet its goals, (2) expert views on any federal actions that could improve the RFS framework, and (3) policy alternatives experts suggested to better meet the goals of the RFS in the future. To address our objectives, we contracted with the National Academy of Sciences to provide us with a list of experts on issues related to the RFS, including the current structure of the RFS; blending, distribution, and marketing infrastructure of biofuels; automobile manufacture; and petroleum consumption and prices. The National Academy of Sciences identified 25 experts, including experts from academia and policy think tanks and practitioners with relevant experience. Areas of expertise included policy analysis of the RFS, first-hand knowledge of the production and distribution of biofuels and flex fuel vehicles, and the economic and environmental ramifications of the RFS. We conducted semistructured interviews and performed a content analysis of the 24 experts' responses to our questions. For reporting purposes, we categorized expert responses as follows: "nearly all" experts represents 21 to 23 experts, "most" experts represents 16 to 20 experts, "many" experts represents 11 to 15 experts, "several" experts represents 6 to 10 experts, and "some" experts represents 2 to 5 experts. See appendix II of this report for a list of experts whose names were provided by the National Academy of Sciences. We also reviewed public comments from stakeholders, relevant legislation, and agency documents pertaining to annual volume requirements (e.g., the Environmental Protection Agency's (EPA) response to public comments) and conducted a literature search for research related to the RFS. In addition, we interviewed officials at EPA, the Department of Energy (DOE), and the Department of Agriculture (USDA). We also interviewed Congressional Research Service officials who have conducted extensive work on the RFS. To provide expert views on actions needed to address these challenges and meet the goals of the RFS in the future, we used our content analysis of the experts' responses, which identified possible actions within the current RFS structure, changes to the RFS structure, and through policy alternatives to the RFS. Finally, this report drew from a companion report, GAO-17-108, that examined federal research and development in advanced biofuels and related issues. We conducted this performance audit from June 2015 to November 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. National Corn to Ethanol Research Center Automotive Fuels Consulting, Inc.; General Motors Research and Development Center (retired) University of Michigan Energy Institute Thorntons Inc. Ford Motor Company (retired) Frank Rusco, (202) 512-3841 or [email protected]. In addition to the individual named above, Karla Springer (Assistant Director), Jessica Artis, and Jarrod West made key contributions to this report. Luqman Abdullah, Richard Burkard, Cindy Gilbert, Robert Keane, Scott McClinton, Cynthia Norris, and Dan Royer also made important contributions.

The RFS generally mandates that domestic transportation fuels be blended with increasing volumes of biofuels through 2022, with the goals of reducing greenhouse gas emissions and expanding the nation's renewable fuels sector while reducing reliance on imported oil. Annual targets for the volumes of biofuels to be blended are set by statute. EPA oversees the program and is responsible for adjusting the statutory targets through 2022 to reflect expected U.S. industry production levels, among other factors, and for setting biofuel volume targets after 2022. Biofuels included in the RFS are conventional (primarily corn-starch ethanol) as well as various advanced biofuels (including cellulosic ethanol and biomass-based diesel). Advanced biofuels emit fewer greenhouse gases than petroleum and corn-starch ethanol. GAO was asked to review challenges to the RFS and their possible solutions. This report provides information on whether the RFS is expected to meet its goals, as well as expert views on any federal actions that could improve the RFS framework, among other things. GAO worked with the National Academy of Sciences to identify experts on issues related to the RFS. GAO interviewed these experts and analyzed their responses. This report also drew on published studies, and a companion report, GAO-17-108 , that examined federal research and development in advanced biofuels and related issues. EPA generally agreed with the report. It is unlikely that the goals of the Renewable Fuel Standard (RFS)--reduce greenhouse gas emissions and expand the nation's renewable fuels sector--will be met as envisioned because there is limited production of advanced biofuels to be blended into domestic transportation fuels and limited potential for expanded production by 2022. Advanced biofuels achieve greater greenhouse gas reductions than conventional (primarily corn-starch ethanol), while the latter accounts for most of the biofuel blended under the RFS. As a result, the RFS is unlikely to achieve the targeted level of greenhouse gas emissions reductions. For example, the cellulosic biofuel blended into the transportation fuel supply in 2015 was less than 5 percent of the statutory target of 3 billion gallons. In part as a result of low production, EPA has reduced the RFS targets for advanced biofuels through waivers in each of the last 4 years (see figure). According to experts GAO interviewed, the shortfall of advanced biofuels is the result of high production costs, and the investments in further research and development required to make these fuels more cost-competitive with petroleum-based fuels even in the longer run are unlikely in the current investment climate. Experts cited multiple federal actions that they suggested could incrementally improve the investment climate for advanced biofuels. For example, some experts told GAO that maintaining a consistent tax credit for biofuels, rather than allowing it to periodically lapse and be reinstated, could reduce uncertainty and encourage investment in advanced biofuels.

Today we are at a key crossroad. In the next few decades, the nation will be struggling with a large and growing structural deficit. At the same time, however, weapons programs are commanding larger budgets as DOD undertakes increasingly ambitious efforts to transform its ability to address current and potential future conflicts. These costly current and planned acquisitions are running head-on into the nation's unsustainable fiscal path. In the past 5 years, DOD has doubled its planned investments in weapons systems, but this huge increase has not been accompanied by more stability, better outcomes, or more buying power for the acquisition dollar. Rather than showing appreciable improvement, programs are experiencing recurring problems with cost overruns, missed deadlines, and performance shortfalls. As I have testified previously, our nation is on an imprudent and unsustainable fiscal path. Budget simulations by GAO, the Congressional Budget Office, and others show that, over the long term, we face a large and growing structural deficit due primarily to known demographic trends, rising health care costs, and lower federal revenues as a percentage of the economy. Continuing on this path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Federal discretionary spending, along with other federal policies and programs, will face serious budget pressures in the coming years stemming from new budgetary demands and demographic trends. Defense spending falls within the discretionary spending accounts. Further, current military operations, such as those in Afghanistan and Iraq, consume a large share of DOD budgets and are causing faster wear on existing weapons. Refurbishment or replacement sooner than planned is putting further pressure on DOD's investment accounts. It is within this context that we must engage in a comprehensive and fundamental reexamination of new and ongoing investments in our nation's weapons systems. Weapons systems are one of the single largest investments the federal government makes. In the last 5 years, DOD has doubled its planned investments in new systems from about $700 billion in 2001 to nearly $1.4 trillion in 2006. Annual procurement totals are expected by DOD to increase from about $75 billion to about $100 billion during 2006 to 2011. At the same time DOD is facing future budget constraints, programs are seeking larger budgets. To illustrate, the projected cost of DOD's top five programs in fiscal year 2001 was about $291 billion. In 2006, it was $550 billion. A primary reason why budgets are growing is that DOD is undertaking new efforts that are expected to be the most expensive and complex ever. Moreover, it is counting on these efforts to enable transformation of military operations. The Army, for example, is undertaking the Future Combat Systems (FCS) program in order to enable its combat force to become lighter, more agile, and more capable. FCS is comprised of a family of weapons, including 18 manned and unmanned ground vehicles, air vehicles, sensors, and munitions, which will be linked by an information network. These vehicles, weapons, and equipment will comprise the majority of the equipment needed for a brigade combat team in the future. When considering complementary programs, projected investment costs for FCS are estimated on the order of $200 billion. Affordability of the FCS programs depends on two key assumptions. First, the program must proceed without exceeding its currently projected costs. Second, FCS has expected large annual procurement costs beginning in 2012. FCS procurement will represent 60 to 70 percent of Army procurement from fiscal years 2014 to 2022. As the Army prepares the next Defense Plan, it will face the challenge of allocating sufficient funding to meet increasing needs for FCS procurement in fiscal years 2012 and 2013. If all the needed funding cannot be identified, the Army will have to consider reducing the FCS procurement rate or delaying or reducing items to be spun out to current Army forces. At the same time, the Air Force is undertaking two new satellite programs that are expected to play a major role in enabling FCS and other future systems. The Transformational Satellite Communications System, which is to serve as a linchpin in DOD's future communications network, and Space Radar, which is focused on generating volumes of radar imagery data for transmission to ground-, air-, ship-, and space-based systems. Together, these systems are expected to cost more than $40 billion. The Department has also been focused on modernizing its tactical aircraft fleet. These efforts include the Joint Strike Fighter (JSF) aircraft program, currently expected to cost more than $200 billion, and the Air Force's F-22A Raptor aircraft, expected to cost more than $65 billion. Concurrently, the Navy is focused on acquiring new ships and submarines with significantly advanced designs and technologies. These include the Virginia Class Submarine, expected to cost about $80 billion, and the DDG- 51 class destroyer ship, expected to cost some $70 billion, and the newer DD(X) destroyer program, which is focused on providing advanced land attack capability in support of forces ashore and to contribute to U.S. military dominance in the shallow coastal water environment. The Navy shipbuilding plan requires more funds than may reasonably be expected. Specifically, the plan projects a supply of shipbuilding funds that will double by 2011 and will stay at high levels for years to follow. Despite doubling its investment the past 5 years, our assessments do not show appreciable improvement in DOD's management of the acquisition of major weapons systems. A large number of the programs included in our annual assessment of weapons systems are costing more and taking longer to develop than estimated. It is not unusual to see development cost increases between 30 percent and 40 percent and schedule delays of approximately 1, 2 or more years. The consequence of cost and cycle-time growth is manifested in a reduction of buying power of the defense dollar--causing programs to either cut back on planned quantities, capabilities, or to even scrap multi- billion dollar programs, after years of effort, in favor of pursing more promising alternatives. Figure 1 illustrates seven programs with a significant reduction in buying power; we have reported similar outcomes in many more programs. This is not to say that the nation does not get superior weapons in the end, but that at currently projected twice the level of investment, DOD has an obligation to get better results. Furthermore, the conventional acquisition process is not agile enough to meet today's demands. Congress has expressed concern that urgent warfighting requirements are not being met in the most expeditious manner and has put in place several authorities for rapid acquisition to work around the process. The U.S. Joint Forces Command's Limited Acquisition Authority and the Secretary of Defense's Rapid Acquisition Authority seek to get warfighting capability to the field quicker. According to U.S. Joint Forces Command officials, it is only through Limited Acquisition Authority that the command has had the authority to satisfy the unanticipated, unbudgeted, urgent mission needs of other combatant commands. With a formal process that requires as many as 5, 10, or 15 years to get from program start to production, such experiments are needed to meet the warfighters' needs. Our reviews have identified a number of causes behind the problems just described, but several stand out. First, DOD starts more weapons programs than it can afford and sustain, creating a competition for funding that encourages low cost estimating, optimistic scheduling, over promising, and suppressing of bad news. Programs focus on advocacy at the expense of realism and sound management. Invariably, with too many programs in its portfolio, DOD and the Congress are forced to continually shift funds to and from programs--undermining well-performing programs to pay for poorly performing ones. Adding pressure to this environment are changes that have occurred within the defense supplier base. Twenty years ago, there were more than 20 fully competent prime contractors competing for multiple new programs annually; today, there are only 6 that compete for considerably fewer programs, according to a recent DOD- commissioned study. This adds pressure on DOD to keep current suppliers in business and limits DOD's ability to maximize competition. Second, DOD has exacerbated this problem by not clearly defining and stabilizing requirements before programs are started. At times, in fact, it has allowed new requirements to be added well into acquisition cycle-- significantly stretching technology and creating design challenges, and exacerbating budget overruns. For example, in the F-22A program, the Air Force added a requirement for air-to-ground attack capability. In its Global Hawk program, the Air Force added both signals intelligence and imagery intelligence requirements. While experience would caution DOD not to pile on new requirements, customers often demand them fearing there may not be another chance to get new capabilities since programs can take a decade or longer to complete. Yet, perversely, such strategies delay delivery to the warfighter, oftentimes by years. Third, DOD commits to its programs before it obtains assurance that the capabilities it is pursuing can be achieved within available resources and time constraints. Funding processes encourage this approach, since acquisition programs attract more dollars than efforts concentrating solely on proving out technologies. Nevertheless, when DOD chooses to extend technology invention into acquisition, programs experience technical problems that have reverberating effects and require large amounts of time and money to fix. When programs have a large number of interdependencies, even minor technical "glitches" can cause disruptions. Only 10 percent of the programs in our latest annual assessment of weapons systems had demonstrated critical technologies to best practice standards at the start of development; and only 23 percent demonstrated them to DOD's standards. The cost effect of proceeding without completing technology development before starting an acquisition can be dramatic. For example, research, development, test and evaluation costs for the programs included in our review that met best practice standards at program start increased by a modest average of 4.8 percent over the first full estimate, whereas the costs for the programs that did not meet these standards increased by a much higher average of 34.9 percent over the first full estimate. Fourth, officials are rarely held accountable when programs go astray. There are several reasons for this, but the primary ones include the fact that DOD has never clearly specified who is accountable for what, invested responsibility for execution in any single individual, or even required program leaders to stay until the job is done. Moreover, program managers are not empowered to make go or no-go decisions, they have little control over funding, they cannot veto new requirements, and they have little authority over staffing. Because there is frequent turnover in their positions, program managers also sometimes find themselves in the position of having to take on efforts that are already significantly flawed. Likewise, contractors are not always held accountable when they fail to achieve desired acquisition outcomes. In a recent study, for example, we found that DOD had paid out an estimated $8 billion in award fees on contracts in our study population regardless of outcomes. In one instance, we found that DOD paid its contractor for a satellite program--the Space- Based Infrared System High--74 percent of the award fee available, or $160 million, even though research and development costs increased by more than 99 percent, the program was delayed for many years and was rebaselined three times. In another instance, DOD paid its contractor for the F-22A aircraft more than $848 million, 91 percent of the available award fee, even though research and development costs increased by more than 47 percent, the program has been rebaselined 14 times, and delayed by more than 2 years. Fifth, these strategies work, because they win dollars. DOD and congressional funding approval reinforces these practices and serves to undercut reform efforts. Stated differently, typically no one is held accountable for unacceptable outcomes and there are little or no adverse consequences for the responsible parties. This is a shared responsibility of both the executive and legislative branches of government. Of course, there are many other factors that play a role in causing weapons programs to go astray. They include workforce challenges, poor contractor oversight, frequent turnover in key leadership, and a lack of systems engineering, among others. Moreover, many of the business processes that support weapons development--strategic planning and budgeting, human capital management, infrastructure, financial management, information technology, and contracting--are beset with pervasive, decades-old management problems, including outdated organizational structures, systems, and processes. In fact, these areas-- along with weapons system acquisitions--are on GAO's high risk list of major government programs and operations. DOD has long recognized such problems and initiated numerous improvement efforts. In fact, since 1949, more than 10 commissions have studied issues such as long cycle time and cost increases as well as deficiencies in the acquisition workforce. This committee just last week heard testimony regarding several of them. Among these recent studies, there is a consensus that DOD needs to instill much stronger discipline into the requirements setting process, prioritize its investments, seek additional experienced and capable managers, control costs, strengthen accountability, and enhance the basis for enterprise-wide decision making. In response to past studies and recommendations, including our own, DOD has taken a number of acquisition reforms. Specifically, DOD has restructured its acquisition policy to incorporate best practices as the suggested way of doing business. For example, policies embrace the concept of closing gaps between requirements and resources before launching new programs. DOD is also reviewing changes to requirements setting. DOD has also strengthened training for program managers, required the use of independent cost estimating, reemphasized the discipline of systems engineering, and tried extracting better performance from contractors--by alternately increasing and relaxing oversight. While all of these steps are well-intentioned, recent policy statements, such as the Quadrennial Defense Review (QDR), and decisions on individual programs have fallen far short of the needed fundamental review reassessment, repriortization and reengineering efforts. For example, the Office of the Secretary of Defense (OSD) does not seem to be pushing for dramatic and fundamental reforms in its acquisition process. In fact, it has either disagreed with recommendations we have made over the past year or claimed that it was already addressing them. These include reports on specific systems such as JSF, the Missile Defense program, FCS, and Global Hawk as well as reports on cross-cutting issues, such as DOD's rebaselining practices, acquisition policy, and support for program managers. We believe DOD's recently issued QDR did not lay out a long term, resource constrained, investment strategy. In fact, the gap between wants, needs, affordability and sustainability seems to be greater than ever. Our work shows that acquisition problems will likely persist until DOD provides a better foundation for buying the right things, the right way. This involves making tough tradeoff decisions as to which programs should be pursued, and more importantly, not pursued, making sure programs are executable, locking in requirements before programs are ever started, and making it clear who is responsible for what and holding people accountable when these responsibilities are not fulfilled. These changes will not be easy to make. They require DOD to reexamine the entirety of its acquisition process--what we think of as the "Big A". This includes making deep-seated changes to program requirements setting, funding, and execution. It also involves changing how DOD views success, and what is necessary to achieve success. The first, and most important, step is implementing a revised DOD-wide investment strategy for weapons systems. In a recent study on program management best practices, we recommended that DOD determine the priority order of needed capabilities based on assessments of the resources--that is dollars, technologies, time, and people needed to achieve these capabilities. We also recommended that capabilities not designated as a priority should be set out separately as desirable but not funded unless resources were both available and sustainable. DOD's Under Secretary of Defense for Acquisition Technology and Logistics--DOD's corporate leader for acquisition--should develop this strategy in concert with other senior leaders, for example, combatant commanders who would provide input on user needs; DOD's comptroller; science and technology leaders, who would provide input on available resources; and acquisition executives from the military services, who could propose solutions. Finally, once priority decisions are made, Congress will need to enforce discipline through various authorization and appropriation decisions. Once DOD has prioritized capabilities, it should work vigorously to make sure each new program is executable before the acquisition begins. This is the "little a." More specifically, this means assuring requirements are clearly defined and achievable given available resources and that all alternatives have been considered. System requirements should be agreed to by Service Acquisition Executives as well as Combatant Commanders. Once programs begin, requirements should not change without assessing their potential disruption to the program and assuring that they can be accommodated within time and funding constraints. In addition, DOD should prove that technologies can work as intended before including them in acquisition programs. This generally requires a prototype to be tested in an operational environment. More ambitious technology development efforts should be assigned to the science and technology community until they are ready to be added to future generations of the product. DOD should also require the use of independent cost estimates as a basis for budgeting funds. Our work over the past 10 years has consistently shown when these basic steps are taken, programs are better positioned to be executed within cost and schedule. To further ensure that programs are executable, DOD should pursue an evolutionary path toward meeting user needs rather than attempting to satisfy all needs in a single step. This approach has been consistently used by successful commercial companies we have visited over the past decade because it provides program managers with more achievable requirements, which, in turn, would facilitate shorter cycle times. With shorter cycle times, the companies we have studied have also been able to assure that program managers and senior leaders stay with programs throughout the duration of a program. DOD has policies that encourage evolutionary development, but programs often favor pursuing more exotic solutions that will attract funds and support. Lastly, to keep programs executable, DOD should demand that all go/no- go decisions be based on quantifiable data and demonstrable knowledge. These data should cover critical program facets such as cost, schedule, technology readiness, design readiness, production readiness, and relationships with suppliers. Development should not be allowed to proceed until certain thresholds are met, for example, a high percentage of engineering drawings completed at critical design review. DOD's current policies encourage these sorts of metrics to be used as a basis for decision making, but they do not demand it. DOD should also place boundaries on time allowed for specific phases of development and production. To strengthen accountability, DOD will need to clearly delineate responsibilities among those who have a role in deciding what to buy as well as those who have role in executing, revising, and terminating programs. Within this context, rewards and incentives will need to be altered so that success can be viewed as delivering needed capability at the right price and the right time, rather than attracting and retaining support for numerous new and ongoing programs. After all, given our current and projected fiscal imbalances, every dollar spent on a want today may not be available for an important need tomorrow. To enable accountability to be exercised at the program level, DOD will also need to (1) match program manager tenure with development or the delivery of a product;( 2) tailor career paths and performance management systems to incentivize longer tenures; (3) strengthen training and career paths as needed to ensure program managers have the right qualifications for run the programs they are assigned to; (4) empower program managers to execute their programs, including an examination of whether and how much additional authority can be provided over funding, staffing, and approving requirements proposed after the start of a program; and (5) develop and provide automated tools to enhance management and oversight as well as to reduce the time required to prepare status information. DOD also should hold contractors accountable for results. As we have recently recommended, this means structuring contracts so that incentives actually motivate contractors to achieve desired acquisition outcomes and withholding award fees when those goals are not met. In addition, DOD should collect data that will enable it to continually assess its progress in this regard. In closing, the past year has seen several defense reviews that include new proposed approaches to improve the way DOD buys weapons. These reviews contain many constructive ideas. If they are to produce better results, however, they must heed the lessons taught--but perhaps not learned--by acquisition history. Specifically, DOD must separate needs from wants in the context of the nation's greater fiscal challenges. Policy must also be manifested in decisions on individual programs or reform will be blunted. DOD's current acquisition policy is a case in point. The policy supports a knowledge-based, evolutionary approach to acquiring new weapons. The practice--decisions made on individual programs-- sacrifices knowledge and executability in favor of revolutionary solutions. It's time to challenge such solutions. Reform will not be real unless each weapons system is shown to be both a worthwhile investment and an executable program. Otherwise, we will continue to start more programs than we can finish, produce less capability for more money, and create the next set of case studies for future defense reform reviews. Mr. Chairman and Members of the Committee, this concludes my statement. I will be happy to take any questions. In preparing for this testimony, we relied on previously issued GAO reports and analyzed recent acquisition reform studies from various organizations. We conducted our review between March 20 and April 5, 2006, in accordance with generally accepted government auditing standards. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In the past 5 years, DOD has doubled its planned investments in weapons systems, but this huge increase has not been accompanied by more stability, better outcomes, or more buying power for the acquisition dollar. Rather than showing appreciable improvement, programs are experiencing recurring problems with cost overruns, missed deadlines, and performance shortfalls. GAO was asked to testify on ways to obtain a better return on DOD's weapons systems investments. This testimony identifies the following steps as needed to provide a better foundation for executing weapon programs: (1) developing a DOD-wide investment strategy that prioritizes programs based on realistic and credible threat-based customer needs for today and tomorrow, (2) enforcing existing policies on individual acquisitions and adhering to practices that assure new programs are executable, and (3) making it clear who is responsible for what and holding people accountable when these responsibilities are not fulfilled. Past GAO reports have made similar recommendations. DOD has a mandate to deliver high-quality products to warfighters, when they need them and at a price the country can afford. Quality and timeliness are especially critical to maintain DOD's superiority over others, to counter quickly changing threats, and to better protect and enable the warfighter. Cost is critical given DOD's stewardship responsibility for taxpayer money, combined with long-term budget forecasts which indicate that the nation will not be able to sustain its currently planned level of investment in weapons systems, and DOD's plans to increase investments in weapons systems that enable transformation of various military operations. At this time, however, DOD is simply not positioned to deliver high quality products in a timely and cost-efficient fashion. It is not unusual to see cost increases that add up to tens or hundreds of millions of dollars, schedule delays that add up to years, and large and expensive programs frequently rebaselined or even scrapped after years of failing to achieve promised capability. Recognizing this dilemma, DOD has tried to embrace best practices in its policies, and instill more discipline in requirements setting, among numerous other actions. Yet it still has trouble distinguishing wants from needs, and many programs are still running over cost and behind schedule. Our work shows that acquisition problems will likely persist until DOD provides a better foundation for buying the right things, the right way. This involves making tough tradeoff decisions as to which programs should be pursued, and more importantly, not pursued, making sure programs are executable, locking in requirements before programs are ever started, and making it clear who is responsible for what and holding people accountable when these responsibilities are not fulfilled. These changes will not be easy to make. They require DOD to re-examine the entirety of its acquisition process--what we think of as the "Big A"--including requirements setting, funding, and execution. Moreover, DOD will need to alter perceptions of what success means, and what is necessary to achieve success.

To obtain a patent, inventors--or more usually their attorneys or agents-- submit an application to USPTO that fully discloses and clearly describes one or more distinct innovative features of the proposed invention and pay a filing fee to begin the examination process. USPTO evaluates the application for completeness, classifies it by the type of patent and the technology involved, and assigns it for review to one of its operational units, called technology centers, that specializes in specific areas of science and engineering. Supervisors in each technology center then assign the application to a patent examiner for further review to determine if a patent is warranted. In making this determination, patent examiners must meet two specific milestones in the patent examination process: first actions and disposals. First action. At this milestone, patent examiners notify applicants about the patentability of their invention. After determining if the invention is new and useful, or a new and useful improvement on an existing process or machine, patentability is determined through a thorough investigation of information related to the subject matter of the patent application and already available before the date the application was submitted, called prior art. Prior art includes, but is not limited to, scientific publications and U.S. and international patents. Disposal. Patent examiners dispose of a patent application by determining, among other things, if a patent will be granted--called allowance--or not. Patent examiners receive credit, called counts, for each first action and disposal, and are assigned production goals on the basis of the number of production units--comprised of two counts--they are expected to achieve in a 2-week period. The counts in a production unit may be any combination of first actions and disposals. The production goals that are used today to measure patent examiner performance are based on the same assumptions that USPTO established in the 1970s. At that time, production goals were determined based on the belief that it should take a patent examiner a certain amount of time to review a patent application and achieve two counts based on their experience (as determined by their position in the agency) and the type of patent they are reviewing. As a result, these goals vary depending upon the patent examiner's position based on the federal government's general schedule pay scale (GS) and the technology center in which the patent examiner works. For example, a GS-12 patent examiner working on data processing applications is expected to achieve two counts in 31.6 hours, whereas a GS-12 patent examiner working on plastic molding applications is expected to do so in 20.1 hours. GS-7 patent examiners working on those types of applications, however, are expected to achieve two counts in 45.1 and 28.7 hours, respectively. Patent examiner achievements are recorded biweekly, and, at the end of each fiscal year, those patent applications that have not been reviewed for first action are counted as part of USPTO's inventory of unexamined applications, otherwise known as the patent application backlog. In each of the last 5 years, USPTO has identified its annual hiring estimates primarily on the basis of available funding levels and its institutional capacity to train and supervise new patent examiners, and not on the basis of the number of patent examiners needed to reduce the existing backlog or review new patent applications. Although this process is consistent with workforce planning strategies established by the Office of Personnel Management (OPM) and has enabled the agency to better match its hiring estimates to its institutional capacity, USPTO's ability to reduce the patent application backlog simply through its hiring efforts is unlikely. Specifically, USPTO begins the process of identifying projected hiring estimates as part of creating its budget submission for the Office of Management and Budget (OMB) 18 months before the start of the hiring year in order to meet OMB's submission timeline. After considering expected funding levels and available patent examiner workforce data, USPTO considers its institutional capacity to supervise and train patent examiners. For example, in identifying its fiscal year 2002 hiring estimate, USPTO determined that funding availability would limit the number of patent examiners the agency could hire, and established its estimate on the basis of the number of patent examiners the agency had hired in the most recent year. However, in fiscal years 2003 through 2006, USPTO determined that funding would not be a limiting factor, and the agency's hiring estimates were based primarily on its institutional capacity to supervise and train patent examiners. USPTO considers a number of factors in determining its institutional capacity to supervise and train new patent examiners. For example, it determines its supervisory capacity by considering the number of additional patent examiners who can be placed in a technology center. This number is limited by the number of supervisors available in each center who can sign patent application approvals and rejections and provide on-the-job-training for new patent examiners. Although new patent examiners can review the prior art relating to patent applications, only supervisors can authorize a new patent examiner's decision to approve or reject a patent application. In an effort to avoid delays and inefficiencies in initial and final decisions on patent applications, the agency tries to ensure that the supervisor to patent examiner ratio is about 1 supervisor for every 12 patent examiners. Similarly, USPTO's training capacity is determined by the number of patent examiners the agency believes it can train in a year. Training capacity was based on 2- or 3-week courses offered throughout the year and were led by supervisory patent examiners. The courses could accommodate about 16 patent examiners each, and in fiscal year 2004, according to USPTO, the agency offered about 28 training sessions. Because USPTO's projected hiring estimates are established at least 18 months in advance of the hiring year, the agency continually refines the estimates to reflect changes that might occur during this period. For example, in 2002, when it created its budget submission to OMB, USPTO projected it would hire 750 patent examiners for fiscal year 2004. However, due to budget constraints, the agency actually hired 443 patent examiners in fiscal year 2004. Figure 1 shows USPTO's projected and actual hiring numbers for fiscal years 2002 through 2006. The differences between projected hiring estimates and the number hired occurred primarily because of funding availability. In fiscal years 2003 and 2004, according to USPTO, the agency's appropriations were significantly less than the agency's budget requests. As a result, the agency could not financially support the number of new patent examiners it had initially planned to hire. In fiscal years 2005 and 2006, however, USPTO hired more patent examiners than originally planned because the agency's appropriation for those years was greater than anticipated. The way in which USPTO identifies annual patent examiner hiring estimates is generally consistent with workforce planning strategies endorsed by OPM. For example, OPM recommends that agencies regularly track workforce trends to ensure updated models for meeting organizational needs; base decisions on sources of information such as past workforce data; and include in its workforce planning process a workforce analysis system that identifies current and future losses due to attrition. We found that USPTO generally followed these processes. Recognizing the need to increase its institutional capacity to hire more patent examiners, USPTO has taken steps to increase its training and supervisory capacity. To increase its training capacity, USPTO implemented an 8-month training program in fiscal year 2006 called the Patent Training Academy. According to USPTO, the academy provides the agency with a constant annual training capacity for 1,200 new patent examiners for each of the next 5 years. Moreover, USPTO officials believe that the academy may indirectly improve the agency's supervisory capacity because new patent examiners should be better prepared to start work in a technology center and therefore will need less supervision and on-the-job training. USPTO plans to monitor new patent examiners after they have graduated from the academy to determine if the agency can use this approach to increase its institutional capacity and, therefore, its future annual hiring estimates. Even with its increased hiring estimates of 1,200 patent examiners each year for the next 5 years, USPTO's patent application backlog is expected to increase to over 1.3 million at the end of fiscal year 2011. The agency has also estimated that if it were able to hire 2,000 patent examiners per year in fiscal year 2007 and each of the next 5 years, the backlog would continue to increase by about 260,000 applications, to 953,643 at the end of fiscal year 2011. Despite its recent increases in hiring, the agency has acknowledged that it cannot hire its way out of the backlog and is now focused on slowing the growth of the backlog instead of reducing it. Although USPTO is hiring as many new patent examiners as it has the annual funding and institutional capacity to support, attrition has continued to increase among patent examiners--one patent examiner has been lost for nearly every two hired over the last 5 years. For example, from the beginning of fiscal year 2002 through fiscal year 2006, USPTO hired 3,672 patent examiners. However, the patent examination workforce only increased by 1,644 because 1,643 patent examiners left the agency and 385 patent examiners were either transferred or promoted out of the position of patent examiner. As shown in figure 2, approximately 70 percent of the patent examiners who left the agency had been at USPTO for less than 5 years, and nearly 33 percent had been at the agency for less than 1 year. The attrition of patent examiners who were at the agency for less than 5 years is a significant loss for USPTO for a variety of reasons. First, attrition of these staff affects USPTO's ability to reduce the patent application backlog because these less experienced patent examiners are primarily responsible for making the initial decisions on patent applications--the triggering event that removes applications from the backlog. Second, when these staff leave USPTO, the agency loses up to 5 years of training investment in them because patent examiners require 4 to 6 years of on-the-job experience before they become fully proficient in conducting patent application reviews. Third, the more experienced examiners who have the ability to examine more applications in less time have to instead devote more of their time to supervising and training the less experienced staff, thereby further reducing the agency's overall productivity. Finally, these workforce losses reduce the pool of potential supervisory patent examiners for the future and therefore impair USPTO's ability to increase its supervisory capacity and, ultimately, its hiring goals. We found that USPTO management and patent examiners disagree significantly on the reasons for the agency's attrition. According to USPTO management, personal reasons are the primary reasons that cause patent examiners to leave the agency. Some of these reasons include the following: The nature of the work at USPTO does not fit with the preferred working styles of some patent examiners, such as those with engineering degrees who are looking for more "hands-on" experiences. Many patent examiners enter the workforce directly out of college and are looking to add USPTO to their resumes and move on to another job, rather than building a career at the agency, otherwise known as the "millennial problem." Patent examiners may choose to leave the area, as opposed to choosing to leave the agency, because their spouse transfers to a position outside of the Washington, D.C., area; the cost of living is too high; or the competition is too high for entry into the Washington, D.C., area graduate and post graduate programs for those patent examiners who would like to pursue higher education. According to USPTO management, the agency has a number of ongoing efforts to help address these issues. For example, the agency is developing a recruitment tool to better assess applicant compatibility with the agency's work environment; targeting midcareer professionals during the recruitment process; and considering the creation of offices located outside the Washington, D.C., area to provide lower cost-of-living alternatives for employees. While Patent Office Professional Association officials--the union that represents patent examiners--agreed that in some cases personal reasons may contribute to patent examiners leaving the agency, they believe that the unrealistic production goals that the agency sets for patent examiners is primarily responsible for attrition. Specifically, according to union officials unrealistic production goals have created a "sweat shop culture" within the agency that requires patent examiners to do more in less time and has therefore been a significant contributor to patent examiners' decisions to leave USPTO. To call attention to this concern, in April 2007 the union joined the Staff Union of the European Patent Office and other international patent examiner organizations in a letter declaring that the pressures on patent examiners around the world have reached such a level that in the absence of serious measures, intellectual property worldwide would be at risk. The letter recommended, among other things, an increase in the time patent examiners have to review patent applications. Patent examiners who participated in our survey generally agreed with union officials. Specifically, approximately 67 percent of patent examiners, regardless of their tenure with the agency, said that the agency's production goals were among the primary reasons they would consider leaving USPTO. Moreover, we estimated that 62 percent of patent examiners are very dissatisfied or generally dissatisfied with the time USPTO allots to achieve their production goals; and 50 percent of patent examiners are very dissatisfied or generally dissatisfied with how the agency calculates production goals. In addition, a number of respondents noted that the production goals are outdated, have not changed in 30 years, and some technologies for which they evaluate applications had not even been discovered at the time the agency's production goals were set. Fifty-nine percent of patent examiners believed that the production system should be reevaluated, including altering the production goals to allow more time for patent examiners to conduct their reviews. We and others have reported in the past that the assumptions underlying the agency's production goals were established over 30 years ago and have not since been adjusted to reflect changes in science and technology. Moreover, USPTO uses these production goals to establish its overall performance goals for patent examiners, such as the number of first actions to be completed in a given year. However, from 2002 through 2006, the agency missed its projections in 4 of the 5 years. Furthermore, according to our survey, patent examiners are discontented with the actions they have to take in order to meet their production goals. Specifically, 70 percent of patent examiners who participated in our survey reported working unpaid overtime to meet their production goals during the last year, some reporting working over 30 extra hours in a 2- week period. In addition, we estimated that 42 percent of patent examiners had to work while they were on paid annual leave in order to meet their production goals. The percentage of patent examiners working while on paid leave was significantly higher for those with longer tenure at the agency. We estimated that 18 percent of patent examiners who had been at USPTO from 2 to 12 months worked to meet their production goals while on paid leave, compared with 50 percent of patent examiners with over 5 years' experience. As one respondent to our survey explained, "Vacation time means catch up time." Another respondent summed up the situation as follows: "I know that the production goals are set to keep us motivated in order to help get over the backlog but if a majority of examiners cannot meet those goals without relying on unpaid overtime or annual leave then something is wrong with the system." According to our survey results, 59 percent of patent examiners identified the amount of unpaid overtime that they have to put into meeting their production goals as a primary reason they would choose to leave USPTO, and 37 percent identified the amount of time they must work during paid leave in order to meet their goals as a primary reason to leave the agency. Even though the agency has not been able to meet its productivity goals for the last 4 years, this extensive amount of unpaid overtime patent examiners have to work in order to meet their production goals does not appear to be a concern for the agency. When we asked USPTO management about the agency's policy for unpaid overtime to meet production goals, the Deputy Commissioner for Patent Operations told us, "As with many professionals who occasionally remain at work longer to make up for time during the day spent chatting or because they were less productive than intended, examiners may stay at the office (or remote location) longer than their scheduled tour of duty to work." From 2002 to 2006, USPTO offered a number of different retention incentives and flexibilities, as table 1 shows. According to USPTO management officials, the three most effective retention incentives and flexibilities that they have offered are the special pay rates, the bonus structure, and opportunities to work from remote locations. More specifically: Special pay rate. In November 2006, USPTO received approval for an across-the-board special pay rate for patent examiners that can be more than 25 percent above federal salaries for comparable positions. For example, in 2007, a patent examiner at USPTO earning $47,610 would earn $37,640 in a similar position at another federal agency in the Washington, D.C., area. Bonus structure. The agency awards bonuses to patent examiners who exceed their production goals by at least 10 percent. For example, according to USPTO, in fiscal year 2006, 60 percent of eligible patent examiners who exceeded production goals by 10 percent or more received a bonus. As table 2 shows, USPTO awarded 4,645 bonuses to patent examiners that totaled over $10.6 million in fiscal year 2006. Opportunities to work from remote locations. In fiscal year 2006, approximately 20 percent of patent examiners participated in the agency's telework program, which allows patent examiners to conduct some or all of their work away from their official duty station 1 or more days a week. In addition, when USPTO began a "hoteling" program in fiscal year 2006, approximately 10 percent of patent examiners participated in the program, which allows some patent examiners to work from an alternative location. According to the results of our survey, patent examiners generally agreed that compensation-related retention incentives and efforts to enhance the work environment were among the most important reasons they would choose to stay at USPTO, as table 3 shows. Current total pay (excluding benefits) The availability of the flexible work schedule program The availability of a hoteling program The availability of a teleworking program The recent implementation of a special pay rate increase The ability to be promoted to the next GS level The availability of the law school tuition program The availability of monetary awards Access to an on-site fitness center The availability of a transit subsidy program The availability of on-site child care The availability of flexible spending accounts (i.e., the program that allows you to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars) The availability of an on-site health unit Activities offered by the Work-Life Committee Despite USPTO's efforts to hire more patent examiners annually and implement retention incentives and flexibilities over the last 5 years, the agency has had limited success in retaining new patent examiners. Because the agency's production goals appear to be undermining USPTO's efforts to hire and retain a qualified workforce, we recommended in 2007 that the agency comprehensively evaluate the assumptions it uses to establish patent examiner production goals and revise those assumptions as appropriate. The Department of Commerce agreed with our findings, conclusions, and recommendation and agreed that the agency's hiring efforts are not sufficient to reduce the patent application backlog. It stated that USPTO is implementing initiatives to increase the productivity of the agency that will result in a more efficient and focused patent examination process. Once USPTO determines the effect of these initiatives on patent examiner productivity, it will reevaluate the assumptions used to establish patent examiner productions goals. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. For further information, please contact Robin M. Nazzaro at (202) 512-3841 or [email protected]. Other contributors to this statement include Vondalee R. Hunt, Assistant Director; Omari Norman; Jamie Roberts; Carol Herrnstadt Shulman, and Lisa Vojta. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The U.S. Patent and Trademark Office (USPTO) helps protect U.S. competitiveness by granting patents for new ideas and innovations. Increases in the volume and complexity of patent applications have extended the time for processing them. Concerns continue about the agency's efforts to attract and retain qualified patent examiners who can meet the demand for patents and help reduce the growing backlog of unexamined patent applications. In 2007, GAO reported on (1) USPTO's process for making its annual hiring estimates and the relationship of these estimates to the patent application backlog; (2) the extent to which patent examiner hiring has been offset by attrition, and the factors that may contribute to this attrition; and (3) the extent to which USPTO's retention efforts align with examiners' reasons for staying with the agency. GAO recommended that USPTO comprehensively evaluate the assumptions it uses to establish its production goals. USPTO agreed to implement this recommendation once it determines the effect of recent initiatives designed to increase the productivity of the agency through a more efficient and focused patent examination process. This testimony is based on GAO's 2007 report, which was based in part on a survey of 1,420 patent examiners. See, GAO, U.S. Patent and Trademark Office: Hiring Efforts Are Not Sufficient to Reduce the Patent Application Backlog, GAO-07-1102 . USPTO primarily determined its annual hiring estimates on the basis of available funding levels and institutional capacity to train and supervise new patent examiners, and not on the basis of the number of patent examiners needed to reduce the existing backlog of patent applications or review new patent applications. USPTO's process for identifying its annual hiring estimates is generally consistent with accepted workforce planning strategies. However, because this approach does not consider how many examiners are needed to reduce the existing backlog or address the inflow of new applications, it is unlikely that the agency will be able to reduce the growing backlog simply through its hiring efforts. Although USPTO is hiring as many new patent examiners as its budget and institutional capacity will support, attrition is significantly offsetting the agency's hiring efforts, and agency management and patent examiners disagree about the causes of attrition. Specifically, from 2002 through 2006, one patent examiner left USPTO for nearly every two hired--70 percent of those who left had been at the agency for less than 5 years. This represents a significant loss to the agency because new patent examiners are primarily responsible for the actions that remove applications from the backlog. According to USPTO management, patent examiners primarily leave the agency because of personal reasons, such as finding that the job is not a good fit. In contrast, 67 percent of patent examiners identified the agency's production goals among the primary reasons they would consider leaving the agency. These goals are based on the number of applications patent examiners must complete during a 2-week period. However, the assumptions underlying these goals were established over 30 years ago and have not since been adjusted to reflect changes in the complexity of patent applications. Moreover, 70 percent of patent examiners reported working unpaid overtime during the past year in order to meet their production goals. The large percentage of examiners working overtime to meet production goals and who would choose to leave the agency because of these goals may indicate that these goals do not accurately reflect the time needed to review applications and are undermining USPTO's hiring efforts. The retention incentives and flexibilities USPTO has provided over the last 5 years generally align with the primary reasons patent examiners identified for staying with the agency. Between 2002 and 2006, USPTO used a variety of retention flexibilities, such as a special pay rate, performance bonuses, and a flexible work place to encourage patent examiners to stay with the agency. According to USPTO management, their most effective retention efforts were those related to compensation and an enhanced work environment. GAO's survey of patent examiners indicates that most patent examiners generally approved of USPTO's retention efforts, and ranked the agency's salary and other pay incentives as well as the flexible work schedule among the primary reasons for staying with the agency.

The origination, securitization, and servicing of mortgage loans involve multiple entities. In recent years, originating lenders generally have sold or assigned their interest in loans to other financial institutions to securitize the mortgages. Through securitization, the purchasers of these mortgages then package them into pools and issue securities for which the mortgages serve as collateral. These mortgage-backed securities (MBS) pay interest and principal to their investors, such as other financial institutions, pension funds, or mutual funds. After an originator sells its loans, another entity is usually appointed as the servicer. Servicing duties can involve sending borrowers monthly account statements, answering customer service inquiries, collecting mortgage payments, maintaining escrow accounts for taxes and insurance, and forwarding payments to the mortgage owners. If a borrower becomes delinquent on loan payments, servicers also initiate and conduct a foreclosure in order to obtain the proceeds from the sale of the property on behalf of the owner of the loan. Any legal action such as foreclosure that a servicer takes generally may be brought in the name and on behalf of the securitization trust, which is the legal owner of record of the mortgage loans. Several federal agencies share responsibility for regulating activities of the banking industry that relate to the originating and servicing of mortgage loans (see table 1). Upon assumption of its full authorities on July 21, 2011, CFPB also will have authority to regulate mortgage servicers with respect to federal consumer financial law. Other agencies also oversee certain aspects of U.S. mortgage markets but do not have supervisory authority over mortgage servicers. Because state laws primarily govern foreclosure, federal laws related to mortgage lending focus on protecting consumers at mortgage origination and during the life of a loan but not necessarily during foreclosure. Federal consumer protection laws, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA), address some aspects of servicers' interactions with borrowers. For example, these laws require servicers to provide certain notifications and disclosures to borrowers or respond to certain written requests for information within specified times, but they do not include specific requirements for servicers to follow when executing a foreclosure. According to Federal Reserve officials, in addition to federal bankruptcy laws, federal laws that address foreclosure processing specifically are the Protecting Tenants at Foreclosure Act of 2009, which protects certain tenants from immediate eviction by new owners who acquire residential property through foreclosure, and the Servicemembers Civil Relief Act, which restricts foreclosure of properties owned by active duty members of the military. Banking regulators oversee most entities that conduct mortgage servicing, but their oversight of foreclosure activities generally has been limited. As part of their mission to ensure the safety and soundness of these institutions, the regulators have the authority to review any aspect of their activities, including mortgage servicing and compliance with applicable state laws. However, the extent to which regulators have reviewed the foreclosure activities of banks or banking subsidiaries that perform mortgage servicing has been limited because these practices generally were not considered as posing a high risk to safety and soundness. According to OCC and Federal Reserve staff, they conduct risk-based examinations that focus on areas of greatest risk to their institutions' financial positions, as well as some other areas of potential concern, such as consumer complaints. Servicers generally manage loans that other entities own or hold, and are not exposed to significant losses if these loans become delinquent. Because regulators generally determined that the safety and soundness risks from mortgage servicing were low, they have not regularly examined servicers' foreclosure practices on a loan- level basis. Oversight also has been fragmented, and not all servicers have been overseen by federal banking regulators. At the federal level, multiple agencies--including OCC, the Federal Reserve, OTS, and FDIC--have regulatory responsibility for most of the institutions that conduct mortgage servicing, but until recently, some nonbank institutions have not had a primary federal or state regulator. Many federally regulated bank holding companies that have insured depository subsidiaries, such as national or state-chartered banks, may have nonbank subsidiaries such as mortgage finance companies. Under the Bank Holding Company Act of 1956, as amended, the Federal Reserve has jurisdiction over such bank holding companies and their nonbank subsidiaries that are not regulated by another functional regulator. Until recently the Federal Reserve generally had not included the nonbank subsidiaries in its examination activity because their activities were not considered to pose material risks to the bank holding companies. In some cases, nonbank entities that service mortgage loans are not affiliated with financial institutions at all, and therefore were not subject to oversight by one of the federal banking regulators. In our 2009 report on how the U.S. financial regulatory system had not kept pace with the major developments in recent decades, we noted that the varying levels or lack of oversight for nonbank institutions that originated mortgages created problems for consumers or posed risks to regulated institutions. In response to disclosed problems with foreclosure documentation, banking regulators conducted coordinated on-site reviews of foreclosure processes at 14 mortgage servicers. Generally, these examinations revealed severe deficiencies in the preparation of foreclosure documentation and with the oversight of internal foreclosure processes and the activities of external third-party vendors. Examiners generally found in the files they reviewed that borrowers were seriously delinquent on the payments on their loans and that the servicers had the documents necessary to demonstrate their authority to foreclose. However, examiners or internal servicer reviews of foreclosure loan files identified a limited number of cases in which foreclosures should not have proceeded even though the borrower was seriously delinquent. These cases include foreclosure proceedings against a borrower who had received a loan modification or against military service members on active duty, in violation of the Servicemembers Civil Relief Act. As a result of these reviews, the regulators issued enforcement actions requiring servicers to improve foreclosure practices. Regulators plan to assess compliance but have not fully developed plans for the extent of future oversight. According to the regulators' report on their coordinated review, they help ensure that servicers take corrective actions and fully implement enforcement orders. While regulatory staff recognized that additional oversight of foreclosure activities would likely be necessary in the future, as of April 2011 they had not determined what changes would be made to guidance or to the extent and frequency of examinations. Moreover, regulators with whom we spoke expressed uncertainty about how their organizations would interact and share responsibility with the newly created CFPB regarding oversight of mortgage servicing activities. According to regulatory staff and the staff setting up CFPB, the agencies intend to coordinate oversight of mortgage servicing activities as CFPB assumes its authorities in the coming months. CFPB staff added that supervision of mortgage servicing will be a priority for the new agency. However, as of April 2011 CFPB's oversight plans had not been finalized. As we stated in our report, fragmentation among the various entities responsible for overseeing mortgage servicers heightens the importance of coordinating plans for future oversight. Until such plans are developed, the potential for continued fragmentation and gaps in oversight remains. In our report, we recommend that the regulators and CFPB develop and coordinate plans for ongoing oversight and establish clear goals, roles, and timelines for overseeing mortgage servicers under their respective jurisdiction. In written comments on the report, the agencies generally agreed with our recommendation and said that they would continue to oversee servicers' foreclosure processes. In addition, CFPB noted that it has already been engaged in discussions with various federal agencies to coordinate oversight responsibilities. As part of addressing the problems associated with mortgage servicing, including those relating to customer service, loan modifications, and other issues, various market participants and federal agencies have begun calling for the creation of national servicing standards, but the extent to which any final standards would address foreclosure documentation and processing is unclear. A December 2010 letter from a group of academics, industry association representatives, and others to the financial regulators noted that such standards are needed to ensure appropriate servicing for all loans, including in MBS issuances and those held in portfolios of the originating institution or by other owners. This letter outlined various areas that such standards could address, including those requirements that servicers attest that foreclosure processes comply with applicable laws and pursue loan modifications whenever economically feasible. Similarly, some regulators have stated their support of national servicing standards. For example, OCC has developed draft standards, and in his February 2011 testimony, the Acting Comptroller of the Currency expressed support for such standards, noting that they should provide the same safeguards for all consumers and should apply uniformly to all servicers. He further stated that standards should require servicers to have strong foreclosure governance processes that ensure compliance with all legal standards and documentation requirements and establish effective oversight of third-party vendors. A member of the Board of Governors of the Federal Reserve System testified that consideration of national standards for mortgage servicers was warranted, and FDIC's Chairman urged servicers and federal and state regulators in a recent speech to create national servicing standards. Most of the regulators with whom we spoke indicated that national servicing standards could be beneficial. For example, staff from one of the regulators said that the standards would create clear expectations for all servicers, including nonbank entities not overseen by the banking regulators, and would help establish consistency across the servicing industry. The regulators' report on the coordinated review also states that such standards would help promote accountability and ways of appropriately dealing with consumers and strengthen the housing finance market. Although various agencies have begun discussing the development of national servicing standards, the content of such standards and how they would be implemented is yet to be determined. According to CFPB staff, whatever the outcome of the interagency negotiations, CFPB will have substantial rulemaking authority over servicing and under the Dodd-Frank Act is required to issue certain rules on servicing by January 2013. We reported that problems involving financial institutions and consumers could increase when activities are not subject to consistent oversight and regulatory expectations. Including specific expectations regarding foreclosure practices in any standards that are developed could help ensure more uniform practices and oversight in this area. To help ensure strong and robust oversight of all mortgage servicers, we recommended that the banking regulators and CFPB include standards for foreclosure practices if national servicing standards are created. In written comments on our report, the agencies generally agreed with this recommendation, and most provided additional details about the ongoing interagency efforts to develop servicing standards. For example, OCC noted that ongoing efforts to develop national servicing standards are intended to include provisions covering both foreclosure abeyance and foreclosure governance. OCC added that the standards, although still a work in progress, will emphasize communication with the borrower and compliance with legal requirements, documentation, vendor management, and other controls. The Federal Reserve commented that the intent of the interagency effort was to address the problems found in the servicing industry, including in foreclosure processing, and coordinate the efforts of the multiple regulatory agencies to ensure that consumers will be treated properly and consistently. FDIC noted that the agency successfully proposed the inclusion of loan servicing standards in the proposed rules to implement the securitization risk retention requirements of the Dodd- Frank Act. FDIC also noted that any servicing standards should align incentives between servicers and investors and ensure that appropriate loss mitigation activities are considered when borrowers experience financial difficulties. CFPB said it has effective authority to adopt national mortgage servicing rules for all mortgage servicers, including those for which CFPB does not have supervisory authority. Finally, Treasury said it has been closely engaged with the interagency group reviewing errors in mortgage servicing and that it supports national servicing standards that align incentives and provide clarity and consistency to borrowers and investors for their treatment by servicers. To date, a key impact of the problems relating to affidavits and notarization of mortgage foreclosure documents appears to be delays in the rate at which foreclosures proceed. Despite these initial delays, some regulatory officials, legal academics, and industry officials we interviewed indicated that foreclosure documentation issues were correctable. Once servicers have revised their processes and corrected documentation errors, most delayed foreclosures in states that require court action likely will proceed. The implications for borrowers could be mixed, but delays in the foreclosure process could exacerbate the impacts of vacant properties and affect recovery of housing prices. Borrowers whose mortgage loans are in default may benefit from the delays if the additional time allows them to obtain income that allows them to bring mortgage payments current, cure the default, or work out loan modifications. However, according to legal services attorneys we interviewed, these delays leave borrowers unsure about how long they could remain in their homes. And borrowers still might be subject to new foreclosure proceedings if banks assembled the necessary paperwork and resubmitted the cases. Communities could experience negative impacts from delayed foreclosures as more properties might become vacant. We reported that neighborhood and community problems stemming from vacancies include heightened crime, blight, and declining property values, and increased costs to local governments for policing and securing properties. Delays in the foreclosures process, although temporary, could exacerbate these problems. Various market observers and regulators indicated that the delays could negatively affect the recovery of U.S. housing prices in the long term. According to one rating agency's analysis, market recovery could be delayed as servicers work through the backlog of homes in foreclosure. Regulators also reported that delays could be an impediment for communities working to stabilize local neighborhoods and housing markets, and could lead to extended periods of depressed home prices. Impacts on servicers, trusts, and investors because of loan transfer documentation problems were unclear. Some academics and others have argued that the way that mortgage loans were transferred in connection with some MBS issuances could affect servicers' ability to complete foreclosures and create financial liabilities for other entities, such as those involved in creating securities. According to these academics, a servicer may not be able to prove its right to foreclose on a property if the trust on whose behalf it is servicing the loan is not specifically named in the loan transfer documentation. In addition, we note in our report that stakeholders we interviewed said that investors in the MBS issuance may press legal claims against the creators of the trusts or force reimbursements, or repurchases. Conversely, other market participants argue that mortgages were pooled into securities using standard industry practices that were sufficient to create legal ownership on behalf of MBS trusts. According to these participants, the practices that were typically used to transfer loans into private label MBS trusts comply with the Uniform Commercial Code, which generally has been adopted in every state. As a result, they argue that the transfers were legally sufficient to establish the trusts' ownership. Although some courts may have addressed transfer practices in certain contexts, the impact of the problems likely will remain uncertain until courts issue definitive, controlling decisions. In the near term, industry observers and regulators noted that these cases and other weaknesses in foreclosure processes could lead to increased litigation and servicing costs for servicers, more foreclosure delays, and investor claims. Although tasked with overseeing the financial safety and soundness of institutions under their jurisdiction, the banking regulators have not fully assessed the extent to which MBS loan transfer problems could affect their institutions financially. According to staff at one of the regulators, as part of the coordinated review, examiners did not always verify that loan files included accurate documentation of all previous note and mortgage transfers--leaving open the possibility that transfer problems exist in the files they reviewed. The enforcement orders resulting from the coordinated review require servicers to retain an independent firm to assess these risks. Regulators will more frequently monitor these servicers until they have corrected the identified weaknesses; however, the regulators have not definitively determined how transfer problems might financially affect other institutions they regulate, including any of the institutions involved in the creation of private label MBS. With almost $1.3 trillion in private label securities outstanding as of the end of 2010, the institutions and the overall financial system could face significant risks. To reduce the likelihood that problems with transfer documentation could pose a risk to the financial system, we recommended that the banking regulators assess the risks of potential litigation or repurchases due to improper mortgage loan transfer documentation on institutions under their jurisdiction and require that the institutions act to mitigate the risks, if warranted. Completing the risk assessments and fully ensuring that regulated institutions proactively address the risks could reduce the potential threat to the soundness of these institutions, the deposit insurance fund, and the overall financial system. In written comments on a draft of our report, the regulators generally agreed with or did not comment on this recommendation. For example, FDIC strongly supported this recommendation and noted its particular interest in protecting the deposit insurance fund. In addition, the Federal Reserve said that it has conducted a detailed evaluation of the risk of potential litigation or repurchases to the financial institutions it supervises and will continue to monitor these issues. Chairman Menendez, Ranking Member DeMint, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. If you or your staff have any questions about matters discussed in this testimony, please contact A. Nicole Clowers at (202) 512-4010 or [email protected]. Other key contributors to this testimony include Cody Goebel (Assistant Director), Beth Garcia, Jill Naamane, and Linda Rego. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses our work on mortgage servicing issues. With record numbers of borrowers in default and delinquent on their loans, mortgage servicers--entities that manage home mortgage loans--are initiating large numbers of foreclosures throughout the country. As of December 2010, an estimated 4.6 percent of the about 50 million first-lien mortgages outstanding were in foreclosure--an increase of more than 370 percent since the first quarter of 2006, when 1 percent were in foreclosure. Beginning in September 2010, several servicers announced that they were halting or reviewing their foreclosure proceedings throughout the country after allegations that the documents accompanying judicial foreclosures may have been inappropriately signed or notarized. The servicers subsequently resumed some foreclosure actions after reviewing their processes and procedures. However, following these allegations, some homeowners challenged the validity of foreclosure proceedings against them. Questions about whether documents for loans that were sold and packaged into mortgage-backed securities were properly handled prompted additional challenges. This statement focuses on (1) the extent to which federal laws address mortgage servicers' foreclosure procedures and federal agencies' authority to oversee servicers' activities and the extent of past oversight; (2) federal agencies' current oversight activities and future oversight plans; and (3) the potential impact of foreclosure documentation issues on homeowners, servicers, regulators, and investors in mortgage-backed securities. It is based on the report we issued on May 2, 2011, on foreclosure documentation problems that Congress requested. In summary, until the problems with foreclosure documentation came to light, federal regulatory oversight of mortgage servicers had been limited, because regulators regarded servicers' activities as low risk for banking safety and soundness. However, regulators' recent examinations revealed that servicers generally failed to prepare required documentation properly and lacked effective supervision and controls over foreclosure processes. Moreover, the resulting delays in completing foreclosures and increased exposure to litigation highlight how the failure to oversee whether institutions follow sound practices can heighten the risks these entities present to the financial system and create problems for the communities in which foreclosures occur. As a result, we recommended in our report that the financial regulators take various actions, including (1) developing and coordinating plans for ongoing oversight of servicers, (2) including foreclosure practices as part of any national servicing standards that are created, and (3) assessing the risks of improper documentation for mortgage loan transfers. The regulators generally agreed with or did not comment on our recommendations, and some are taking actions to address them.

The Social Security Act was enacted in 1935 during the Great Depression as a social insurance program to provide an income foundation upon which individuals could build for their retirement years. In 1956, the DI program was added to Social Security to provide income to disabled workers. Over the years, the three main components of retirement income--Social Security, pensions, and savings--have dramatically improved the income of the elderly, thereby substantially reducing their poverty rates. According to SSA data, Social Security benefits constitute approximately 80 percent of total income for elderly households (households in which the head of household is aged 65 or older) in the lowest two-fifths of the income distribution, compared with only 21 percent of total income for households in the highest fifth. The Social Security Act established 65 as the minimum age at which retirement benefits can be obtained. Sixty-five was selected as a compromise between age 60, which appeared too low from a cost standpoint, and age 70, which appeared too high given that life expectancy at the time was 59 years for men and 63 years for women. Since 1956, women have had the option to take reduced benefits at age 62, and since 1961, this option has also been available to men. As a result, 62 has been defined as the ERA and 65 is considered the NRA. The long-term financing problem that Social Security faces is largely a result of lower birth rates and increasing longevity. One way to at least partially compensate for these changes is to raise the retirement ages. The Congress has already approved one change in the retirement age, in 1983, when it enacted legislation that phased in an increase in the NRA to 67 over a 22-year period beginning in the year 2000. Currently, there are proposals before the Congress to raise the retirement ages further by increasing the ERA from 62 to 65, along with several proposals to further increase the NRA from 67 to 70. Longer life expectancy and the improved health of the nation's elderly are the primary justifications for these recommended increases. Raising the retirement ages effectively reduces benefits and thereby would improve Social Security's solvency. The extent of the improvement depends on how much and how soon the retirement ages are raised. Because individuals retiring before the NRA receive lower benefits and those retiring after the NRA receive a premium, raising the NRA reduces the initial benefits for all retirees. For example, if the NRA was increased to 70, people who retire between ages 65 and 69 would have their benefits reduced for early retirement. And those who retire at age 70 would then receive the basic benefit amount now received at 65 instead of receiving the premium for delayed retirement. SSA's actuaries estimate that increasing the NRA from 65 to 69 over the years 2000 through 2015, and raising the ERA at the same rate, would close over one-half of the long-term trust fund shortfall and thereby extend the period of projected solvency by 13 years. If the NRA and ERA were further increased at the rate of 1 month every 2 years starting in 2016, then depletion of the fund would not occur for an additional 5 years (because 19 percent more of the shortfall would be made up). The combined effect of these retirement age increases would eliminate 72 percent of the difference between the Social Security trust fund's revenues and outlays over the next 75 years. Raising the retirement ages also could lead to an increase in economic activity if people worked longer. By remaining in the work force, older workers would be increasing the number of their productive years. In effect, there would be an increase in the economy's resource base--in this case, society's stock of human resources--and these increased resources would allow the economy to produce more goods and services. However, the increase in economic activity assumes that, by remaining in the labor force for more years, older workers would not be displacing younger workers . Raising the Social Security retirement ages would provide many individuals an incentive to work longer, but whether they do depends on how the labor market responds. Having people work longer would help solve the problem of the declining ratio of workers to retirees. Working longer could also give workers more time to save and to accrue pension benefits. Still, it is unclear whether workers will want to work longer and whether employers will want to retain or hire them. For many years, Americans have been choosing to receive Social Security benefits earlier, although the decline in the average age at which people elect to receive benefits has leveled off since the 1980s. In 1940, the average age for drawing Social Security benefits was 68.8, but by 1985 it had fallen to 63.7, where it remains today. Less than one-sixth of men aged 65 and over are in the labor force today, compared with nearly half in 1950. In addition, life expectancies have increased by nearly 12 years for men and 14 years for women since 1940. The combination of decreasing retirement ages and increasing life expectancies means that people are spending an increasing proportion of their lives in retirement. Data from the Survey of Income and Program Participation (SIPP) shows that approximately 22 to 31 percent of men aged 62 to 67 report that they have a disability that limits their ability to work. These data suggest that although a substantial portion of the population may have difficulty continuing to work to later ages, the majority of people have the capability to work beyond the current ERA and NRA. Social Security policy is a factor that affects individuals' choice of when to retire. Social Security currently gives incentives for individuals to reduce their working hours once they reach ages 62 or 65. Individuals make their decisions to work based primarily on the trade-off of earnings versus leisure time. The availability of Social Security benefits allows workers to substitute their earnings with nonlabor income and to take more leisure time. The majority of workers (53 percent) take Social Security benefits at age 62, the first year they are eligible. Also, individuals tend to retire more often at ages 62 and 65 than at any other ages, suggesting that the ERA and NRA influence the decision on when to retire. household wealth, and the employee's health status. Research suggests that the decision to retire is based primarily on financial considerations. One recent study, by Burkhauser and others, examined the effects of raising the ERA and concluded that such an increase would have only a limited impact on individuals in poor health because the majority of people who retire at the ERA do so because they are financially able to do it. This study suggests that raising the ERA would, on average, deny Social Security benefits to people who could work longer and not take benefits away from unhealthy individuals who retire early because they can no longer work. This research concludes that raising the ERA and the NRA should lead to individuals working longer, but those who cannot work longer may see their household income decline. In households with two or more income earners, the healthy member(s) of the household may be able to work longer to offset some or all of the lost Social Security benefits. However, households without this option could experience large declines in their income if the retirement ages are raised. For some households, this decline in income could be sufficient to push the household below the poverty level. the hiring of older workers. The researchers who found this negative correlation speculated that it is the result of the Age Discrimination in Employment Act (ADEA), which mandates that firms must offer workers with similar experience the same level of benefits. Since younger employees are less costly to insure, firms will prefer them. The potential tenure with an employer is another obstacle to hiring older workers because of recruitment and training costs. Recruitment involves job advertising costs and interview time. Newly hired employees may also require significant training to perform their new job. If these costs are substantial, they can serve as barriers to hiring older workers. Firms would be more likely to invest in younger workers because they have the potential to remain with the firm for a longer period, which reduces the average costs of recruitment and training. A final obstacle that older workers face is a negative perception among employers about their productivity. Surveys find that most managers believe the negative aspects of older workers outweigh the positive aspects. The productivity traits of older workers that managers tend to find favorable are experience, judgment, commitment to quality, low turnover, and good attendance and punctuality. The negative perceptions that managers have about older workers' productivity are a tendency toward inflexibility, an inability to effectively use new technology, difficulty in learning new skills, and concerns about physical ability. situation, rather than a desire to retire, could discourage an older worker from remaining in the labor force. Blue-collar workers will likely experience more difficulties in extending their careers than will white-collar workers. Because of the nature of their jobs, many older blue-collar workers--who compose 40 percent of the labor force between the ages of 53 and 63--experience health problems that may inhibit their ability to work and reduce the demand for their labor. We analyzed the Health and Retirement Study (HRS), a nationally representative sample composed of individuals born between 1931 and 1941, to compare the health status of blue- and white-collar workers. Our analysis found that older blue-collar workers are at greater risk for having several health problems compared with older white-collar workers (see table 1). We assessed the effects of occupation on specific health problems, controlling for employment status, age, race, sex, alcohol consumption, and smoking. Blue-collar workers are more likely to have musculoskeletal problems, respiratory diseases, diabetes, and emotional disorders than are white-collar workers. For example, blue-collar workers are 58 percent more likely to have arthritis, 42 percent more likely to have chronic lung disease, and 25 percent more likely to have emotional disorders. White-collar workers were not at greater risk for having any of the health problems we examined. White-collar workers did have higher rates of cancer; however, the difference was not statistically significant. Social Security Reform: Raising Retirement Ages Improves Program Solvency but May Cause Hardship for Some Cancer (other than skin) When all blue-collar occupations are grouped together, blue-collar workers are 80 percent more likely than white-collar workers to experience pain that affects their ability to perform their jobs (see table 2). The blue-collar occupations with risk factors for pain affecting performance are personal services; farming, fishing, and forestry; mechanics and repair; construction; mining; precision production; machine operator; transportation operator; and material handler. These occupations comprise one-third of workers aged 53 to 63. Older blue-collar workers with health problems have lower earnings and are in less demand for their labor. Blue-collar work is often physically demanding, and current or potential employers may foresee a risk of a worker's compensation claim or increased health care costs from older employees. This reduced labor demand means these workers may accumulate less wealth, which makes it difficult for them to afford to retire even if they are not physically capable of working more years. For example, 18 percent of blue-collar workers with two or more health problems are retired, while only 14 percent of those with no problems are retired (see table 3). Table 3 shows that older blue-collar workers with health problems had higher unemployment rates than healthy blue-collar workers. Our analysis also showed that blue-collar workers had higher unemployment rates than white-collar workers with similar health status. Corresponding to these higher unemployment rates, the blue-collar workers with health problems had lower earnings. The older blue-collar workers who had arthritis, a foot or leg problem, chronic lung disease, asthma, diabetes, or an emotional problem--all conditions that blue-collar workers are at greater risk for having compared with white-collar workers--have 38 percent, 33 percent, 27 percent, 36 percent, 25 percent, and 78 percent lower median earnings, respectively, than blue-collar workers without these conditions. As noted earlier, these reduced earnings make it difficult for unhealthy, older blue-collar workers to afford to retire. benefits awarded at that age. Some of the individuals with low income and assets who are awarded DI may also qualify for SSI disability benefits. Another incentive for individuals to apply to the DI program is that participants are eligible for medical coverage under Medicare 2 years after DI benefits begin. Thus, individuals awarded DI benefits before age 63 get extra Medicare coverage that they would otherwise not be eligible for until age 65. Therefore, if Medicare eligibility was raised along with the ERA and NRA, individuals would have an incentive to try to attain DI benefits. An additional medical coverage issue is that individuals who are dually eligible for DI and SSI benefits are also generally eligible to receive Medicaid, which will increase costs to this program. Raising retirement ages would change some of the disincentives that currently keep people from applying for DI benefits at age 62. Data from SSA show that the current structure of Social Security reduces claims for new DI participators aged 62 to 64. Figure 1 shows a steady increase in the rate of new disability awards from ages 53 to 61. The rate of new awards then drops substantially at age 62 and falls further through age 64. DI participation is likely discouraged at ages 62 to 64 because of the application process and restrictions on earnings. There is a 5-month waiting period after the onset of the disability until someone can apply for benefits, and the application process is lengthy and complex. In comparison, the application process for Social Security retirement benefits is more straightforward, given that the applicant meets the coverage and age requirements. In addition, DI benefits are generally subject to a greater reduction than Social Security retirement benefits if beneficiaries have any earnings. Also, DI benefits are offset by worker's compensation benefits, while Social Security retirement benefits are not. If the ERA was raised to 65 and the NRA to 70, then the incentives that apply to Social Security retirement benefits would be applicable at age 65 rather than age 62. Under this scenario, individuals aged 62 to 64 would have a greater incentive to apply for disability benefits, and they would be expected to do so at rates comparable to individuals at younger ages (55 to 61) under the present system. Figure 1 contains a trend line to indicate the expected rate of change if the increase in new DI participation continues beyond age 62. The trend in new DI participation among individuals aged 55 to 61 under the present system suggests that DI participation among individuals aged 62 to 64 would increase approximately 2.5 percent if the ERA was raised to age 65. As noted earlier, some of these new DI participants would be dually eligible for SSI and Medicaid benefits, which would impose additional costs. Addressing Social Security's solvency problem is one of the most important issues currently facing the administration and the Congress. Numerous proposals are before the Congress to restore the balance between promised benefits and available funds. Increases in the ERA and NRA could make up a substantial amount of Social Security's long-term financing shortfall, depending on the size of the increases. Increases in retirement ages may also have positive economic effects by inducing individuals to extend their careers, which could increase economic output. Since life expectancies and the health of the elderly are improving, many people have the capability to work longer, and increasing retirement ages would encourage this. While raising the retirement ages will extend the life of the Social Security trust fund and could lead to higher levels of economic output, the potential negative consequences should be recognized. For example, older workers who are laid off or need to reenter the workforce after retiring may have difficulty finding a job. Blue-collar workers may experience these problems to a greater degree, because the nature of their work leads to several health problems that inhibit their ability to continue working to later ages, compared with those in white-collar jobs. These health problems reduce their employability and hence their ability to accumulate enough wealth to afford to retire if they are not physically capable of working longer. Finally, in considering retirement age increases, the effect of this action on other government programs needs to be understood. Participation in disability insurance programs will likely increase, primarily by blue-collar workers, if retirement ages are raised. The magnitude of the increase depends on the extent to which individuals react to the newly created incentives to apply to these programs. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or Members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO discussed raising the retirement age for social security benefits, focusing on: (1) how raising the retirement ages could affect social security's long-term solvency and the U.S. economy; (2) how the labor market for older workers might respond to these changes; and (3) the possible impacts from raising the retirement ages on the Disability Insurance (DI) and Supplemental Security Income (SSI) programs. GAO noted that: (1) raising the retirement ages does appear to improve the social security program's long-term solvency and could increase the nation's economic output; (2) raising the ages at which individuals can draw benefits creates incentives for workers to remain in the labor force, thereby increasing revenues to the trust fund and decreasing the amount of benefits paid; (3) the majority of older workers, aged 62 to 67, do not appear to have health limitations that would prevent them from extending their careers, and thus their labor force participation should increase as the retirement ages are raised; (4) this greater labor force participation should raise the level of economic output as more people work longer; (5) however, the extent to which labor force participation increases depends on whether sufficient jobs are available for older workers; (6) employees may be willing and able to extend their careers, but it is unclear whether employers will be willing to retain or hire them because of negative perceptions about costs and productivity; (7) blue-collar workers may be disproportionately affected by these labor demand and supply factors because they are at greater risk for incurring certain health problems that could limit their ability to remain in the labor force; (8) for example, workers in poor health who otherwise might have kept working until they qualified for social security retirement benefits may opt to apply for DI, which could increase costs to this program; and (9) in addition, SSI could also experience increased participation and higher costs because some individuals will be dually eligible for DI and SSI.

The four-seat EA-6B Prowler aircraft conducts missions for all services. The AEA mission is focused on protecting U.S. aircraft and ground forces by disabling enemy electronic capabilities. The EA-6B performs this mission with a complement of electronic receivers and jammers, referred to as its electronic suite, which are located on the aircraft structure and in external pods attached to its wings. A development effort is currently under way to replace the EA-6B with a two-seater electronic attack variant of the F/A-18F, designated the EA-18G Growler. The EA-6B joined the Navy's fleet in January 1971. The EA-6Bs's initial deployment was in 1972 over the skies of Southeast Asia. Since the early 1990s, use of the EA-6B has steadily increased. In 1991 the aircraft was used in Operation Desert Storm and in support of Iraqi "no-fly" zones instituted after that war. In 1995, the EA-6B was selected to become the sole tactical radar support jammer for all services after the Air Force decided to retire its fleet of EF-111 aircraft. This decision resulted in increased use of the EA-6B. Since 1995 the Prowler force has provided AEA capability during numerous joint and allied operations against both traditional and nontraditional threats. It was used to provide support for Operation Allied Force in Kosovo and for peacekeeping operations over Bosnia-Herzegovina and Yugoslavia, and is currently being used against traditional and nontraditional target sets in support of ground forces. These capabilities continue to be demonstrated in the Global War on Terrorism, in which EA-6B operations in Afghanistan and Iraq protect coalition forces and disrupt critical communications links. There have been several upgrades to the EA-6B's electronic suite since it was initially fielded to address increased threats faced by U.S. forces. The standard version, fielded in 1971, was quickly replaced in 1973 with the expanded capability EA-6B, which augmented the electronic countermeasure coverage of the aircraft. In 1977, the Improved Capability version entered service, and was followed by a more sophisticated ICAP II version, first deployed in 1984. The EA-6B/ICAP II featured updated receivers, displays, and software to cover a wider range of known surveillance and surface-to-air missile radars. As a result of heavy use and the limited inventory of the EA-6B, the Joint Chiefs of Staff directed that the inventory of EA-6Bs be managed as low-density/high-demand (LD/HD) assets. Low-density/high demand assets are force elements consisting of major platforms, weapon systems, or personnel that possess unique mission capabilities and are in continual high demand to support worldwide joint military operations. In 1998 an ICAP III upgrade was initiated to address capability gaps against threats from mobile surface-to- air missile systems. In addition, concerns surfaced about an anticipated decline in the EA-6B inventory because of structural fatigue issues. As a result, an AEA analysis-of-alternative was started in 1999 to find a replacement for the EA-6B. At that time it was anticipated that the EA-6B would remain in the inventory until at least 2015. Plans, as recently as December 2001, were to upgrade all 123 EA-6B aircraft in the inventory to the ICAP III configuration. The ICAP III provides rapid emitter detection, identification, geolocation, selective reactive jamming, and full azimuth coverage. Also, ICAP III-equipped EA- 6Bs will have the ability to integrate multiple EA-6Bs to match any threat density, and to control other manned or unmanned assets. The upgrade is needed to address capability gaps in the ICAP II electronic suite presently installed in EA-6B aircraft. The EA-6B ICAP III production line is currently scheduled to shut down after the fiscal year 2006 buy. The AoA report, published in 2002, concluded that an EA-6B replacement would be needed in 2009 to meet the services needs. The AoA further concluded that two components are needed to provide a complete AEA solution that is able to meet DOD's collective needs. These two components are a recoverable "core" component and an expendable "stand-in" component. The AEA AoA report identified 27 platform combinations that were capable of delivering jamming support. The study concluded that the final AEA solution must address both anticipated short-term platform shortfalls, as well as how best to implement the follow-on capability based on the menu of alternatives developed by the AoA. In addition, the study concluded that before a service can begin a formal acquisition program, the discussion should consider, among other things, whether one service will provide all DOD core component capability, and whether the AEA core component will reside on a single platform. Subsequent to the AoA report, the Navy and the Air Force each decided to develop their own unique aircraft from the 27 platform combinations identified in the AoA to perform the core component of AEA, as shown in figure 2. The Navy opted to develop the EA-18G Growler, a derivative of the F/A-18F, as its core component. The Air Force decided to develop an electronic attack variant of the B-52, designated the EB-52 SOJ (Standoff Jammer), to function as its core component of the AoA solution and an unmanned combat air vehicle and an unmanned decoy as the expendable stand-in components of its AEA AoA solution. The Marine Corps opted to continue using the EA-6B with the ICAP III electronic suite in anticipation of an electronic variant of the Joint Strike Fighter (F-35) being developed as a replacement for its EA-6Bs. The combination of these service AEA solutions is shown below in the DOD AEA system of systems. F/A-18 E/F, F-22, JSF AESA Kinematic Range of Known SAMs As a result of these changes the services have updated a memorandum of agreement that would allow Navy expeditionary EA-6B squadrons to be decommissioned between fiscal years 2009 and 2012, to be replaced by U.S. Air Force electronic attack capability. The Navy's aircraft would be dedicated to providing carrier-based AEA support to the Navy. The Navy determined that an inventory of 90 aircraft would be needed to support the Navy's core component requirement. In 2001 it was projected that an inventory of 108 EA-6Bs would be needed if the Navy were to continue to provide AEA mission support to all the services. In February 2006, DOD proposed to terminate two major components of the system of systems: the B-52 Standoff Jammer system and the Joint Unmanned Combat Air System (J-UCAS). The goal of the B-52 SOJ program was to provide long-range jamming of sophisticated enemy air defense radars and communications networks, using high-powered jamming equipment. The Air Force believes that a standoff jamming capability is still required, and it is investigating the solution options, platform numbers, and mix to deliver this capability. As part of the cancellation of the B-52 SOJ, the Air Force is investigating other solution options and platforms to provide the standoff capability, including examining how the B-52 SOJ cancellation affects Navy plans to retire the expeditionary squadrons of EA-6Bs. The goal of the J-UCAS program is to demonstrate the technical feasibility and operational value of a networked system of high-performance and weaponized unmanned air vehicles. The conclusion of the May 2002 AoA report that the EA-6B inventory would be insufficient past 2009 was not based on the Navy's requirement for 90 aircraft, but on an inventory requirement of 108 aircraft that would meet the needs of all services. The decision to move to a system of systems using multiple aircraft types means the Navy will no longer be required to support all of DOD's electronic attack requirements. As a result, EA-6B aircraft will be able to meet the Navy's suppression of enemy air defense needs through at least 2017 and the needs of the Marine Corps through 2025 as long as sufficient numbers of the aircraft are outfitted with ICAP III electronics suites. If the Navy is required to support all services, given the recent Air Force proposal to terminate the EB-52 standoff jammer program, additional EA-6Bs may require the ICAP III upgrade. According to program officials, the EA-6B ICAP III electronic suite upgrade was determined to be operationally effective and suitable in 2005 and has proven to be significantly better than the ICAP II electronic suite that is currently in use on all but a few EA-6Bs. However, while the EA-6B inventory decline has been postponed, the planned number of aircraft that would receive the ICAP III electronic suite upgrade has been significantly reduced, leaving most EA-6Bs with a shortfall in electronic attack capability against some current and future threats. Production of the EA- 6B ICAP III upgrade is scheduled to end after the 2006 buy. Program officials said that DOD's 2002 decision to move to a system of systems concept has reduced the inventory requirement for the Navy from 108 aircraft to 90 aircraft. The Navy determined that an inventory of 90 aircraft would be needed to support Navy's core component requirement. An inventory of 108 EA-6Bs would be needed if the Navy were to continue to provide electronic attack mission support to all the services. The memorandum of agreement between the services, in which the EA-6B has been the sole provider of electronic attack since 1996, allows the Navy expeditionary squadrons to be decommissioned between fiscal year 2009 and 2012 and replaced by the U.S. Air Force's EB-52 standoff jammer. However, the Air Force has recently canceled the EB-52 jammer. As shown in figure 3, the EA-6B inventory levels are now expected to be sufficient to meet the Navy's requirement for 90 aircraft through at least 2017 and the Marine Corps requirement for 31 aircraft through 2025. Procurement and replacement of 114 wing center sections for the EA-6B, begun in 1998, have been made on 94 aircraft and are ongoing. A few aircraft have received more than one wing center replacement because of heavy use. As a result, program officials identified the fatigue life of the fuselage as the determining factor in projected inventory levels. The official estimated life analysis of the EA-6B was conducted between 1984 and 1988. The aircraft used in that analysis had 1,873 actual flight hours when the test began, and program management believes that factor was not considered in determining the current fuselage life limit. Program management has asked that updated fatigue life charts be developed based on this information. Program management predicts that this will result in an increase in fuselage life to 14,000 hours, as shown in the solid line in figure 3. In addition, according to program officials extended inventory life can be obtained by procuring 32 additional EA-6B wing center sections at an estimated cost of $170 million. This would result in an inventory of over 90 EA-6Bs through 2019. This projected inventory is represented by the dashed line in figure 3. However, according to program officials, Northrop Grumman Corporation will wrap up wing center section production late this summer, and any new wing center section production would have to be placed on order this year to avoid additional startup and production break costs. While the inventory of EA-6Bs is now projected to meet the Navy's inventory needs through 2017, most of that inventory will be less able to address some current and future threats than recently anticipated. According to program documents, the ICAP II tactical jamming system, currently installed on most EA-6B aircraft, is limited in its ability to conduct numerous critical functions. Its receivers and integrated connectivity are limiting factors in the ICAP II's ability to detect, locate, and react to threat systems. Threat systems have become more sophisticated and incorporate advanced technology, severely limiting current ICAP II equipped EA-6Bs' receivers' ability to detect and identify threats. The ICAP III upgrade, at an estimated cost of $11.7 million per aircraft for the last four upgrades, provides selective reactive jamming capability; accurate emitter geolocation; full azimuth coverage; and a flexible command and control warfare core system that can integrate and coordinate multiple EA-6Bs to match any threat density, as well as the ability to integrate and control other manned or unmanned command and control warfare assets. Program officials project that a lower unit cost could be achieved if higher quantities are procured. Recent operational test and evaluation (OPEVAL) results for the EA-6B equipped with the ICAP III electronic suite have determined it to be operationally effective and suitable. Since these results, Navy operations and training units have flown and observed two EA-6B squadrons upgraded with ICAP III and found the upgrade to be significantly more capable than EA-6B aircraft equipped with the ICAP II electronic suite. According to Navy users who flew the EA-6B with ICAP III during a recent training detachment, the ICAP III system demonstrated a 30 percent increase in jamming effectiveness over the ICAP II. More data on the superior performance of ICAP III relative to the ICAP II system will become available as results from its first deployment, which just recently occurred, develop. Although the ICAP III-equipped EA-6Bs have been found to be significantly more capable, the numbers of aircraft that are funded to receive the ICAP III upgrade has been reduced compared with earlier DOD intentions to fully upgrade all EA-6Bs. Currently 14 EA-6B aircraft have been funded to receive the ICAP III upgrade, because of funding reductions, development test results, and the decision in 2003 to replace the EA-6B with the EA- 18G. According to Navy and Marine Corps requirements officials, fitting only 14 EA-6Bs with ICAP III is not sufficient to allow for the transition to the EA- 18G without leaving them with an airborne electronic attack capability shortfall against some current and future threats. They believe that between 21 (to meet the Navy requirement) and 31 (to meet the Marine Corps requirement) EA-6Bs should be fitted with ICAP III to address this shortfall. However, an analysis provided by the EA-6B program office concluded that 44 ICAP III aircraft would be needed to meet both Navy and Marine Corps requirements. We have not validated the number of aircraft Navy and Marine Corps officials identified as needed. Because of recent decisions affecting Air Force electronic attack near-term capabilities, additional EA-6Bs may be needed if the Navy is tasked to support the electronic attack requirements of all services beyond 2010. However, increasing the number of EA-6Bs with ICAP III will not be an option if ICAP III production ends in 2006 as currently planned. The EA-18G development schedule is aggressive according to program officials and the DOD Director of Operational Test and Evaluation's 2005 annual report. While the program is currently on cost and schedule according to program officials, our analysis shows that the program is not fully following the knowledge-based approach inherent in best practices and DOD's acquisition guidance, thus increasing the risk of cost growth and schedule delays. In addition, we have found that most research and development cost growth is reported after a program has passed the critical design review--the acquisition phase the EA-18G recently entered. Over the last several years, we have undertaken a body of work examining weapon system acquisition in terms of lessons learned from best system development practices. Successful programs attain high levels of knowledge in three aspects of a new product or weapon: technology, design, and production. If a program is not attaining high levels of knowledge, it incurs increased risk of problems, with attendant cost growth and schedule delays. The EA-18G airborne electronic attack program entered system development with immature technologies, and some of these technologies are still not mature. Also, while most of the design drawings are complete, it is possible that redesign may be needed in the future as the technologies mature. In addition, the Navy plans to procure a large percentage of the total EA-18G aircraft during low-rate initial production based on limited knowledge of the aircraft's ability to perform the electronic attack mission. This could result in the need to retrofit already produced EA-18G aircraft, shown in mock-up form in figure 4, a possibility that the Navy is already anticipating. According to program officials, the EA-18G program is currently on cost and schedule. While it held its critical design review in April 2005, it is now in the phase where most research and development cost growth is recognized and reported. We recently reviewed the development cost experience of 29 programs that have completed their product development cycle--the time between the start of development and the start of production. We found a significant portion of the recognized total development cost increases of these programs took place after they were approximately halfway into their product development cycle. These increases typically occurred after the time of the design review of the programs. The programs experienced a cumulative increase in development costs of 28.3 percent throughout their product development. Approximately 8.5 percent of the total development cost growth occurred up until the time of the average critical design review. The remaining 19.7 percent occurred after the average critical design review. Our work shows that the demonstration of technology maturity by the start of system development phase is a key indicator of achieving a match between program resources (knowledge, time, and money) and customer requirements. We recently reported that the cost effect of proceeding into product development without mature technologies can be dramatic. Research, development, and test and evaluation costs for programs that started development with mature technologies increased by an average of 4.8 percent, while those that began with immature technologies increased by an average 34.9 percent. In December 2003, after a truncated concept exploration phase, the EA- 18G was approved to enter system development, in order to achieve a 2009 initial operational capability date directed by the Chief of Naval Operations. Prior to entering system development, the program office assessed the readiness of the EA-18G's technologies and concluded that the system was not developing or advancing any new technologies and that only proven systems with minor modifications using mature technologies would be utilized. In addition, program officials stated that the EA-18G development benefited from the maturity of the F-18F platform and the airborne electronic attack suite currently flown on the EA-6B. Our assessment of the technology maturity of the EA-18G, however, differs from that offered by program officials. Over the last few years, we have reported on the system's progress in our annual assessment of selected major defense acquisition programs. We have reported that at the start of system development none of the program's five critical technologies were fully mature, and as recently as our March 2005 report this had not changed. While they are similar to the mature technologies found on the EA-6B and the F/A-18F, integrating those technologies on the EA-18G involves form and fit challenges. Three of the critical technologies--the ALQ-99 jamming pods, the F/A-18F aircraft, and the tactical terminal system--are approaching full maturity; two other technologies--the communications countermeasure set and the ALQ-218 receiver--are less mature. The Communications Countermeasures Set (CCS) provides communications detection and processing to the EA-18G. Among other things, it is used to degrade the effectiveness of the communications components that make up enemy integrated air defense systems. The existing set used on legacy EA-6Bs is out of production, and a replacement system is needed for use in the EA-18G. The new one is to be composed of new components, and it will function in a new environment. We believe that putting the CCS into the space constraints of the EA-18G platform may be a challenge and thus should be considered a technology risk to the program. The EA-6Bs fitted with ICAP III have a new technologically mature receiver, the ALQ-218, which is housed in the large space on the aircraft's vertical tail. The ALQ-218 receiver for the EA-18G, however, is being split and redesigned so it can be integrated into the aircraft's smaller wingtip pods. The wingtip environment is also known to be harsh, with noise and vibration that are known to be particularly severe and can degrade the reliability of receiver components. Isolators will be used in an attempt to lower the vibration levels. Since the ALQ-218 antenna elements will be subject to flexing of the wing that could reduce system performance, accelerometers will be placed in the wingtip pods to measure relative movement between the wingtips so that accurate threat locations can be made. In addition, many subcomponents also include new and modified parts, so the receiver's performance and delivery schedule are being tracked as risks to the program. Furthermore, the unique ALQ-218 wingtip covers, or radomes, have recently surfaced as potentially problematic. There are technical risks with the radome's electrical characteristics and environmental specifications--especially its ability to withstand hail strike requirements. The radome is being tracked as a high risk to the program because it may not meet a performance requirement. Flight tests on the EA-18G to measure the impact of noise and vibration on completed components will not start until February 2007. The performance of the ALQ-218 radome will not be known until flight tests that demonstrate its capability are conducted later this year. The maturity of the full ALQ-218 will not be fully known until the EA-18G aircraft completes flight tests with these components during developmental testing scheduled to start in April 2008. The design of the EA-18G appears stable because almost all of its design drawings are complete. However, the order in which knowledge is built throughout product development is important to delivering products on time and within costs. Our past work has shown that knowledge gaps have a cumulative effect. For example, design stability cannot be attained if key technologies are not mature. Until all the EA-18G critical technologies demonstrate maturity, the potential for design changes remains. While the program held its system-level critical design review in April 2005, flight tests will be needed to verify the loads and environment used for some of these designs and determine the maturity of the critical technologies. The EA-18G production decision scheduled for April 2007 will be based on limited demonstrated functionality. The initial capability demonstrated in support of the production decision will be less than that of the ICAP III on the EA-6B. Four EA-18G aircraft will be built to conduct operational tests during the system development and demonstration test phase. The Navy plans to procure an additional one-third, or 30, of the EA-18G aircraft during low-rate initial production (LRIP), at an estimated cost of $2,297.1 million for the two low-rate initial production lots in fiscal year 2007 and fiscal year 2008. This low-rate initial production quantity is significantly higher than the recommended DOD acquisition target of 10 percent. The program does not plan to demonstrate through flight tests a fully functional production representative prototype until testing in April and May of 2008. In addition, program plans call for procuring 56 EA-18G full- rate production (FRP) aircraft to achieve the procurement objective of 90 aircraft. As a result, full funding for 56 of the 90 EA-18G aircraft and 34 of the 56 airborne electronic attack suites will be committed prior to the completion of operational testing and evaluation. This creates a risk, acknowledged by the program office, that redesign and retrofitting may be needed, since it will not be known how effective and suitable the EA-18G will be or what changes are required until after those tests are completed. The EA-18G requirements are to meet, and in some cases exceed, those of the EA-6B ICAP III, adding an air-to-air intercept capability and the ability to communicate while jamming. However, according to program documents the first operational test, scheduled to be completed in February 2007, 2 months before the low-rate initial production decision, will demonstrate a much more limited capability, primarily the ability to radiate a simple, single-source jamming assignment and the ability to receive, identify, and display limited simple emitters. Test results demonstrating full ICAP III equivalent capabilities will not be available until the operational evaluation scheduled to be completed in January 2009, 3 months before the projected full-rate production decision, when the third and final software release will be available for testing. The test plan is driven by software development, and the EA-18G software will be available for testing in three releases, or builds. Software is on the critical path to program completion and will provide the functionality that is available for testing before each production decision. While the program officials responsible for managing the software appear to be tracking all major cost, schedule, and quality markers, software development is still considered a moderate risk. Problems or delays in the initial software releases could affect the start of the operational evaluation. Even before that, the current software development schedule will not allow the program to demonstrate that the EA-18G system can fully function until after the program office has committed to producing all 30 of the low-rate initial production aircraft. Under the current schedule, operational testing of the final software release needed to demonstrate the desired functionality of EA-18G aircraft will not be completed until January 2009 - 3 months before the projected full-rate production decision. Should the Air Force decisions to terminate its EB-52 jammer and Joint- Unmanned Combat Air System programs stand, the airborne electronic attack framework that arose after the 2002 analysis of alternatives will not materialize as planned. These decisions and the emergence of irregular threats place an added burden on the Navy's EA-6B and EA-18G airborne electronic attack assets and may result in an even larger gap in DOD's capability. A reduction in plans to upgrade Navy EA-6B with ICAP III electronic suites creates a transition shortfall in capability until the EA-18G becomes operational. Potential delays in the EA-18G development and testing effort would only aggravate this shortfall. The EA-18G development schedule is based on a premise--EA-6B inventory will not be sufficient beyond 2009-- that is no longer valid for assessing the Navy's future needs. The inventory of EA-6B aircraft is now projected to be sufficient to meet Navy and Marine Corps needs for another decade or longer. In addition, the compressed and aggressive schedule, a direction given to the program office, does not allow decision makers to benefit from the demonstration of knowledge at critical junctures, a proven mitigator of risk. The availability of EA-6B aircraft allows DOD to consider an alternative to its current strategy. After determining how it will fulfill the warfighter's needs and address capability shortfalls, DOD could outfit additional EA-6B aircraft with upgraded ICAP III electronic suites. This option is made possible by the successful integration of the ICAP III electronic suite with the EA-6B aircraft and structural improvements. However, this would necessitate not closing production of these electronic suites in 2006, as presently planned. To mitigate the effects accruing from the shortfall in upgraded EA-6B aircraft, the risk of delay in the development of the EA-18G, and the proposed cancellation of the EB-52 jammer and the Joint-Unmanned Combat Air System, we recommend that the Secretary of Defense take the following two actions: Determine the number of EA-6Bs equipped with ICAP III electronic suites necessary to deal with the existing and near-term capability gaps. Consider procuring this necessary number of ICAP III upgrades. If DOD implements the option, we recommend that the department continue the EA-6B ICAP III production line after the fiscal year 2006 buy, and restructure its EA-18G low-rate initial production plans so that procurement of the aircraft occurs after the aircraft has demonstrated full functionality. DOD provided us with written comments on a draft of this report. The comments appear in appendix II. DOD partially concurred with our recommendation that the Secretary of Defense determine the necessary number of EA-6Bs equipped with ICAP III electronic suites to deal with the existing and near-term capability gap. DOD agreed that the Navy's airborne electronic attack inventory needs review and has directed a study of department wide airborne electronic attack forces to be issued on September 15, 2006. However, it is unclear from DOD's response if the department's review will specifically identify, as we recommended, the necessary number of ICAP III-equipped EA-6Bs needed to address the existing and near-term capability gap. In light of the end of planned ICAP III production this year, DOD needs to identify this specific number, as it is a necessary prerequisite to our second recommendation. DOD also partially concurred with our recommendation that the Secretary of Defense consider procuring the determined number of ICAP III upgrades and that if DOD takes this option, the department (1) continue ICAP III production and (2) restructure the EA-18G low-rate initial production plans so that the procurement of the aircraft occurs after the aircraft has demonstrated full functionality. Regarding the first part of our recommendation, DOD agreed that it should consider procuring the required ICAP III upgrades, as determined by the ongoing airborne electronic attack review, but stated that it is premature to make a decision until the ICAP III inventory levels are determined. We agree that such determination is a prerequisite and have so stated in our first recommendation. However, that determination needs to be completed before the ICAP III production line ends in fiscal year 2006. With regard to the second part of our recommendation, DOD stated that the current EA- 18G low-rate initial production plan provides the best balance of risk and cost to expeditiously meet warfighters' needs. We remain concerned that producing EA-18G aircraft before testing demonstrates that the design is mature unnecessarily increases the likelihood of design changes that will lead to cost growth, schedule delays, and performance problems. In the past, Congress has raised concerns about the costly outcomes of highly concurrent development and production efforts that are not "flying before buying." Starting production before flight tests demonstrate the full ICAP III equivalent capability works as intended places the $2,297.1 million low- rate initial production investment at significant risk. The procurement of additional ICAP-III-equipped EA-6Bs would allow the time to properly test the EA-18G before making a production decision and reduce the risk of costly retrofitting of the initially produced EA-18Gs. Therefore, we continue to believe that our recommendation should be implemented. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Air Force, and Navy; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will provide copies to others on request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. Should you or any of your staff have any questions on matters discussed in this report, please contact me on (202) 512-4841. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Principal contributors to this report were David Best Assistant Director, Jerry Clark, Robert Ackley, Michael Aiken, Judy Lasley, Chris Miller, and Robert Swierczek. To determine if the key conclusion reached in the Department of Defense's (DOD) May 2002 airborne electronic attack (AEA) analysis of alternatives (AoA)--the projected inventory of EA-6Bs would be insufficient beyond 2009--is still valid, we interviewed officials in the Office of the Secretary of Defense; the Strategic Command (Offutt, Nebraska); the Commander Electronic Attack, Pacific Fleet (Whidbey Island); and officials responsible for Air Force, Navy, and Marine Corps AEA requirements. We interviewed personnel responsible for Improved Capability (ICAP) III electronic warfare testing at the Office of the Director, Operational Test and Evaluation (Washington, D.C.); Commander of Operational Test and Evaluation Navy (Norfolk, Virginia); and VX-9 personnel responsible for ICAP III testing at China Lake, California. In addition to the reviewing 2002 AEA AoA, we reviewed pertinent DOD, service, and contractor documents addressing the status of the EA-6Bs inventory, plans for maintaining the status of EA-6B suppression capabilities, testing conducted for the EA-6B ICAP III program, the AEA system of systems, gaps in the AEA, and potential solutions for AEA. To determine whether the acquisition management approach to the Navy's airborne electronic attack core component, the EA-18G, is knowledge- based and can help forestall future risks, we reviewed pertinent DOD, service, and contractor documents addressing the status of the EA-18G development effort. We discussed airborne electronic attack issues and EA-18G development and production with contractor personnel at Boeing Corporation in St. Louis, Missouri and El Segundo, California. We discussed software matters with officials at China Lake and Point Mugu, California. We met with pilots at Patuxent River Naval Air Station, China Lake, Whidbey Island Naval Air Station, Fallon Naval Air Station, and Boeing Corporation to discuss pilot workload issues given the transition to the two-seat EA-18G from the four-seat EA-6B. As with our past work on the EA-18G development effort conducted under our annual assessment of selected major defense acquisition programs, we focused our work to determining whether the program was following a knowledge-based acquisition approach. We met with Navy EA-18G program officials currently involved with the development effort to document the maturity status of the aircraft's critical technologies, the status of its design effort, and plans for producing the aircraft. We performed our review from May 2005 through March 2006 in accordance with generally accepted government auditing standards. Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-06-391. Washington, D.C.: March 31, 2006. Military Readiness: DOD Needs to Identify and Address Gaps and Potential Risks in Program Strategies and Funding Priorities for Selected Equipment. GAO-06-141. Washington, D.C.: October 25, 2005. Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-05-301. Washington, D.C.: March 31, 2005. Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, But More Controls Are Needed. GAO-04-53. Washington, D.C.: November 10, 2003. Defense Acquisitions: Stronger Management Practices Are Needed to Improve DOD's Software-Intensive Weapon Acquisitions. GAO-04-393. Washington, D.C.: March 1, 2004. Electronic Warfare: Comprehensive Strategy Still Needed for Suppressing Enemy Air Defenses. GAO-03-51. Washington, D.C.: November 25, 2002. Electronic Warfare: Comprehensive Strategy Needed for Suppressing Enemy Air Defenses. GAO-01-28. Washington, D.C.: January 3, 2001. Contingency Operations: Providing Critical Capabilities Poses Challenges. GAO/NSIAD-00-164. Washington, D.C.: July 6, 2000. Combat Air Power: Joint Assessment of Air Superiority Can Be Improved. GAO/NSIAD-97-77. Washington, D.C.: February 26, 1997. Combat Air Power: Funding Priority for Suppression of Enemy Air Defenses May Be Too Low. GAO/NSIAD-96-128. Washington, D.C.: April 10, 1996. Combat Air Power: Joint Mission Assessments Needed Before Making Program and Budget Decisions. GAO/NSIAD-96-177. Washington, D.C.: September 20, 1996.

The EA-6B has conducted airborne electronic attack for all services since 1996. In 2002, the Department of Defense (DOD) completed an analysis of alternatives for the EA-6B that concluded the inventory would be insufficient to meet the DOD's needs beyond 2009. Since then, the services have embarked on separate acquisition efforts to develop airborne electronic attack assets. In 2003, the Navy started development of the EA-18G aircraft to replace the EA-6B. This report was done under the Comptroller General's authority and assesses if (1) DOD's 2002 conclusion that the EA-6B inventory would be insufficient beyond 2009 remains valid for assessing the Navy's future needs, and (2) the acquisition approach used to develop the EA-18G is knowledge-based and might mitigate future risks. EA-6B aircraft will be able to meet the Navy's suppression of enemy air defense needs through at least 2017 and the needs of the Marine Corps through 2025--as long as sufficient numbers of the aircraft are outfitted with upgraded electronics suites. The conclusion that the EA-6B inventory would be insufficient past 2009 was not based on the Navy's requirement for 90 aircraft, but on an inventory requirement of 108 aircraft that would meet the needs of all services. The decision to move to a system of systems using multiple aircraft types means the Navy will no longer be required to support all of DOD's electronic attack requirements. However, insufficient quantities of upgraded jamming systems means that the majority of the EA-6B fleet is equipped with the older jamming system that is limited in its ability to conduct numerous critical functions. If the Navy is required to support all services, given the recent Air Force proposal to terminate its EB-52 standoff jammer program, additional EA-6Bs may require the Improved Capability (ICAP) III upgrade. The risk of cost growth and schedule delays in the EA-18G program is increasing because the program is not following a knowledge-based approach to acquisition. None of its five critical technologies were fully mature as the system development phase began, and that is still the case today. Of particular concern is the ALQ-218 receiver, placed in the harsh wingtip environment on the EA-18G and not the more benign setting of the EA-6B's tail, for which it was developed. While the EA-18G's design appears stable, and almost all its design drawings are complete, that may change once the aircraft is flight-tested. Production of the EA-18G is also risky: One-third of the total buy will be procured as low-rate initial production aircraft based on limited demonstrated functionality.

For more than a decade, rapid increases in the use of computer technology, both at work and in the home, have changed the way Americans work and communicate. As of September 2001, 174 million people--66 percent of the U.S. population--were using computers in their homes, schools, libraries, and work. In the workplace, 65 million of the 115 million employed adults age 25 and over, almost 57 percent, used a computer at work. However, in recent years, while the increase in the percentage of employees using computers has been modest (52 percent in 1998 to 57 percent in 2001), the percentage using the Internet and/or e-mail at work grew from about 18 percent in 1998 to almost 42 percent in 2001. As the use of these electronic technologies has increased in the workplace, so have employers' concerns about their employees' use of company-owned computing systems--e-mail, the Internet, and computer files--for activities other than company business. Likewise, privacy advocates have raised concerns about the potential for employers to infringe upon employees' right to privacy. In response to these concerns, many employers have developed policies to notify their employees that they monitor use of these systems and to provide guidance to employees about the appropriate uses of the computing technologies. Information on the number of private sector companies that monitor their employees, their monitoring practices, and their effects on employee productivity and morale is very limited. While some of these studies suffer from methodological limitations such as low response rates, taken together they seem to indicate a general trend towards employers' increased monitoring of their employees. In addition, software developers have made it easier and inexpensive for businesses to monitor their employees by creating software that can, for example, scan e-mail messages for certain words or phrases and/or block inappropriate Internet sites. The Electronic Communications Privacy Act (ECPA) of 1986, which is intended to provide individuals with some privacy protection in their electronic communications, has several exceptions that limit its ability to provide protection in the workplace. For example, the act does not prevent access to electronic communications by system providers, which could include employers who provide the necessary electronic equipment or network to their employees. (See, e.g., U.S. v. McLaren, 957 F. Supp. 215 (M.D. Fla. 1997)). Because the ECPA provides only limited protection to private sector employees, some privacy advocates have called for a new law that would specifically address workplace computer privacy and limit the powers and means of employer monitoring. The most recent federal statute affecting privacy in the workplace is the USA PATRIOT Act, which was enacted in the wake of the September 11, 2001, terrorist attacks. This act expands the federal government's authority to monitor electronic communications and Internet activities, including e-mail. However, no federal executive agency has general oversight responsibilities for private sector employee-monitoring programs. Many states have statutes that are similar to the ECPA, with greater protection in some cases. Additional protection may be provided through state common law, which is based on judicial precedent rather than legislative enactments. Such decisions, however, have generally given employers substantial leeway in monitoring computer use of their employees. While state common law may recognize the right of an individual to take legal action for an offense known generally as "invasion of privacy," such actions historically have not provided employees with additional protections. Courts have found that employers' monitoring of their employees' electronic transmissions involving e-mail, the Internet, and computer file usage on company-owned equipment is not an invasion of privacy. Invasion of privacy claims against an employer generally require employees to demonstrate, among other things, that they had a "reasonable expectation of privacy" in their communications. Courts have consistently held, however, that privacy rights in such communications do not extend to employees using company-owned computer systems, even in situations where employees have password-protected accounts. All 14 companies we contacted routinely collected and stored employee e-mail messages, information on Internet sites visited, and computer file activity. Eight of these companies reported that they only read or reviewed information on employees' electronic transmissions once the company determined that a further investigation of employee conduct was warranted. However, 6 of 14 companies told us that they routinely performed additional analyses on the stored information to determine if employees were misusing company computer resources. For example, these companies routinely searched the e-mail message titles, addresses, or contents for proprietary information or offensive language. In general, we found that the companies we studied initiated few investigations of employee computer conduct. Most of the companies that have reviewed information on employees' electronic transmissions and determined that misuse occurred, reported that penalties ranged from counseling and warnings to termination. All 14 companies collected and retained electronic transmission data as part of their normal business operations, primarily as backup files and to manage their computer resources. Backup files can be quickly restored if a computer system failure occurs, and the company's operations can continue with as little interruption as possible. However, according to company officials, the information on these backup files was also available as a source of data for reviews of individual employee e-mail messages, Internet use, or computer files. Company officials also said that stored data were used to manage their computer resources. For example, officials at one company told us that they collect e-mail and Internet data to track the systems' capacity. Another company's representatives said they use the collected information for troubleshooting and to correct network problems. The 14 companies collected different information for e-mail, Internet use, and computer files. For e-mail messages, officials from the 14 companies reported they generally collect and store all business and personal incoming and outgoing e-mail messages including attachments, addresses, and the date and time the e-mail was sent or received. For the Internet sites visited, generally the information collected included the web address and the date and time the website was used. For computer file activity, all the contents of the files on their network computer systems were backed-up daily. Officials from the 14 companies reported they retained these data for short periods of time. Nine of these companies said that they generally retained these files for 90 days or less, and one company kept its e-mail data for as little as 3 days. Eight of the companies reported that they would only review the employee electronic transmission data they collected if there was an indication of employee misuse of computer resources and the company initiated an investigation. Generally, investigations were initiated by either a complaint submitted to management by a company employee or a "request for information" by management concerning an employee's conduct. These initiating requests were usually reviewed by a number of company officials, including representatives from Human Resources, General Counsel, or Computer Security prior to the actual retrieval of employee information. Company officials told us that unless they received a request for data, they would not review any of their employees' electronic transmissions. They added that access to any data collected for an investigation is restricted to a limited number of company officials. Company officials cited several reasons for establishing this reactive approach for reviewing employee electronic transmissions. One company believed it was important to establish an atmosphere of trust and presumed employees would use the system primarily for business purposes. Another company's officials said that they did not have enough resources to actively monitor their employees' electronic transmissions. Six of the 14 companies we contacted, in addition to collecting and storing information on employee computer use, performed routine analyses on all employee e-mail or Internet data resulting in the review of selected electronic transmissions. These companies reviewed the electronic transmission information for several reasons. Company officials reported that they needed to protect proprietary information and prevent Internet visits to inappropriate sites. For example, 3 companies reviewed e-mail messages using commercial software that searched for keywords. These companies selected the words to be searched, and a computer file of e-mail messages that matched pre-selected key words would be generated. Company officials routinely reviewed this file to determine if e-mails contained inappropriate material. Other companies reported different strategies to identify employee misuse of computer resources. One company's computer security office generated a weekly report of the 20 employees who logged on the Internet the most times and listed the sites visited. Officials reviewed this list to determine if inappropriate sites have been visited. A second company reviewed the Internet use of a random sample of 10 to 20 employees each month. This review was intended to identify employees who had visited offensive or inappropriate sites. Employees identified through this process were generally counseled against further misuse. Finally, one company, in 2001, monitored the inappropriate websites employees visited, such as hate, violence, and pornographic, and in 2002, it purchased new software to block these offensive sites. Generally, the companies we reviewed--regardless of whether they routinely reviewed employee computer use or examined individual employee records only to pursue particular complaints--reported that the total number of investigations was very small as a proportion of the number of employees with access to e-mail, the Internet, or computer files. The number of annual investigations ranged from 5 to 137 and represented less than 1 percent of the total domestic employees at these companies. For example, one company with more than 50,000 domestic employees reported 72 e-mail investigations and 48 Internet investigations in calendar year 2001. We found companies most often investigated the alleged misuse of employee e-mail followed by investigations of Internet use. Not surprisingly, the company that routinely reviewed employee Internet use initiated the most investigations on employee Internet conduct-- 90 investigations. Investigations of the content of employees' computer files were the smallest in number, and only one company told us that they had initiated investigations related to them. Only 2 of the 14 companies we interviewed were able to provide data on the types of disciplinary actions taken against employee misuse of computer resources. One company reported that of its 20,000 employees, it terminated 2 employees for inappropriate e-mail use, 2 for Internet misuse, and 1 for computer file violation in 2001. The other company reported that over a 5-year period it had terminated 14 employees for misuse of the Internet. Most of the 14 companies reported various types of actions that could be taken against employees for inappropriate use of computer resources. Four companies told us these actions ranged from informal discussions or formal counseling between the employee and company managers to terminations. Only the most flagrant and repeated violations would result in employee termination. The 14 companies we reviewed all have written policies that included most of the elements recommended in the literature and by experts as critical to a company computer-use policy. There is a general consensus that policies should at least affirm the employer's right to review employee use of company computer assets, explain how these computer assets should and should not be used, and forewarn employees of penalties for misuse. We also found that all companies disseminated information about these policies through their company handbooks, and 8 discussed their computer-use policies with new employees at the time of hire. In addition, some companies provided annual training to employees on company policies, and others sent employees periodic reminders on appropriate computer conduct. The 14 companies we reviewed had written policies that explained employee responsibilities and company rights regarding the use of company-owned systems. Our discussions with company officials and review of written policies showed that all 14 contain most, if not all, of the policy elements recommended by experts. From our review of the literature and discussions with legal experts, privacy advocates, and business consultants, we identified common elements that should be included in company computer-use policies (see table 1). These experts generally believed that the most important part of a company's computer- use policy is to inform employees that the tools and information created and accessed from a company's computer system are the property of the company and that employees should have no "expectation of privacy" on their employers' systems. Courts have consistently upheld companies' monitoring practices where the company has a stated policy that employees have no expectation of privacy on company computer systems. The experts also agreed computer-use policies should achieve other company goals, such as stopping release of sensitive information, prohibiting copyright infringement, and making due effort to ensure that employees do not use company computers to create a hostile work environment for others. Finally, according to experts, employees should clearly understand the consequences for violating company computer policies. For example, one company's computer-use policy states that "violators are subject to disciplinary action up to termination of employment and legal action." While the experts we interviewed recommended that employers include the above elements so that employees can be informed and acknowledge that they have no expectation of privacy on company-owned systems, some experts recommended additional steps that would help to protect employee privacy. For example, one expert recommended that employee groups participate in the formulation and review of monitoring policies; and another expert recommended that employees have access to any information collected on their electronic transmissions. Furthermore, other experts recommended an alternate policy framework that would preclude employers' review of employee electronic transmissions except when they have a reasonable independent indication of inappropriate use. From our review of company computer-use policies, including interviews with private sector officials and reviews of written policies, we determined that all 14 companies generally addressed most of the seven key elements of a computer-use policy (see table 2). While we determined that these 14 companies' computer-use policies generally addressed the key elements, we found that there was variation in the specificity in policy statements. For example, one company's policy statement regarding "Monitoring Use of Proprietary Assets" stated, " reserves the right to access and monitor the contents of any system resource utilized at its facilities." Another company's policy stated, "the information and communications processed through your account are subject to review, monitoring, and recording at any time without notice or permission." An official from another company, which only collected and stored employee computer use information and did not routinely review electronic transmissions, told us his company informed employees of its capacity to monitor its property with the more general statement that "data is collected and the company reserves the right to review this data." Only one company reported that its policy did not include language specifically informing employees that their computer use was subject to review by other people in the company. Representatives from this company told us that their policy does, however, include a statement that employee messages could be accessed and that the company could not ensure their confidentiality. Under "Establishing No Expectation of Privacy" some companies directly inform employees that they should under no circumstances expect privacy. For example, one policy stated, "All users should understand that there is no right or reasonable expectation of privacy in any e-mail messages on the company's system." Somewhat less explicit, another policy stated, "Our personal privacy is not protected on these systems, and we shouldn't expect it to be." Some companies generally implied the principle of "no expectation of privacy" with statements like, " reserves the right to audit, access, and inspect electronic communications and data stored or transmitted on its Computer Resources." Finally, the employers we reviewed also addressed improper uses of computer resources. All company representatives had policies that notified employees about improper uses; and the eight written policies we reviewed contained specific prohibitions on the use of company resources to create or transmit offensive material. Moreover, seven of these policies included some form of the word "harass" under their discussion of prohibited or inappropriate uses of corporate systems, and some also included a form of the word "discriminate." No two policies addressed this issue in exactly the same terms, but representative statements prohibited behaviors such as "viewing or communicating materials of an obscene, hateful, discriminatory or harassing nature"; "any messages or data that...defames, abuses, harasses or violates the legal rights of others"; and "Accessing, downloading, or posting material that is inappropriate, fraudulent, harassing, embarrassing, profane, obscene, intimidating, defamatory, unethical, abusive, indecent or otherwise unlawful." Experts recommend that policies include such specific prohibitions in order to limit a company's liability for workplace lawsuits, and they stress the importance of ensuring that employees understand the company's definitions of inappropriate use. Both the literature we reviewed and experts we interviewed agreed that establishing company policies on employee computer use is incomplete without strategies to disseminate the information. Experts pointed out that informing employees about these policies not only established the limits of employee expectations about privacy but also allowed them the opportunity to conform their behavior to the circumstances of having limited privacy. Among the 14 companies we contacted, we found multiple and active ways to inform and remind employees about the policies concerning the use of computer systems. Officials at 8 of the companies we reviewed said that at the time of hire, new employees receive training on company policies for using the computer systems. Officials from 5 companies told us they required all employees to participate in an annual review of their computer-use policies, either through an Intranet-based training or over e-mail. Other training techniques company officials described to us included business conduct reviews every 2 years, weekly e-mail reminders of their policies, and a series of videotapes that explain policies to employees. In addition to training programs, 10 companies have daily messages referring to the corporate policies that employees must acknowledge before they are allowed to log in to the systems. None of the companies' representatives we interviewed said that they had changed any of their computer-use polices or practices as a result of the terrorist attacks on September 11, 2001. Officials from four companies reported that after September 11th, they had been asked by law enforcement agencies to provide information about their employees' and customers' use of their e-mail systems and other sources and that they had complied with these requests. But none of the employers we interviewed had increased the amount or type of information they gathered on employees' use of e-mail, the Internet, or computer files. However, representatives from 10 companies did report increased concern for the security of their computer systems from outside trespassers or viruses entering their systems through e-mail or from imported computer files. Seven company representatives mentioned the Code Red Worm--which appeared around July 2001--and the Nimda virus--entering computer networks on September 18, 2001--as particular examples of the most serious kind of threat they faced and said these events had motivated them to strengthen the virus protection of their systems. Ten of the companies we reviewed told us that they have procedures to screen incoming e-mail messages for viruses, for example, by deleting file attachments with an "exe" extension from all incoming e-mail messages. In early 2002, one company began and another was preparing to use software that searches title lines of incoming e-mail and deletes messages with sex-themed language, simply because the volume of unsolicited e-mail had begun to overwhelm their systems. Such actions reflect the widespread belief among the company officials we interviewed that the worst nuisance and most likely threat to company computer systems comes from outside trespassers with a capacity to paralyze a company's Internet infrastructure or disrupt business, rather than the company's own employees. We are sending copies of this report to the Secretary of Labor 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 on (202) 512-7215 if you or your staff have any questions about this report. Key contributors to this report are listed in appendix I. In addition to the individuals named above, Nancy R. Purvine, Eric A. Wenner, Shana Wallace, and Julian P. Klazkin made key contributions to this report.

Over the past decade, there has been a technological revolution in the workplace as businesses have increasingly turned to computer technology the primary tool to communicate, conduct research, and store information. Also during this time, concern has grown among private sector employers that their computer resources may be abused by employees--either by accessing offensive material or jeopardizing the security of proprietary information--and may provide an easy entry point into a company's electronic systems by computer trespassers. As a result, companies have developed "computer conduct" policies and implement strategies to monitor their employees' use of e-mail, the Internet, and computer files. Federal and state laws and judicial decisions have generally given private sector companies wide discretion in their monitoring and review of employee computer transmissions. However, some legal experts believe that these laws should be more protective of employee privacy by limiting what aspects of employee computer use employers may monitor and how they may do so. Following the September 11, 2001, terrorist attacks on the United States, policymakers re-examined many privacy issues as they debated the USA PATRIOT Act, which expands the federal government's authority to monitor electronic communications and Internet activities. GAO reviewed 14 private sector companies' monitoring policies and found that all companies reviewed store their employees' electronic transactions: e-mail messages, information on Internet sites visited, and computer file activity. They collect this information to create duplicate or back-up files in case of system disruption; to manage computer resources such as system capacity to handle routine e-mail and Internet traffic; and to hold employees accountable for company policies. Representatives from all of the companies had policies that contained most of the elements experts agreed should be included in company computer-use polices. None of the companies GAO studied had changed any of their employee computer-use policies or monitoring practices after the September 11 attacks. Most companies did, however, report a growing concern about electronic intrusion into their computer systems from outside trespassers or viruses and had increased their vigilance by strengthening their surveillance of incoming electronic transmissions.

In 1990, we designated DOE program and contract management as an area at high risk of fraud, waste, abuse, and mismanagement. In January 2009, to recognize progress made at DOE's Office of Science, we narrowed the focus of the high-risk designation to two DOE program elements--NNSA and the Office of Environmental Management. In February 2013, our most recent high-risk update, we further narrowed this focus to major projects (i.e., projects over $750 million) at NNSA and the Office of Environmental Management. DOE has taken some steps to address our concerns, including developing an order in 2010 (Order 413.3B) that defines DOE's project management principles and process for executing a capital asset construction project, which can include building or demolishing facilities or constructing remediation systems. NNSA is required by DOE to manage the UPF construction project in accordance with this order. The project management process defined in Order 413.3B requires DOE projects to go through five management reviews and approvals, called "critical decisions" (CD), as they move forward from project planning and design to construction to operation. The CDs are as follows: CD 0: Approve a mission-related need. CD 1: Approve an approach to meet a mission need and a preliminary cost estimate. CD 2: Approve the project's cost, schedule and scope targets. CD 3: Approve the start of construction. CD 4: Approve the start of operations. In August 2007, the Deputy Secretary of Energy originally approved CD 1 for the UPF with a cost range of $1.4 to $3.5 billion. In June 2012, prior to the UPF contractor's August 2012 determination that the facility would need to be enlarged due to the space/fit issue, the Deputy Secretary of Energy reaffirmed CD 1 for the UPF with an estimated cost range of $4.2 to $6.5 billion and approved a phased approach to the project, which deferred significant portions of the project's original scope. According to NNSA documents, this deferral was due, in part, to the multibillion dollar increase in the project's cost estimate and to accelerate the completion of the highest priority scope. In July 2013, NNSA decided to combine CD 2 and CD 3 for the first phase of UPF, with approval planned by October 2015.of June 2012, and proposed start of operations. Table 1 shows the UPF's phases, scope of work, cost estimate as Infrastructure Strategy for the Y-12 plant. In early February 2014, the NNSA Deputy Administrator for Defense Programs directed his staff to develop an Enriched Uranium Infrastructure Strategy to establish the framework of how NNSA will maintain the Y-12 plant's uranium mission capabilities into the future. Key aspects considered during the strategy's development included, among other things: (1) an evaluation of the uranium purification capabilities currently conducted in building 9212 and the throughput needed to support requirements for life extension programs and nuclear fuel for the U.S. Navy; (2) an evaluation of the alternatives to the UPF that prioritizes replacement capabilities by risk to nuclear safety, security, and mission continuity; (3) an identification of existing infrastructure as a bridging strategy until replacement capability is available in new infrastructure. A draft of the strategy was delivered to the Deputy Administrator in April 2014. NNSA is currently revising the draft, and an NNSA official said that the agency has not yet determined when it will deliver a revised version to the Deputy Administrator. NNSA is currently evaluating alternatives to replacing enriched uranium operations at the Y-12 plant with a single facility. In early January 2014, NNSA began to consider options other than the UPF for enriched uranium operations at the Y-12 plant because, according to the UPF Federal Project Director, the project is facing budget constraints, rising costs, and competition from other high-priority projects within NNSA--such as the planned B61 bomb and W78/88 warhead nuclear weapon life extension projects. On April 15, 2014, NNSA completed a peer review that identified an alternative to replacing enriched uranium operations with a single facility. The results of the review, which were released to the public on May 1, 2014, included a proposed solution for replacing or relocating only Building 9212 capabilities (uranium purification and casting) by 2025 at a cost not exceeding $6.5 billion. This proposed solution would require NNSA to (1) construct two new, smaller facilities to house casting and other processing capabilities, (2) upgrade existing facilities at the Y-12 plant to house other uranium processing capabilities currently housed in Building 9212, and (3) appoint a senior career executive within NNSA's Office of Defense Programs with the responsibility and authority to coordinate the agency's overall enriched uranium strategy. As of July 2014, NNSA was still evaluating the review's recommendations, but the NNSA Acting Administrator previously stated that NNSA does not plan to continue full operations in Building 9212, which has been operational for over 60 years, past 2025 because the building does not meet modern safety standards, and increasing equipment failure rates present challenges to meeting required production targets. In addition, according to NNSA officials, while NNSA was conducting its review, the UPF project team suspended some design, site preparation, and procurement activities that could potentially be impacted by the range of alternatives being considered. In January 2013, NNSA completed a review to identify the factors that contributed to the space/fit issue. This review took into account the actions completed by the contractor or in progress since the space/fit issue was identified, input from the contractor, and NNSA's own experience with and knowledge of the project. NNSA identified a number of factors that contributed to the space/fit issue within both the contractor and NNSA organizations. Specifically: NNSA oversight. NNSA identified limitations in its oversight of the project. Specifically, NNSA determined that it did not have adequate staff to perform effective technical oversight of the project, and requests and directives from NNSA to the UPF contractor were not always implemented because NNSA did not always follow up. According to NNSA officials, when the space/fit issue was identified in 2012, the UPF project office was staffed by nine full-time equivalents (FTE). The Defense Nuclear Facilities Safety Board also raised concerns on several occasions prior to the space/fit issue about whether this level of staffing was adequate to perform effective oversight of the contractor's activities. Design integration. NNSA found that the design inputs from subcontractors for the contractor's 3D computer model, used to allocate and track space usage within the facility, were not well integrated. In 2008, the UPF contractor subcontracted portions of the design work, such as glovebox and process area design, to four subcontractors, and to track how these design elements fit together, the UPF contractor developed a model management system that generates a 3D computer model of the facility as the design progresses. This 3D model was intended to, among other things, allow the contractor to determine whether there is adequate space in the building's design for all processing equipment and utilities, or whether changes to the design are necessary to provide additional space. However, according to NNSA officials, prior to the space/fit issue, the design work of the four subcontractors was not well integrated into the model, and as a result, the model did not accurately reflect the most current design. Communications. NNSA identified communications shortcomings throughout the project. For example, the contractor did not always provide timely notification to the NNSA project office of emerging concerns and did not engage NNSA in development of plans to address these concerns. NNSA found that there was reluctance on the part of the contractor to share information with NNSA without first fully vetting the information and obtaining senior management approval. In addition, NNSA found that a "chilled" work environment had developed within the UPF contractor organization, and that, as a result, communications from the working level and mid-level managers up to senior management were limited because of concerns of negative consequences. Furthermore, communications between the NNSA project office, the UPF contractor, and NNSA headquarters were limited by a complex chain of command. According to NNSA officials, prior to 2013, the UPF project was managed by NNSA's Y-12 Site Office, and the UPF Federal Project Director reported to NNSA at a relatively low level. NNSA officials said that, as a result, any concerns with the UPF project had to compete for attention with many other issues facing the Y-12 site as a whole. Management processes and procedures. NNSA found that the contractor's management processes and procedures did not formally identify, evaluate, or act on technical concerns in a timely manner. In addition, NNSA found that the UPF contractor's project management procedures had shortcomings in areas such as risk management, design integration, and control of the technical baseline documents. Specifically, some of the contractor's procedures were not project- specific and could not be used for work on the UPF project without authorizing deviations or providing additional instructions. According to NNSA, these shortcomings led in part to inadequate control of the design development process, as the contractor did not document interim decisions to deviate from the design baseline, adequately describe the design, or maintain it under configuration control. In response to NNSA's review of the factors that contributed to the space/fit issue, NNSA and the UPF contractor have both taken some actions to address the factors identified by the review. In addition, NNSA has begun to share lessons learned from the UPF project consistent with both DOE's project management order, which states that lessons learned should be captured throughout the course of capital asset construction projects, as well as our prior recommendation to ensure that future projects benefit from lessons learned. The specific actions NNSA and the contractor have taken include the following: NNSA oversight. NNSA has taken actions to improve its oversight of the UPF project to ensure that it is aware of emerging technical issues and the steps the contractor is taking to address them by, among other things, increasing staffing levels for the UPF project office from 9 FTEs in 2012 to more than 50 FTEs as of January 2014. According to NNSA officials, many of the additional staff members are technical experts in areas such as engineering and nuclear safety, and these additional staff have enabled NNSA to conduct more robust oversight of the contractor's design efforts than was previously possible. For example, in July 2013, NNSA used some of these additional staff to conduct an in-depth assessment of the UPF contractor's design solution for the space/fit issue. This assessment found that, among other things, as of July 2013, the facility design and 3D model were not sufficiently complete to determine whether there was adequate space remaining in parts of the facility to accommodate all required equipment while still providing adequate margin for future design changes during construction and commissioning. The assessment also found that the contractor's monthly space/fit assessment reports, developed to evaluate and report on space utilization in the facility, were providing an overly optimistic view of space/fit, leading to a low level of senior management engagement in resolving these issues. According to NNSA officials, as of January 2014, the UPF contractor had taken actions to address many of the assessment's findings, and the agency plans to continue to monitor the contractor's performance closely in these areas through its normal oversight activities, such as attending periodic meetings to review the 3D model. Design integration. According to NNSA and UPF contractor officials, the UPF contractor took steps to better integrate the efforts of the subcontractors conducting design and engineering work on different elements of the facility. For example, in late 2012, the UPF contractor hired a model integration engineer to integrate the subcontractors' design work and ensure that all design changes are incorporated into the model so that it accurately reflects the most current design. The model integration engineer also manages a team of subject matter experts who monitor space utilization in each individual process area as the design progresses and conduct monthly assessments of the space margins remaining in each area. In addition, the UPF contractor also developed a formal change control process to define and manage space within the 3D model. Under this process, design changes made by the individual design teams must be submitted to the model integration engineer for approval to ensure that they do not exceed the boundaries established for each process area or interfere with other equipment. Furthermore, changes that have a significant impact on equipment layout must be approved by a review board prior to being accepted and integrated into the model. According to contractor officials, as of January 2014, the subcontractor teams had submitted 111 change requests, and 75 requests had been approved. The officials said that they are working to reduce the remaining backlog. According to NNSA, the contractor also developed a monthly space/fit assessment process to evaluate and report on space utilization in the facility. As part of this process, the model integration team evaluates the space remaining in each process area of the facility to determine whether each area has (1) no space/fit challenges, (2) no current space/fit challenges but the potential for challenges in the future as a result of the design being less complete than other areas, or (3) confirmed space/fit challenges, i.e., areas where design changes are necessary to ensure that all equipment will fit into the space allotted to it. The model integration team then prepares a report and briefs senior project management on its findings. According to a UPF contractor document, as of December 2013, 26 process areas had no space/fit challenges, 13 process areas had no challenges but had the potential for challenges in the future, and 2 process areas had confirmed space/fit challenges. NNSA and UPF contractor officials said that, as of January 2014, they were confident that these remaining space/fit challenges can be addressed within the current size parameters of the facility, but that the project will not have absolute certainty about space/fit until the design is fully complete. Instead, the project will only be able to gradually reduce the amount of space/fit uncertainty and risk as the detailed design progresses. However, the officials said that, prior to CD 2/3 approval, the contractor is required to conduct a detailed review of the 3D model to ensure there is adequate space for all equipment and utilities, and NNSA plans to assess the results of this review. Communications. According to an NNSA official, communications between NNSA and the contractor significantly improved after the space/fit issue was identified, and the contractor kept NNSA better informed of emerging concerns and its plans to address these concerns. In addition, NNSA held a partnering session with the contractor in June 2014, which included management representatives from NNSA and the contractor in functional areas such as engineering, nuclear safety, and procurement, and included discussions on defining federal and contractor roles, managing change, and mapping the path forward for the project. On July 15, 2014, NNSA and the contractor signed a formal partnering agreement to enhance (1) clarity and alignment on mission and direction, (2) transparency, (3) responsiveness, and (4) effectiveness in meeting commitments, among other things. The agreement also included a commitment to meet quarterly to discuss progress made toward achieving these goals. NNSA and UPF contractor officials also said that the contractor took steps to enhance communications between working-level employees and senior management and improve its organizational culture after the space/fit issue was identified. For example, the contractor established a Differing Professional Opinion (DPO) process through which employees can raise concerns to project management, began conducting annual surveys of the project's safety culture to determine the extent to which employees are willing to raise concerns, and formally defined its safety culture policy to conform to guidelines established by the Nuclear Regulatory Commission. According to NNSA and UPF contractor officials, the contractor's annual surveys showed a steady improvement in employees' willingness to bring concerns and issues to management since the space/fit issue was identified. In addition, the contractor also brought in additional senior project and engineering managers from outside the UPF project in order to foster greater communication between senior managers and working-level employees. In addition, NNSA recently reorganized its management of major construction projects, including the UPF, resulting in more direct communications between the UPF project office and NNSA headquarters. Specifically, in 2012, the UPF FPD began reporting directly to APM, rather than reporting to NNSA at a relatively low level through the Y-12 Site Office, and NNSA officials said that this new organizational structure has streamlined NNSA's management of the project by increasing the FPD's control over project resources and functions, as well as the FPD's responsibility and accountability for achieving project goals. Management processes and procedures. According to the UPF contractor, it developed formal processes for identifying and tracking the status of major technical and engineering issues. For example, according to NNSA and contractor officials, the contractor implemented a process for tracking the project's highest-priority action items, as determined by the project's management team, including certain issues related to space/fit. Specifically, as of January 2014, these items included actions to ensure that technical changes are fully reviewed so that their impact on the project's design, procurement activities, and construction is understood. In addition, according to UPF contractor officials, the contractor implemented a separate system to track the identification and resolution of significant technical issues during the design process, and any employee can submit a technical issue for inclusion in this system if they believe that it is serious enough to require management attention. After an issue is added to the system, the corrective actions implemented to address it are tracked until they are completed, and technical issues affecting space/fit are placed into a separate, higher-priority category within the system. As of January 2014, there were nine technical issues affecting space/fit in this higher-priority category, and three of those issues had been resolved. For example, in August 2013, the project identified a technical issue in which one processing area did not contain enough space to accommodate the replacement of a component, but the project developed a solution that resolved the issue in October 2013. In addition, according to NNSA and the UPF contractor, the contractor uses a separate system to track the status of non-technical issues that are identified by project reviews. The contractor uses this system to formally assign responsibility for any corrective actions to the appropriate contractor personnel and to monitor the status of each action until completion. In order for a corrective action to be closed out in this system, the personnel responsible for the corrective action must provide evidence of completion. For example, in April 2013, the contractor identified nine corrective actions needed to address a number of the contributing factors for the space/fit issue, and began using this system to track their status. As of January 2014, six of these actions had been completed, two were in process, and one had been cancelled. For example, the contractor was still in the process of reviewing and evaluating the procedure set used for the project to identify any improvements necessary, and the cancelled corrective action--the development of a communication partnering policy between NNSA and the contractor--was replaced by the June 2014 partnering session discussed above. NNSA has also recently begun to share lessons learned from the space/fit issue. This was an original goal of NNSA's review of the factors that contributed to the space/fit issue, and is consistent with both DOE's project management order, which states that lessons learned should be captured throughout the course of capital asset construction projects, as well as our prior recommendation to ensure that future projects benefit from lessons learned. NNSA officials said that lessons learned from the space/fit issue had been informally incorporated into other NNSA activities in a variety of ways, to include informing independent project reviews and cost estimates, and led to a broader recognition of the need for increased federal staffing levels to enhance NNSA's oversight activities on other projects. More recently, the UPF Federal Project Director conducted a presentation on lessons learned from the UPF project, including lessons learned from the space/fit issue, at a July 2014 training session for federal project directors. As we have noted in other work, the sharing of lessons learned is an important element of NNSA's and DOE's efforts to better inform and improve their management of other capital acquisition projects. As we reported in December 2013, NNSA estimated that it will need approximately $300 million per year between 2019 and 2038 in order to fund the construction projects it plans to undertake during that time. Documenting the lessons learned as a result of the UPF space/fit issue may help prevent other costly setbacks from occurring on these other projects. We are not making any new recommendations in this report. We provided a draft of this report to NNSA for comment. In its written comments (see appendix I), NNSA generally agreed with our findings. NNSA also provided technical comments that were incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. David C. Trimble, (202) 512-3841 or [email protected]. In addition to the individual named above, Jonathan Gill (Assistant Director), Mike Armes, John Bauckman, Patrick Bernard, Antoinette Capaccio, Will Horton, and Steven Putansu made key contributions to this report.

NNSA conducts enriched uranium activities--including producing components for nuclear warheads--at the Y-12 National Security Complex in Tennessee. NNSA has identified key shortcomings in the Y-12 plant's current uranium operations, including rising costs due to the facility's age. In 2004, NNSA decided to build a new facility--the UPF--to consolidate and modernize its enriched uranium activities. In July 2012, the UPF contractor concluded that the UPF's processing equipment would not fit into the facility as designed, and that addressing this issue--which NNSA refers to as a "space/fit" issue--would cost an additional $540 million. The Fiscal Year 2013 National Defense Authorization Act mandated that GAO periodically assess the UPF. This is the fourth report, and it assesses (1) factors NNSA identified that contributed to the UPF space/fit issue and (2) actions, if any, NNSA and the UPF contractor have taken to address the space/fit issue. GAO reviewed NNSA and contractor documents, visited the Y-12 plant, interviewed NNSA and UPF contractor representatives, and observed the computer model NNSA and the UPF contractor use to track space usage within the facility. GAO is not making any new recommendations. In commenting on a draft of this report, NNSA generally agreed with GAO's findings. In January 2013, the National Nuclear Security Administration (NNSA) completed a review to identify the factors that contributed to the space/fit issue with the Uranium Processing Facility (UPF), and identified a number of factors within both NNSA and the contractor managing the UPF design at that time. NNSA's review identified shortcomings in 1) federal oversight of the project, 2) design integration, 3) communications, and 4) the UPF contractor's management processes and procedures. For example, NNSA determined that it did not have adequate federal staff to perform effective oversight of the project, and that the design inputs for the computer model the contractor used to allocate and track space utilization within the facility were not well integrated. NNSA also found that communications shortcomings occurred because the contractor did not always provide timely notification to the NNSA project office of emerging concerns, and that the contractor's management processes and procedures did not formally identify, evaluate, or act on technical concerns in a timely manner. NNSA and the UPF contractor took actions to address the factors that contributed to the space/fit issue, and NNSA has begun to share lessons learned from the space/fit issue, consistent with both Department of Energy (DOE) guidance and GAO's prior recommendation to ensure that future projects benefit from lessons learned. Specifically, NNSA has taken actions to improve its oversight of the project by increasing federal staffing levels for the UPF project office from 9 full-time equivalents (FTE) in 2012 to more than 50 FTEs as of January 2014. According to NNSA officials, these additional staff enabled NNSA to conduct more robust oversight of the contractor's design efforts than was previously possible. The contractor also took steps to better integrate the efforts of the four subcontractors that are conducting design and engineering work on different elements of the facility. For example, in late 2012 the contractor hired an engineer to integrate the subcontractors' design work and ensure that all design changes were incorporated into the contractor's computer model. The contractor also improved design integration by developing a monthly assessment process to evaluate and report on space utilization in the facility. In addition, according to an NNSA official, communications between NNSA and the contractor significantly improved after the space/fit issue was identified as the contractor kept NNSA better informed of emerging concerns and its plans to address them. The contractor also developed formal management processes for identifying and tracking the status of major technical and engineering issues. For example, the contractor implemented processes for tracking the identification and resolution of both technical and non-technical issues during the design process. In addition, NNSA has recently begun to share lessons learned from the space/fit issue, consistent with DOE guidance and our prior recommendation to ensure that future projects benefit from lessons learned. For example, in July 2014, the UPF federal project director conducted a presentation on lessons learned from the UPF project, including lessons learned from the space/fit issue, at a training session for NNSA federal project directors.

Defense, like the rest of the government and the private sector, is relying on technology to make itself more efficient. The Department is depending more and more on high-performance computers linked together in a vast collection of networks, many of which are themselves connected to the worldwide Internet. Hackers have been exploiting security weaknesses of systems connected to the Internet for years, they have more tools and techniques than ever before, and the number of attacks is growing every day. These attacks, coupled with the rapid growth and reliance on interconnected computers, have turned cyberspace into a veritable electronic frontier. The need to secure information systems has never been greater, but the task is complex and often difficult to understand. Information systems security is complicated not only by rapid growth in computer use and computer crime, but also by the complexity of computer networks. Most large organizations today like Defense have a conglomeration of mainframes, PCs, routers, servers, software, applications, and external connections. In addition, since absolute protection is not feasible, developing effective information systems security involves an often complicated set of trade-offs. Organizations have to consider the (1) type and sensitivity of the information to be protected, (2) vulnerabilities of the computers and networks, (3) various threats, including hackers, thieves, disgruntled employees, competitors, and in Defense's case, foreign adversaries and spies, (4) countermeasures available to combat the problem, and (5) costs. In managing security risks, organizations must decide how great the risk is to their systems and information, what they are going to do to defend themselves, and what risks they are willing to accept. In most cases, a prudent approach involves selecting an appropriate level of protection and then ensuring that any security breaches that do occur can be effectively detected and countered. This generally means that controls be established in a number of areas, including, but not limited to: a comprehensive security program with top management commitment, sufficient resources, and clearly assigned roles and responsibilities for those responsible for the program's implementation; clear, consistent, and up-to-date information security policies and vulnerability assessments to identify security weaknesses; awareness training to ensure that computer users understand the security risks associated with networked computers; assurance that systems administrators and information security officials have sufficient time and training to do their jobs properly; cost-effective use of technical and automated security solutions; and a robust incident response capability to detect and react to attacks and to aggressively track and prosecute attackers. The Department of Defense's computer systems are being attacked every day. Although Defense does not know exactly how often hackers try to break into its computers, the Defense Information Systems Agency (DISA) estimates that as many as 250,000 attacks may have occurred last year. According to DISA, the number of attacks has been increasing each year for the past few years, and that trend is expected to continue. Equally worrisome are DISA's internal test results; in assessing vulnerabilities, DISA attacks and successfully penetrates Defense systems 65 percent of the time. Not all hacker attacks result in actual intrusions into computer systems; some are attempts to obtain information on systems in preparation for future attacks, while others are made by the curious or those who wish to challenge the Department's computer defenses. For example, Air Force officials at Wright-Patterson Air Force Base told us that, on average, they receive 3,000 to 4,000 attempts to access information each month from countries all around the world. into sensitive Defense systems. They have "crashed" entire systems and networks, denying computer service to authorized users and preventing Defense personnel from performing their duties. These are the attacks that warrant the most concern and highlight the need for greater information systems security at Defense. To further demonstrate the seriousness of some these attacks, I would like to briefly discuss the 1994 hacker attacks the Subcommittee asked us to specifically examine on the Air Force's Rome Laboratory in Rome, New York. This incident demonstrates how easy it is for hackers to gain access to our nation's most important and advanced research. Rome Laboratory is the Air Force's premier command and control research facility--it works on very sensitive research projects such as artificial intelligence and radar guidance. In March and April 1994, a British hacker known as "Datastream Cowboy" and another hacker called "Kuji" (hackers commonly use nicknames or "handles" to conceal their real identities) attacked Rome Laboratory's computer systems over 150 times. To make tracing their attacks more difficult, the hackers weaved their way through international phone switches to a computer modem in Manhattan. The two hackers used fairly common hacker techniques, including loading "Trojan horses" and "sniffer" programs, to break into the lab's systems. Trojan horses are programs that when called by authorized users perform useful functions, but that also perform unauthorized functions, often usurping the privileges of the user. They may also add "backdoors" into a system which hackers can exploit. Sniffer programs surreptitiously collect information passing through networks, including user identifications and passwords. The hackers took control of the lab's network, ultimately taking all 33 subnetworks off-line for several days. The attacks were initially suspected by a systems administrator at the lab who noticed an unauthorized file on her system. After determining that their systems were under attack, Rome Laboratory officials notified the Air Force Information Warfare Center and the Air Force Office of Special Investigations. Working together, these Air Force officials regained control of the lab's network and systems. They also monitored the hackers by establishing an "electronic fishbowl" in which they limited the intruders' access to one isolated subnetwork. tactics, such as where the enemy is located and what targets are to be attacked. The hackers also launched other attacks from the lab's computer systems, gaining access to systems at NASA's Goddard Space Flight Center, Wright-Patterson Air Force Base, and Defense contractors around the country. Datastream Cowboy was caught in Great Britain by Scotland Yard authorities, due in large part to the Air Force's monitoring and investigative efforts. Legal proceedings are still pending against the hacker for illegally using and stealing British telephone service; no charges have been brought against him for breaking into U.S. military computer systems. Kuji was never caught. Consequently, no one knows what happened to the data stolen from Rome Lab. In general, Defense does not assess the damage from the computer attacks because it can be expensive, time-consuming and technically difficult. But in the Rome case, Air Force Information Warfare Center staff estimated that the attacks on the Rome Lab cost the government over half a million dollars. This included costs for time spent to take the lab's systems off the networks, verify the integrity of the systems, install security "patches," and restore computer service. It also included costs for the Office of Special Investigations and Warfare Center personnel deployed to the lab. But the estimate did not include the value of the research data that was compromised by the hackers. Information in general is very difficult to value and appraise. In addition, the value of sensitive Defense data may be very different to an adversary than to the military, and may vary a great deal, depending on the adversary. Rome Lab officials told us, however, that if their air tasking order research project had been damaged beyond repair, it would have cost about $4 million and 3 years to reconstruct it. In addition, the Air Force could not determine whether any of the attacks were a threat to national security. It is quite possible that at least one of the hackers may have been working for a foreign country interested in obtaining military research data or learning what the Air Force is working on. While this is only one example of the thousands of attacks Defense experiences each year, it demonstrates the damage caused and the costs incurred to verify sensitive data and patch systems. systems experts believe that computer attacks are capable of disrupting communications, stealing sensitive information, and threatening our ability to execute military operations. The National Security Agency and others have acknowledged that potential adversaries are attempting to obtain such sensitive information by hacking into military computer systems. Countries today do not have to be military superpowers with large standing armies, fleets of battleships, or squadrons of fighters to gain a competitive edge. Instead, all they really need to steal sensitive data or shut down military computers is a $2,000 computer and modem and a connection to the Internet. Defense officials and information systems security experts believe that over 120 foreign countries are developing information warfare techniques. These techniques allow our enemies to seize control of or harm sensitive Defense information systems or public networks which Defense relies upon for communications. Terrorists or other adversaries now have the ability to launch untraceable attacks from anywhere in the world. They could infect critical systems, including weapons and command and control systems, with sophisticated computer viruses, potentially causing them to malfunction. They could also prevent our military forces from communicating and disrupt our supply and logistics lines by attacking key Defense systems. Several studies document this looming problem. An October 1994 report entitled Information Architecture for the Battlefield prepared by the Defense Science Board underscores that a structured information systems attack could be prepared and exercised by a foreign country or terrorist group under the guise of unstructured hacker-like activity and, thus, could "cripple U.S. operational readiness and military effectiveness." The Board added that "the threat . . . goes well beyond the Department. Every aspect of modern life is tied to a computer system at some point, and most of these systems are relatively unprotected." Given our dependence on these systems, information warfare has the potential to be an inexpensive but highly effective tactic which many countries now plan to use as part of their overall security strategy. methods of attack. Defense has taken steps to strengthen its information systems security, but it has not established a comprehensive and effective security program that gives sufficient priority to protecting its information systems. Some elements of a good security program are in place. Most notably, Defense has implemented a formal information warfare program. DISA is in charge of the program and has developed and begun implementing a plan for protecting against, detecting, and reacting to information systems attacks. DISA established its Global Defensive Information Warfare Control Center and its Automated Systems Security Incident Support Team (ASSIST) in Arlington, Virginia. Both the center and ASSIST provide centrally coordinated, around-the-clock response to attacks and assistance to the entire Department. Each of the military services has established computer emergency response capabilities, as well. The Air Force is widely recognized as the leader among the services for having developed considerable experience and technical resources to defend its information systems. However, many of Defense's policies relating to computer systems attacks are outdated and inconsistent. They do not set any standards or require actions for what we and many others believe are important security activities, such as periodic vulnerability assessments, internal reporting of attacks, correction of known vulnerabilities, and damage assessments. In addition, many of the Department's system and network administrators are not adequately trained and do not have enough time to do their jobs properly. Computer users throughout the Department are often unaware of fundamental security practices, such as using sound passwords and protecting them. Further, Defense's efforts to develop automated programs and use other technology to help counter information systems attacks need to be much more aggressive and implemented on a departmentwide basis, rather than in the few current locations. administrators receive enough time and training to do their jobs properly. Further, we recommend that Defense assess its incident response capability to determine its sufficiency in light of the growing threat, and implement more proactive and aggressive measures to detect systems attacks. The fact that these important elements are missing indicates that Defense has not adequately prioritized the need to protect its information resources. Top management at Defense needs to ensure that sufficient resources are devoted to information security and that corrective measures are successfully implemented. We have testified and reported on information systems weaknesses for several years now. In November 1991, I testified before the Subcommittee on Government Information and Regulation on a group of Dutch hackers breaking into Defense systems. Some of the issues and problems we discussed here today existed then; some have worsened, and new challenges arise daily as technology continues to advance. Without increased attention by Defense top management and continued oversight by the Congress, security weaknesses will continue. Hackers and our adversaries will keep compromising sensitive Defense systems. That completes my testimony. I'll be happy to answer any questions you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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GAO discussed information security procedures at the Department of Defense (DOD). GAO noted that: (1) as many as 250,000 DOD computer systems were attacked in 1995; (2) hackers successfully penetrate DOD computer systems 65 percent of the time; (3) hackers attack DOD computer systems to steal and destroy sensitive data and install reentry devices; (4) these attacks cost the government over half a million dollars, including the cost of disconnecting the system, verifying the system's integrity, installing security patches, and restoring computer services; (5) hackers are capable of disrupting communications and threatening U.S. military operations; (6) DOD faces a huge challenge in protecting its computer systems due to the size of its information infrastructure, increasing amounts of sensitive data, Internet use, and skilled hackers; (7) DOD has established a Global Information Warfare Control Center and a Automated Systems Security Incident Support Team to provide around-the-clock service and respond to computer attacks; (8) many DOD policies pertaining to computer security are outdated and inconsistent and DOD system and network administrator's are inadequately trained to perform their jobs; and (9) DOD needs to be more aggressive in developing an automated program that responds to computer attacks.

Technology development partnerships are key elements of the technology transfer program of each NNSA laboratory and production facility. NNSA laboratory and facility managers told us that they have primarily used the following types of partnerships: CRADAs: An NNSA laboratory or production facility and private partner(s) agree to collaborate on a research project that is consistent with DOE's mission and has a potential impact on U.S. economic competitiveness. The NNSA laboratory or production facility and its private partner(s) contribute personnel, services, facilities, equipment, intellectual property, and/or other resources to the CRADA project. The private partner(s) may also provide funding, in-kind (noncash) contributions, and other resources directly beneficial and specifically identifiable and necessary in the performance of the project. However, NNSA and its laboratory or production facility are not allowed to transfer funds to the private partner(s). At a minimum, DOE retains a nonexclusive, nontransferable, irrevocable license to use any invention developed under the CRADA on behalf of the U.S. government. The private partner has the option to choose an exclusive license for a pre-negotiated field of use for any inventions developed by the NNSA laboratory or production facility under the CRADA. Technical assistance for small businesses: In response to section 3135(b) of the National Defense Authorization Act for Fiscal Year 1993, NNSA's laboratories and production facilities have provided technical assistance to small businesses. Work-for-other agreements: An NNSA laboratory or production facility agrees to conduct a defined scope of work or list of tasks, and the private partner pays for the entire cost of the project. While intellectual property rights are negotiable, the private sponsor typically retains title rights to any inventions. Cost-shared procurement contracts: An NNSA laboratory or production facility and private partner(s) agree to collaborate to develop technologies or computer codes for Defense Program mission requirements. Lawrence Livermore National Laboratory has used these contracts for the Accelerated Strategic Computing Initiative. Technology licensing agreements: An NNSA laboratory or production facility grants a business an exclusive or nonexclusive license to use its intellectual property in return for a licensing fee and/or royalties. User facility agreements: An NNSA laboratory or production facility permits outside organizations to use its unique research equipment and/or facilities to conduct research. The private organization pays the full cost of using research equipment or facilities and retains title rights to any intellectual property. In response to the phasing out of dedicated funding for partnerships, NNSA's laboratories and production facilities have reduced their CRADAs and technical assistance to small businesses while entering into more agreements that are fully funded by the business partners. The total number of CRADAs at NNSA laboratories and production facilities has declined by more than 60 percent, from a high of 639 in fiscal year 1995 to 244--including only 21 new CRADAs--in the first 6 months of fiscal year 2001. During this period, DOE's funding for CRADAs dropped even more-- from $222 million to $19 million. Similarly, technical assistance for small businesses dropped from about 1,700 actions that assisted small businesses in fiscal year 1995 to 136--including only 59 new assistance agreements--in the first 6 months of fiscal year 2001. While these types of partnerships have declined, work-for-other agreements and technology licenses, which require no DOE funds, grew substantially. (Table 4 in app. II provides partnership data by fiscal year for each NNSA facility.) Table 1 shows that the number of active CRADAs at the NNSA laboratories and production facilities grew rapidly in the early 1990s and then dropped by more than half through the first 6 months of fiscal year 2001. This trend reflects a similar pattern in the growth and decline of DOE's dedicated funding for technology partnerships. Sandia National Laboratories has entered into more CRADAs than any other NNSA laboratory. (See table 5 in app. II.) In fiscal year 1995, when CRADA activity peaked, Sandia had 254 active CRADAs--40 percent of all NNSA CRADAs. Sandia participated in 153 CRADAs (44 percent of all CRADAs) in fiscal year 2000 and 120 CRADAs (about 50 percent of all CRADAs) in the first half of fiscal year 2001. The number of CRADAs at Lawrence Livermore National Laboratory has dropped even more--from 159 in fiscal year 1995 to 26 in the first two quarters of fiscal year 2001. Lawrence Livermore has shifted its emphasis from using CRADAs with private partners to using procurement contracts with its contractors to develop new technologies important for its mission, according to laboratory officials. Figure 1 shows funding sources for CRADAs at NNSA laboratories and production facilities for fiscal years 1991 through 2000. As figure 1 and table 1 show, CRADA expenditures at NNSA's laboratories and production facilities peaked in fiscal year 1995. In that year, DOE contributed $222 million, including $205 million in Technology Partnership Program funding, and private partners contributed $167 million in direct and in-kind support for CRADA activities. As DOE's dedicated funding for technology partnerships declined, the proportion of private partners' direct and in- kind contributions increased and has constituted more than half of all CRADA funding since fiscal year 1997. In the first two quarters of fiscal year 2001, DOE contributed $19 million and private partners contributed $61 million in direct and in-kind support for CRADA activities. (See table 6 in app. II for CRADA funding at individual NNSA facilities.) Table 2 shows the extent to which NNSA's laboratories and production facilities used the other primary types of technology development partnerships. Generally, partnerships that relied on DOE funds have decreased, while those predominantly funded by businesses have grown. For example, technical assistance for small businesses, which was primarily funded by DOE's Technology Partnership Program, dropped sharply--from about 1,700 actions that assisted small businesses in fiscal year 1995 to about 500 in fiscal year 2000. In contrast, work-for-other agreements, which are wholly funded by businesses, grew substantially from 209 agreements in fiscal year 1995 to 987 agreements in fiscal year 2000. Similarly, technology licensing agreements have greatly increased during this period. (See tables 7, 8, and 9 in app. II for each NNSA facility's participation in each of these partnerships.) User facility agreements, which provide access to unique NNSA experimental research equipment and facilities, increased from 103 in fiscal year 1995 to 165 in fiscal year 1998 and then decreased to 96 agreements in fiscal year 2000. Businesses have provided more direct funding for work-for-other agreements than for any of the other types of partnerships. (See table 10 in app. II.) NNSA officials and laboratory managers identified various advantages and disadvantages of collaborative research under a CRADA. (See table 3.) An advantage of collaborative research under a CRADA is often accompanied by a disadvantage. For example, the ability to leverage research funding, staff, and equipment can be offset by concerns over a CRADA's relevance to mission objectives and the risk inherent in sharing control over the scope of the research, project time frames, and intellectual property. Each of the NNSA laboratories we visited provided examples of successful CRADAs for both the laboratory and the CRADA partner(s). For example, in 1997, Sandia, Lawrence Livermore, and Lawrence Berkeley National Laboratory (a DOE energy science laboratory) entered into a CRADA with a consortium of microelectronics manufacturers to develop extreme ultraviolet lithography equipment for making next-generation computer chips with enhanced speed and memory. Consortium members are providing $250 million to develop this technology, which is also important for developing advanced computational capabilities that NNSA needs for its nuclear stockpile stewardship program. Technology transfer officials at the NNSA laboratories noted that CRADAs have enhanced their laboratories' research by, for example, bringing together a wide range of scientific disciplines to address technical problems or providing NNSA scientists with access to advanced technology or manufacturing processes. Sandia officials generally preferred a CRADA to a work-for-others agreement because CRADA partners actively participate in the research. Sandia officials told us that the Technology Partnership Program had been an important catalyst for initiating CRADAs because it was the laboratories' primary source of financial support in the early stages of the CRADA project before researchers could demonstrate that the CRADA would directly benefit a specific DOE program. However, some DOE managers have questioned the value of certain CRADAs--particularly some related to the Technology Transfer Initiative in the mid-1990s--stating that those CRADAs had used scarce resources for projects not closely tied to NNSA's mission. Furthermore, negotiating and approving the terms of a CRADA could take more than 1 year to complete in the early 1990s. According to Sandia National Laboratories' data, this time has been substantially reduced--in fiscal year 2000, CRADAs were processed from initiation to final approval in 86 days, on average, including an average of 4 days for DOE's review and approval. Laboratory officials attributed this improved efficiency to the use of a standardized format for these agreements and the common practice of amending existing CRADAs to broaden the scope of work in lieu of negotiating a new agreement. In several cases, Sandia used blanket or "umbrella" CRADAs to combine a number of different projects with the same partner into a single agreement. NNSA laboratory managers identified three primary options for providing financial and management support for CRADAs: Continue to rely primarily on laboratory research managers to determine whether participating in a CRADA effectively supports their mission research. In addition to research funds, NNSA's laboratories have used other DOE funds, including their "laboratory-directed research and development" funds and Accelerated Strategic Computing Initiative funds, to support certain CRADAs. DOE has contributed $19.4 million for active CRADAs at NNSA laboratories and production facilities in fiscal year 2001. Set aside a small portion of research funding specifically to provide initial support for mission-related CRADAs until they show sufficient potential benefits that program managers would be willing to provide financial support. Establish an advocate within NNSA responsible for facilitating funding for CRADAs. The laboratory managers noted that the advocate's office could be combined with one of the two funding options. A senior official at NNSA headquarters stated that the two funding options were reasonable. However, the senior official preferred to assign responsibility for facilitating CRADAs to a senior office within NNSA without giving it responsibility for advocacy. We provided DOE with a draft of this report for its review and comment. NNSA's Institutional and Joint Programs Division generally agreed with the draft report. NNSA also provided comments to improve the report's technical accuracy, which we incorporated as appropriate. To obtain trend data on technology development partnerships, we asked officials at NNSA and its laboratories to identify the primary types of technology partnerships that they have used with private entities. We then developed a data collection instrument to obtain participation and funding data from NNSA's three nuclear weapons laboratories and three of its production facilities from fiscal year 1991 through the second quarter of fiscal year 2001. To help ensure consistency across locations, we worked with officials from these laboratories and facilities to establish uniform definitions and resolve any discrepancies. In addition, we (1) interviewed NNSA officials at DOE headquarters and DOE's Albuquerque and Oakland Operations Offices and (2) visited Lawrence Livermore National Laboratory, Los Alamos National Laboratory, and Sandia National Laboratories to obtain the views of administrators and scientists about their laboratories' participation in and funding of technology development partnerships. To identify the advantages and disadvantages of CRADAs, we interviewed NNSA officials at DOE headquarters and obtained the views of laboratory administrators and scientists at Lawrence Livermore National Laboratory, Los Alamos National Laboratory, and Sandia National Laboratories. We also interviewed executives of four businesses that participated in at least one CRADA with an NNSA laboratory to obtain their perspective about CRADAs. We conducted our review from January 2001 through May 2001 in accordance with generally accepted government auditing standards. We did not independently verify the data provided by NNSA's laboratories and production facilities. We are sending copies of this report to the Secretary of Energy, the Director of the Office of Management and Budget, and other interested parties. We will make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report were Richard Cheston, Sandra Davis, and Timothy Minelli. NNSA's report entitled Report to Congress on Technology Partnerships With Non-federal Entities Within the National Nuclear Security Administration During Fiscal Year 2000 primarily examined CRADA activities at its laboratories and production facilities. The report stated that with the termination of the Technology Partnership Program's dedicated funding, CRADA partnerships will obtain either financial support from individual DOE research programs--ensuring that the project is more clearly linked to DOE's mission--or full funding from the private sector partner. NNSA stated that more than 200 of its 348 CRADAs supported its core missions in fiscal year 2000 and pointed to CRADA- developed technologies that benefited both NNSA and its private partners. For example, a CRADA used NNSA advanced laser technology to develop an improved laser shot peening process to make indentations that reduce fatigue in critical metal parts, such as jet engine fan blades and nuclear waste disposal containers. According to NNSA, the absence of dedicated funding could also result in fewer CRADAs that provide only secondary, or spinoff, benefits for its core mission. A separate NNSA report discussed technical assistance for small businesses, which also was cut back as the Technology Partnership Program was phased out. NNSA reported that CRADAs are advantageous because they can leverage its laboratories' resources and bring to bear the expertise of several partners to address technical challenges. CRADAs also allow for more flexibility in the treatment of intellectual property than do other types of partnership agreements. NNSA noted that some laboratory personnel and private sector partners are skeptical about using CRADAs because they believe that negotiations take longer than necessary. Although the congressional mandate directed NNSA to recommend actions that would make CRADAs more effective in supporting its mission, NNSA made no recommendations. In response to section 3135(b) of the National Defense Authorization Act for Fiscal Year 1993, DOE's Defense Programs established the Small Business Initiative to facilitate and encourage the transfer of technology to small businesses. Data were not readily available. 21 223 244 5.7 $4.0 $18.3 13.2 $0.7 $28.1 61.9 $139.6 $122.9 26.3 $2.5 $32.4 0 $0 $1.2 $19.7 4.71.6 10.81.2 88.8 $7.2 $80.4 $184.4 111.9 $255.7 $244.2 Primarily includes research funds. Some CRADAs at NNSA laboratories have used laboratory- directed research and development funds. Planned in-kind contribution by nonfederal partner(s). Data were not readily available. Data were not readily available. Data were not readily available. Data were not readily available on the number of continuing licenses. Data are not available. Not applicable.

Congress enacted the National Competitiveness Technology Transfer Act to encourage federal laboratories operated by contractors to enter into cooperative research and development agreements (CRADA) with businesses, universities, and other private partners. This act was designed to improve the United States' competitive position in the world economy by facilitating the transfer of technology from federal laboratories to U.S. businesses. This report reviews the National Nuclear Security Administration's (NNSA) (1) use of CRADAs and (2) views on the advantages and disadvantages of CRADAs. GAO found that NNSA has reduced its use of CRADAs while entering into more agreements fully funded by private partners. Dedicated funding for CRADAs was gradually phased out and program managers at the laboratories were supposed to rely on regular research funding to make up the shortfall. However, NNSA laboratory managers have stated that because the funding has not been replaced with research funds, their laboratories have either prematurely terminated many CRADAs or required the private partners to fully fund the work. According to NNSA officials, CRADAs offers both advantages and disadvantages. CRADAs have enabled laboratories to recruit and retain experienced staff and have improved U.S.' businesses position in the global economy. However, CRADAs also compete for limited funding and generally take longer to execute because of the complexity of the agreements.

During the energy boom of the early 1980s, BLM found that it could not handle the case processing workload associated with a growing number of applications for oil and gas leases. The bureau recognized that to keep up with increased demand, it needed to automate its manual records and case processing activities. Therefore, in the mid-1980s, it began planning to acquire an automated land and mineral case processing system. At that time, BLM estimated that the life-cycle cost of such a system would be about $240 million. In 1988 BLM expanded the scope of the system to include a land information system (LIS). The expanded system was to provide automated information systems and geographic information systems technology capabilities to support other land management functions, such as land use and resource planning. BLM combined the LIS with a project to modernize the bureau's computer and telecommunications equipment, and estimated the total life-cycle cost of this combined project to be $880 million. The project was reduced in scope in 1989 to respond to concern about the high cost and named the ALMRS/Modernization. The project consisted of three major components--the ALMRS IOC, a geographic coordinate database, and the modernization of BLM's computer and telecommunications infrastructure and rehost of selected management and administrative systems. Estimated life-cycle costs were $575 million (later reduced to $403 million), and BLM planned to complete the entire project by the end of fiscal year 1996. The ALMRS IOC was to be the flagship of the ALMRS/Modernization, and was to replace various manual and ad hoc automated systems. The bureau designated the ALMRS IOC a critical system for (1) automating land and mineral records, (2) supporting case processing activities, including leasing oil and gas reserves and recording valid mining claims, and (3) providing information for land and resource management activities, including timber sales and grazing leases. The system was expected to more efficiently record, maintain, and retrieve land description, ownership, and use information to support BLM, other federal programs, and interested parties. It was to do this by using the new computer and telecommunications equipment that was deployed throughout the bureau, integrating multiple databases into a single geographically referenced database, shortening the time to complete case processing activities, and automating costly manual records. Despite the promise of ALMRS IOC to significantly improve business operations, repeated problems with its development have prevented deployment. For example, during a user evaluation test in May 1996, problems were reported involving unacceptably slow system performance. Subsequent testing in 1996 uncovered 204 high-priority software problems, which delayed project completion by about a year. In testing conducted in November 1997, BLM encountered workstation failures and slowdowns caused by insufficient workstation memory and by problems discovered in two BLM-developed software applications. Some of these problems had been identified in earlier tests but had not been corrected. Additional testing uncovered software errors that resulted in missing, incorrect, and incomplete data, and error files that contained accurate data. As a result of these problems, BLM postponed the Operational Assessment Test and Evaluation (OAT&E) that had been scheduled for December 1997. The OAT&E was to determine whether ALMRS IOC was ready to be deployed to the first state office. In October 1998, the OAT&E was conducted and showed that ALMRS IOC was not ready to be deployed because it did not meet requirements. During the test, users reported several problems, including that ALMRS IOC (1) did not support BLM's business activities, (2) was too complex, and (3) significantly impeded worker productivity. For example, one tester reported that entering data for a $10 sale of a commodity, such as gravel, required an hour of data entry using ALMRS IOC, whereas with the existing system, the same transaction would have taken about 10 minutes. Users also reported that system response time problems were severe or catastrophic at all test sites. One user said "It is ridiculous to spend 2 or 3 hours to enter information in this system, when it takes 30 minutes to an hour to process the information into the legacy system." Finally, users reported data converted from legacy databases were not accurate, and that validation of the converted legacy data required inordinate effort and time. Because these problems are significant, senior BLM officials have decided that ALMRS IOC is not currently deployable. According to BLM, it obligated about $411 million on the ALMRS/Modernization project between fiscal years 1983 and 1998, of which more than $67 million was spent to develop ALMRS IOC software. The $67 million does not include ALMRS IOC costs that are part of other cost categories, such as costs for work performed from fiscal years 1983 through 1988, project management, computer and telecommunications hardware and software, data management, and systems operation and maintenance. The reported obligations associated with the major cost categories of the ALMRS/ Modernization are summarized in table 1. Senior BLM officials told us that although ALMRS IOC is not currently deployable, BLM has benefited from the ALMRS/Modernization work. BLM has deployed about 6,000 workstations throughout the bureau, provided office automation capabilities, and implemented a national telecommunications network with electronic mail and internet access, which has enhanced communications and enabled BLM to communicate with other federal agencies. BLM's view of the benefits received, however, does not reflect the fact that it has not realized the significant business- related benefits and improvements ALMRS IOC was to provide. Mr. Chairman, since May 1995 we have reported many problems and risks that threatened the successful development and deployment of the ALMRS/ Modernization. Our reports have discussed these issues, their causes, and our recommended corrective actions. BLM has been slow to implement some of our recommendations and has not yet fully implemented others. Following is a summary of the problems, causes, and associated recommendations we have reported. BLM did not develop a system architecture or formulate a concept of operations before designing and developing the ALMRS/Modernization. A system architecture describes the components of a system, their interrelationships, and principles and guidelines governing their design and evolution. A concept of operations describes how an organization would use planned information technology to perform its business operations and accomplish its missions. Designing and developing the project without a system architecture and concept of operations unnecessarily increased the risk that the ALMRS/Modernization would not meet the business and information needs of the bureau. BLM has never had a credible project schedule, reliable milestones, or a critical path to manage the development and deployment of the ALMRS/ Modernization. As a result, BLM has not known with any certainty how long it would take and, therefore, how much it would cost to complete the ALMRS/Modernization. Because BLM has not implemented our recommendation to establish a credible project schedule, the ALMRS/ Modernization has been driven by self-imposed deadlines. In trying to meet those deadlines, BLM has deferred some tasks until after completion of the project, and has not corrected all problems when it found them because doing so would cause it to miss the self-imposed project deadlines. BLM faced serious risks because it had not established a robust configuration management program for the ALMRS/Modernization. Configuration management is essential to controlling the composition of and changes to computer and network systems components and documentation. The lack of configuration management increased the risks that system modifications could lead to undesirable consequences, such as causing system failures, endangering system integrity, increasing security risks, and degrading system performance. In response to our recommendation, BLM later developed a configuration management plan and related policies and procedures for the ALMRS/ Modernization. We planned to review field office implementation of the configuration management program after completion of the ALMRS IOC; however, we have not done so because the system was not deployed. BLM incurred serious risks because it had not established a security plan or security architecture for the ALMRS/Modernization. The lack of such security controls increased risks to the confidentiality, integrity, and availability of stored and processed data. BLM recently completed work in response to our recommendation. It performed a risk analysis, developed a system security plan and architecture, identified management and operational controls, and developed disaster and recovery plan procedures. As with configuration management, we planned to review field office implementation of the security program after completion of the ALMRS IOC, but have not done so because the system was not deployed. BLM invited serious risks because it had not established transition plans to guide the incorporation of ALMRS IOC into its daily operations. Deploying a major information system that people will use to do their jobs requires careful planning to avoid business and operational problems. Without transition plans, BLM increased the risk that using ALMRS IOC would disrupt, rather than facilitate, its work processes and ability to conduct land and mineral management business. In response to our recommendation, BLM developed transition plans; however, the plans were not adequate. They did not outline needed changes in organizational roles, responsibilities, and interrelationships, or address issues such as how state and subordinate offices would deal with oil and gas, mining, and solid mineral business process changes that would result from implementing ALMRS IOC. BLM faced serious risks because it had not established operations and maintenance plans. The lack of plans increased the risk that the bureau would not meet its automation objectives or the daily needs of its offices. BLM developed operations and maintenance plans in response to our recommendation. We expected to review field office implementation of the operations and maintenance plans after completion of the ALMRS IOC; however, we have not done so because the system was not deployed. BLM invited serious risks because it planned to stress test only the ALMRS IOC component--state and district offices, ALMRS IOC servers, terminals, and workstations. This increased the risk that BLM would deploy the ALMRS IOC nationwide without knowing whether the ALMRS/Modernization--ALMRS IOC, office automation, e-mail, administrative systems, and various departmental, state, and district software applications in a networked environment--would perform as intended during peak workloads. BLM agreed to fully stress test the entire ALMRS/Modernization before deploying the ALMRS IOC component throughout the bureau. BLM did not develop a Year 2000 contingency plan to ensure that critical legacy systems could operate after January 1, 2000, if the ALMRS IOC could not be delivered in 1999. We recommended that BLM develop a Year 2000 contingency plan to ensure continued use of those critical legacy systems ALMRS IOC was to replace. BLM implemented this recommendation and began executing the plan in 1998, when it became clear that ALMRS IOC would not be fully implemented by the end of 1999. At this point, BLM has made an enormous investment in software that does not meet its business needs. At the same time, it has not adopted information technology management practices required by recent legislation or suggested by industry best practices. Because of its large investment, BLM should analyze ALMRS IOC to determine whether the software can be cost-beneficially modified to meet the bureau's needs. In addition, to reduce the risk that future information technology efforts will result in a similar outcome, BLM should assess its investment management practices and its systems acquisition capabilities. Until these assessments and subsequent improvement actions are taken, BLM will not be adequately prepared to undertake any sizable system acquisition. We believe that since BLM has invested over $67 million to develop the ALMRS IOC software, the bureau should thoroughly analyze the software to determine whether it can be modified to meet users' needs and at what cost. This analysis should be part of an overall effort to identify and assess all viable alternatives, including (1) using or modifying ALMRS IOC software, (2) modifying or evolving existing land and recordation systems, (3) acquiring commercial, off-the-shelf software, or (4) developing new systems. The alternative analysis should clearly identify the risks, costs, and benefits of each alternative, and should be performed only after BLM is assured that it has fully verified its current business requirements. In this regard, senior BLM officials said they are performing an analysis to determine where ALMRS IOC failed to meet users' expectations and critical business requirements. According to the acting land and resources information systems program manager, BLM is beginning to develop plans for future information technology modernization. These plans are to identify alternatives to deploying ALMRS IOC, and evaluate those alternatives based on cost, functionality, and return on investment. BLM also plans to document its current and planned business processes and systems architectures as part of this effort. While such planning is necessary, BLM also needs to assess its investment management practices to help avoid future problems. The Clinger-Cohen Act of 1996 seeks to maximize the return on investments in information systems by requiring agencies to institute sound capital investment decision-making. Under the act, agencies must design and implement a process for maximizing the value and assessing and managing the risks of information technology acquisitions. An information technology investment process is an integrated approach that provides for data-driven selection, control, and evaluation of information technology investments. The investment process is comprised of three phases. The first phase involves selecting investments using quantitative and qualitative criteria for comparing and setting priorities for information technology projects. The second phase includes monitoring and controlling selected projects through progress reviews at key milestones to compare the expected costs, risks encountered, and performance benefits realized to date. These progress reviews are essential for senior managers to decide whether to continue, accelerate, modify, or terminate a selected project. The third phase involves a postimplementation review or evaluation of fully implemented projects to compare actuals against estimates, assess performance, and identify areas where future decision-making can be improved. According to senior BLM officials, the bureau has established an Information Technology Investment Board to provide support for its capital planning processes. It intends to apply more rigorous, structured processes to analyze its information technology investments and select, control, and evaluate information technology investment alternatives. Until such processes are fully in place, the bureau cannot be assured that future investments will be properly selected, managed, and evaluated using sound investment criteria to provide effective support for the bureau's mission and goals. Further, to ensure that information technology investment processes are carried out adequately, the Clinger-Cohen Act also requires agencies to assess the knowledge and skills of its executive and management staff to meet agencies' information resources management requirements, and to take steps to rectify any deficiencies. The Software Engineering Institute (SEI) has identified the need for organizations to focus on information resources management capabilities. Organizations should improve their capabilities using a process to characterize the maturity of their workforce practices, guide a program of workforce development, set priorities for immediate actions, and establish a culture of software engineering excellence. According to senior BLM officials, the bureau examined the kind of skills that its field office computer specialists had, and identified the skills they would need. However, the officials recognize that this was not the same as the more comprehensive assessment suggested by SEI. Such assessments are needed to better identify and manage information technology investments. Consequently, the bureau should evaluate and, where needed, enhance the knowledge and skills of its staff to help ensure that the investment management processes it puts in place can be effectively carried out by its information resources management organization. Finally, the Clinger-Cohen Act requires agencies to develop, maintain, and facilitate the implementation of a sound and integrated information technology architecture. An information technology architecture provides a comprehensive blueprint that systematically details the breadth and depth of an organization's mission-based mode of operation. An architecture provides details first in logical terms, such as defining business functions, providing high-level descriptions of information systems and their interrelationships, and specifying information flows; and second in technical terms, such as specifying hardware, software, data, communications, security, and performance characteristics. By enforcing an information technology architecture to guide and constrain a modernization program, an agency can preclude inconsistent systems design and development decisions, and the resulting suboptimal performance and excess cost. As I discussed earlier, BLM did not develop a system architecture before designing and developing the ALMRS/Modernization. This is a key reason why ALMRS IOC did not meet the bureau's business needs. BLM still has not developed an architecture that documents its business processes and the technology and systems that support them. BLM needs to develop an information technology architecture to guide its future investment plans. Research by SEI has shown that defined and repeatable processes for managing software acquisition are critical to an organization's ability to consistently deliver high-quality information systems on time and within budget. These critical management processes include project planning, requirements management, software project tracking and oversight, software quality assurance, software configuration management, and change control management. To assist organizations in evaluating and enhancing systems acquisition capabilities and processes, SEI has developed models for conducting software process assessments and software capability evaluations to determine the state of their capabilities and identify areas requiring improvement. BLM also needs an independent assessment of its systems acquisition capabilities, and must ensure that it uses sound systems acquisition processes. As I discussed earlier, BLM did not develop several key management controls for the ALMRS/Modernization. BLM did not develop a credible project schedule or develop adequate transition plans. In addition, the lack of a configuration management program, security plan and architecture, and operations and maintenance plans further increased BLM's risks. These problems indicate the need for BLM to ensure that the deficiencies in its systems acquisition capabilities and processes are acknowledged and corrected. Until such assessments are completed and corrective action taken, BLM should not undertake any sizable systems acquisition or development efforts. Mr. Chairman, that concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. 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 Bureau of Land Management's (BLM) Automated Land and Mineral Record System project, also known as the ALMRS/Modernization, focusing on: (1) the history of the project; (2) the results of GAO's reviews, including the key reasons for problems; and (3) where GAO believes BLM should go from here. GAO noted that: (1) BLM spent over 15 years and estimates that it invested about $411 million planning and developing the ALMRS/Modernization, only to have the major software component--known as the ALMRS Initial Operating Capacity (IOC)--fail; (2) as a result of that failure, the bureau decided not to deploy ALMRS IOC at this time; (3) GAO has previously reported on the significant problems and risks that BLM has encountered; (4) GAO has made many recommendations to reduce those risks; however, BLM has been slow to implement some recommendations and has not yet fully implemented others; (5) BLM now needs to determine whether it can salvage any of the more than $67-million reported investment in ALMRS IOC software, by analyzing the software to determine if it can be cost-beneficially modified to meet BLM's needs; and (6) in addition, to reduce the risk that future efforts will result in similar failures, BLM should assess its information technology investment practices and systems acquisition capabilities.

Over the last 10 years, DOD prime contract and total subcontract dollar awards have increased. From 1993 to 2002, DOD prime contract dollars increased almost 15 percent, from $136.8 billion to $157.1 billion. As shown in table 1, total subcontract dollars awarded by DOD contractors increased more than 40 percent, from $53.0 billion to $75.5 billion. In addition, small businesses have generally received increasing dollar amounts from DOD contractors over a 10-year period--from $19.9 billion in fiscal year 1993 to $25.8 billion fiscal year 2002. However, as shown in figure 1, small businesses' share of total subcontract dollars from DOD contractors has decreased in recent years. The percent share that small business received has ranged from a high of about 43 percent ($21.7 billion) in fiscal year 1995 to a low of about 34 percent ($25.8 billion) in fiscal year 2002. In order to foster the participation of small businesses in subcontracting, the Federal Acquisition Regulation (FAR) requires DOD contractors to have subcontracting plans for most contracts of more than $500,000 ($1 million for construction contracts). These plans document what actions the contractor will take to provide various types of small businesses with the maximum practicable opportunities to participate in subcontracting. See appendix II for description of small business categories. Contractors with DOD are to provide semiannual reports to DCMA on their small business achievements for each contract that has a subcontracting plan as well as semiannual summary reports that encompass all their contracts with a particular agency. The National Defense Authorization Act for Fiscal Years 1990 and 1991 authorized DOD to establish the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans (Test Program), which allowed the negotiation, administration, and reporting of subcontracting plans on a plant, division, or companywide basis rather than a plan for each individual contract. The purpose of the Test Program is to increase subcontracting opportunities for various types of small businesses while reducing the administrative burdens on contractors. The companies that participated in this Test Program in fiscal year 2002 accounted for about 41 percent of DOD's subcontracting activity in that same fiscal year. The Office of the Under Secretary of Defense, Office of Small and Disadvantage Business Utilization is responsible for the overall assessment of the Test Program. Originally scheduled for fiscal years 1991 through 1992, the Test Program has been extended several times and is scheduled to end September 30, 2005. Under the Test Program, small business goals are negotiated annually, whereas for individual plans, goals are generally negotiated once for the life of the contract. As of fiscal year 2003, 15 contractors have comprehensive plans under the Test Program. DCMA is responsible for reviewing DOD contractors' subcontracting plans and monitoring and assessing contractor's performance to determine how well contractors are implementing their plans and meeting their small business goals. DCMA is also involved in annually negotiating goals with contractors participating in the Test Program. Since 1982, DOD has required prime contractors to report quarterly to DOD's Office of Program Acquisition and International Contracting on contracts exceeding $500,000 when the contractor or its first tier subcontractor will perform any part of the contract that exceeds $100,000 outside the U.S., unless a foreign place of performance (1) is the principal place of performance and (2) is identified in the firm's offer. First-tier subcontractors that award subcontracts in excess of $100,000 to be performed outside the U.S. are also subject to the reporting requirement. Reported information is to include the type of supply or service provided, the principal place of subcontract performance, and the dollar value of the transaction. The information is used as part of DOD's efforts to monitor foreign procurements and assess matters related to defense trade balances and domestic industrial base capabilities. DOD's Office of Program Acquisition and International Contracting reports to the Director of Defense Procurement and Acquisition Policy. Although the Test Program has been in existence since fiscal year 1991, DOD does not know if it is achieving its intended objectives to provide more small business subcontracting opportunities and to reduce administrative burden for contractors. The Office of the Under Secretary of Defense, Office of Small and Disadvantage Business Utilization, which is to report the results of the Test Program in December 2005, shortly after the program is set to expire, commissioned a preliminary study of the program in 2002. The data assessing the merits of the program were never formally released, but the resulting preliminary report had a number of recommendations. DOD recognizes that it needs to establish metrics and other criteria for measuring program results in meeting the intended objectives. We found that DOD and contractor officials have various views on the strengths and weaknesses of the program. To assess the Test Program, DOD commissioned a preliminary review of the program by the Logistics Management Institute (LMI). LMI noted in its draft report that, in terms of achievements for subcontracting to small businesses, the Test Program results improved impressively between 1991 and 1996--from small businesses receiving 12 percent of total subcontracts to receiving about 36 percent--but declined to about 29 percent by 2000. LMI attributed the decline to factors external to the program--some of which we discuss later. Most of its recommendations dealt with addressing ways of improving small business achievements, but also included program-specific recommendations, such as increasing visibility of subcontracting activity at the corporation's division and program level, where feasible; deducting directed-source procurements from subcontracting allowing subcontracting plan renegotiations to reflect major contract awards that occur after negotiations; establishing annual meetings of program participants and DCMA to allow exchange of ideas, best practices, and lessons learned; permitting removal of poor performing participants after appropriate notice; requiring participants to track and annually report administrative savings and costs and results of their outreach activities; and limiting enrollment to 20 participants. While the final report has not been issued, DOD officials said they have taken into consideration a number of the recommendations from the study by LMI. For example, DCMA has taken steps to improve oversight of contractor performance and hold contractors more accountable for achieving their subcontracting goals, and DOD has chartered a council to share Test Program knowledge and experience. In addition, some DOD program offices require contractors to report on their subcontracting activity at the program level to increase visibility of subcontracting to small businesses. Despite DOD's attempts to assess the program, it still does not know whether using the Test Program is affecting subcontracting opportunities for small businesses and reducing administrative burden for the contractors. DOD, through DCMA, is to report on each participating contractor's performance by December 15, 2005 by comparing the contractor's performance under the program with its performance for 3 fiscal years before the acceptance into the program. DOD officials told us they are uncertain how they will measure contractors' performance to meet their reporting requirement and assess trends over time. This uncertainty is in part due to not having the original participants in the program to establish a baseline to evaluate performance and changes in company compositions. Further, these officials noted that mergers and acquisitions can greatly change company compositions and business bases from year to year making trend determinations difficult. DCMA officials told us they plan on hiring a contractor to help them complete their review of the overall results of the Test Program and will use the results of the LMI study as a tool to help develop Test Program metrics. DCMA and contractor officials we interviewed gave varied opinions--both positive and negative--on the Test Program. Some said that while they were uncertain about its increasing small business opportunities, they thought participating in the Test Program helped increase the visibility of the results of small business program companywide or divisionwide. Others said the comprehensive plan sometimes resulted in lost visibility of individual contract performance and reduced accountability at the program level. In fact, one contractor recently stopped participating in the program because of the lost ability to monitor individual contract performance. DCMA and contractor officials we interviewed said they were uncertain if there had been a reduction of administrative burden since, for example, under the Test Program contractors were required to prepare a detailed plan, negotiate small business goals each year, and submit performance data semiannually. Plus, certain large DOD programs requested contractors to report small business data. Many agreed that, regardless of what type of plan contractors used, success of the small business program relies on contractor management's commitment to meeting small business goals. DCMA and contractor officials also stated that contractor management must have the ability to monitor company performance on those goals. Between fiscal years 1999 and 2003, the DOD contractors we reviewed had varied success in meeting their small business goals. DOD and contractor officials provided several reasons for the mixed success of the subcontracting program, but DOD has not formally studied those factors that may encourage or discourage the participation of small businesses in DOD subcontracts. In the past 5 years, the 15 DOD contractors participating in the Test Program had varying success in meeting their small business goals established in their subcontracting plans. Overall, the contractors in the Test Program were not consistent from year to year in meeting their goals for the traditional small business categories. For example, in at least 3 of the past 5 years, 11 of the 15 contractors met their overall small business goals, seven contractors met their goals for small disadvantaged businesses, and six contractors met their goals for women-owned small businesses. DOD and contractor officials noted that a changing acquisition environment has added to the challenge in meeting their small business goals. Changes included (1) the increased breadth, scope, and complexity of DOD prime contracts that require, among other things, teaming arrangements with other, typically large contractors and (2) prime contractors' strategic sourcing decisions to leverage their purchasing power by reducing the number of their suppliers including small businesses. Contractor officials also said that the relatively limited supply of qualified small businesses that could provide the needed goods and services also increases the difficulty in meeting small business goals. DOD has not studied to what degree the changing acquisition environment or other factors contribute to the success or failure of its small business subcontracting program. Contractor and DCMA officials report that the breadth, scope, and complexity of DOD prime contracts for weapons systems has increased over the years. According to officials, this has had several consequences, which have limited the opportunities for small businesses. First, prime contractors are increasingly relying on teaming arrangements to win contracts. Their teaming partners, typically large businesses, receive a sizable portion of the first-tier subcontracts. For example, under a major defense contract, the contractor awarded about 56 percent of its total subcontract dollars to its teaming partners, significantly reducing the opportunities of small businesses to win first-tier subcontracts. Also, prime contractors are increasingly serving as systems integrators instead of systems manufacturers and are buying major assemblies rather than parts and components. Systems integrators are often responsible for the development, management, and eventual delivery of a large weapon system. Consequently, as in the case of teaming arrangements, systems integrators often use large businesses as first-tier subcontractors. Contractor officials said that although small businesses may still be receiving contract dollars through second- or lower-tier subcontracts, contractors could only count their first-tier subcontract awards towards their small business goals. In addition, many contractors have made the strategic-sourcing decision to reduce the number of suppliers in their supplier base. Contractors report reducing their supplier bases by as much as 50 percent over the past 5 years in a move to leverage their purchases, cut costs, and improve performance to remain competitive in the world market. Contractors also noted that by reducing the number of contractors, they often relied on larger corporatewide contracts, which could also affect their small business suppliers. For example, officials of one contractor noted that when it went to a single information systems contractor, it no longer contracted with a number of small firms. Finally, contractors report difficulty in finding qualified small businesses to provide the goods and services needed. Contractor officials said this is particularly true for small business programs with certification requirements--such as the programs for small disadvantaged businesses and Historically Underutilized Business Zone (HUBZone) businesses--and for very recent programs, such as the service-disabled veterans program. The Small Business Administration has certified significantly fewer small disadvantaged businesses and HUBZone firms than hoped. Consequently, contractors often have difficulty meeting small disadvantaged business goals, and few have met their HUBZone goals. Further, according to DCMA officials responsible for on site monitoring of subcontracting plans, qualified businesses in different small business categories usually compete for the same type of work. Consequently, according to these DCMA officials, contractors have difficulty meeting goals for all small business types and often report wide fluctuations in subcontracting achievements among the groups, depending on which ones win contracts in a given year. The categories of small business that DOD uses include small businesses, small disadvantaged businesses, women-owned small businesses, veteran- owned and service-disabled veteran-owned small businesses, HUBZone businesses, Historically Black Colleges and Universities, and Minority Institutions. Since 2002, DCMA has taken steps to help improve its oversight of DOD's small business program. These steps include issuing an updated policy for monitoring contractors' small business subcontracting programs, issuing new guidance to help DCMA personnel in implementing small business program requirements, and developing new criteria for rating contractor performance. Previously, DCMA, through its small business specialists, carried out its small business subcontracting program responsibilities through (1) contractor orientation and training, (2) small business outreach and "matchmaking," (3) Test Program review and negotiation, and (4) contractor performance evaluations. Training primarily involved informing the contractors and other DCMA personnel of contractor responsibilities and small business program requirements. Outreach and "matchmaking" activities included attending or arranging small business conferences and open houses and identifying qualified small businesses to contractors. DCMA policies and procedures also required small business specialists to review contractors' subcontracting performance and perform two kinds of reviews: annual reviews of Test Program participants and reviews of contractor subcontract performance. Test Program plan reviews--annually assess each contractor participating in the Test Program. The review includes determining how well the contractor is performing under the plan, including whether it met its goals for the year. However, these reviews do not result in an overall rating. Contractors' subcontract-performance reviews--assess all DOD contractor facilities with subcontracting plans, whether comprehensive or individual. In general, DCMA reviews the DOD contractors it is responsible for monitoring on an annual basis. The review assesses contractor policies and procedures, outreach activities, record keeping and reporting procedures, training that contractor personnel received to implement their small business subcontracting program, and contractor performance on meeting small business goals. DCMA assigned ratings on a 5-point scale from "outstanding" to "unsatisfactory." DCMA small business specialists said that because the rating criteria were loosely defined, contractors could receive different ratings depending on the interpretation of the small business specialist. For example, in fiscal year 2001, one company's performance received a "highly successful" rating even though it had not met any of its three long-standing small business goals for that period of the review. In fiscal year 2002, DCMA rated another company's performance as "unacceptable" although it had demonstrated similar performance on its goals. DCMA's new policy and guidance emphasizes the agency's oversight function. In July 2003, DCMA published an updated policy for monitoring contractors' small business subcontracting programs. While DCMA continues to conduct its reviews under its revised policy, it created more specific criteria for determining contractor performance. The criteria particularly emphasize contractors' small business goal achievements and contractor accountability, including the contractors participating in the Test Program. For example, under DCMA's new rating criteria, to receive a "highly successful" performance rating, the contractor must meet three long-standing small business goals and at least one of the newer goals (e.g. veteran-owned small business) as well as demonstrating significant success in other initiatives identified in its subcontracting plan. In September 2003, DCMA published a new procedural guide to assist DCMA Small Business Specialists in implementing the small business program. For example, the guidance provides factors, such as a contractor's past performance, that should be considered when negotiating goals with Test Program participants. DCMA continues to assess the oversight of the Test Program and whether further changes need to be made. Other steps DCMA has taken that allow the more efficient use of its resources include establishing a risk-based approach to its reviews of contractors and limiting its training and outreach functions. The risk- based approach allows DCMA to skip a review of a contractor for 1 year if the contractor's previous year's rating was "outstanding," there were no significant changes in their contracting activity, and there were no significant personnel changes affecting the contractor's small business program. In addition, according to DCMA officials, DCMA is significantly limiting its training and outreach functions on the basis that other organizations, such as the Small Business Administration and Procurement Technical Assistance Centers, already provide these services. We could not determine the extent of subcontracting to firms performing outside the U.S. because of inconsistent reporting of subcontracting activities by contractors and poor database management by DOD. According to the contractors in our review, most subcontracts to firms performing outside the U.S. accounted for a small percentage of their total subcontract dollars. Further, the contractors stated that most of the dollars to firms performing outside the U.S. were awarded on a noncompetitive basis. These contractors reported several reasons for awarding subcontracts to firms performing outside the U.S in fiscal year 2002. We could not assess the full extent that defense contractors' subcontract with firms performing outside the U.S. In November 1998, we reported that DOD's Office of Program Acquisition and International Contracting did not have safeguards for ensuring the completeness and accuracy of its database of subcontracts to firms performing outside the U.S. At that time, we found instances in which DOD contractors did not report their subcontracts to firms performing outside the U.S. in accordance with DOD's reporting requirements because they were unaware of the reporting requirements or misunderstood the criteria for reporting this type of subcontract. Plus, we identified that DOD lacked standards and procedures for managing this database. In October 2003, during our review, the Director of Defense Procurement and Acquisition Policy--through the Office of Program Acquisition and International Contracting--began to take the following actions to address contractor compliance sent letters to the top 100 parent companies of DOD contractors to remind them about DOD reporting requirements for subcontracts to firms performing outside the U.S. and requested they ensure all their subsidiaries also comply with this reporting requirement, sent a memorandum to the Senior Acquisition Executives of the Military Department and the Defense Agencies requesting they remind their contracting officers of the reporting requirement, engaged in outreach efforts with government and industry personnel to help ensure this effort to improve contractor compliance was fully communicated, sent a memorandum to DCMA requesting its assistance in periodically verifying that contractors are complying with the reporting requirements, and clarified reporting requirements for subcontracts to firms performing outside the U.S. The Office of Program Acquisition and International Contracting intends to perform periodic verification of reporting of subcontracts to firms performing outside the U.S. and is in the process of establishing those procedures. Because no action had been taken to improve data reliability until recently, we could not rely on the data available to determine the extent that DOD contractors were subcontracting with firms outside the U.S. Contractors at four of the five locations we visited spent between approximately 2 and 6 percent of their total DOD subcontracting dollars in fiscal year 2002 on subcontracts to firms performing outside the U.S. The fifth contractor subcontracted about 18 percent of its subcontracting dollars with firms performing outside the U.S. in fiscal year 2002 due to a teaming arrangement for a large defense contract it was awarded. According to a contractor official, this percentage would more typically be around 10 percent. At the five contractor locations, the total subcontract dollars to firms performing outside the U.S. ranged between approximately $29 million and $1.9 billion in fiscal year 2002. These subcontracts were for items such as parts for military systems, communication equipment for satellites, components for military aircraft, and sensors for satellite weather forecasting. While one contractor reported awarding most of its subcontract dollars to firms performing outside the U.S. on a competitive basis in fiscal year 2002, four contractors reported awarding the majority of their subcontract dollars non-competitively. Consequently, small businesses generally did not have the opportunity to compete for these types of subcontracts. Contractor officials said that even when their subcontracts with firms performing outside the U.S. were competed, they were not necessarily for the type of products that small businesses had the expertise or technology to provide. For example, one contractor competitively awarded a contract for an amplifier used in communication equipment to a firm outside the U.S. The contractor did not identify or solicit small businesses in the competition because of the unique technology and expertise required for that particular amplifier. Contractor officials said the reasons for the awards to firms performing outside the U.S. in fiscal year 2002 include: Directed source--Contractor officials stated some subcontracts were awarded to companies outside the U.S. because DOD directed them to subcontract with a certain supplier. For example, a prime contractor was directed by DOD to award a subcontract to a company outside the U.S. to produce a sensor for a weather forecasting satellite because the company previously had a contract directly with the U.S. Government. Offset agreements--The contractors said that to sell military goods and services to other countries, they often have to form agreements with foreign countries that necessitate subcontracting with foreign firms to some degree. For example, one U.S. prime contractor awarded a subcontract to a firm in a foreign country because a prior offset agreement required the contractor to purchase about $1 billion in goods and services from firms in that country. The $32.3 million subcontract was for a structural frame for the troop ramp and an air deflector for the C-17 transport aircraft. International agreements--Sometimes subcontracts are awarded to companies outside the U.S. because of international agreements between the U.S. and foreign countries. For instance, a contractor awarded a series of subcontracts to firms performing outside the U.S. based on an international agreement in which a 13-nation consortium contributed to the development of components for a missile to be used by these nations. Some of the components produced by the various countries included control systems, rocket motors, and guidance systems. Team Arrangements--This is an arrangement where two or more contractors form a partnership or joint venture to act as a potential prime contractor or a potential prime contractor agrees with one or more other contractors to have them act as its subcontractors under a specified Government contract or acquisition program. Product specialization--Contractor officials said it was very expensive to develop and change suppliers of specialized parts; therefore, DOD contractors typically continue to award contracts to the same supplier that originally supplied the products. That supplier may be located outside the U.S. For instance, one contractor awarded a subcontract to such a supplier because it was the only one that had a specification drawing for the production of pedestals for a radar system. In another case, a DOD contractor awarded a subcontract to a company outside the U.S. because it was the only supplier that already had the tools and the expertise to manufacture and produce a horizontal stabilizer for the F-5 aircraft. Because of its large contracting operations, DOD is critical to the success of federal programs designed to provide opportunities for small businesses. DOD has recognized the importance of its role in federal contracting; has taken limited steps to help improve opportunities for small businesses, such as the Test Program; and has revised DCMA guidance to hold contractors more accountable for their small business goals. However, after 12 years of implementing the Test Program, DOD does not know whether these initiatives are effective. While DOD has collected data over the years, it has not established metrics to evaluate the effectiveness of the Test Program. As a result, there is no systematic way of determining whether the program is meeting its intended objectives and whether further changes need to be made. In addition, the reliability of the data submitted by contractors on their subcontracts to firms performing outside the U.S. remains a concern. DOD has only recently started to take action on improving its data collection and has yet to establish procedures for validating the information. Without accurate and complete information on subcontracts to firms performing outside the U.S., DOD cannot make informed decisions on industrial base issues. We are making the following two recommendations to the Secretary of Defense: In order to evaluate the effectiveness of the Test Program, we recommend the Secretary of Defense direct the Office of the Under Secretary of Defense, Office of Small and Disadvantage Business Utilization, to develop metrics to assess the overall results of its Test Program. Also, to ensure DOD has the information it needs to accurately determine the number and dollar amount of subcontracts to firms performing outside the U.S., we recommend the Secretary of Defense direct DOD's Office of Program Acquisition and International Contracting to establish procedures to improve the quality of the information in its database of subcontracts performed outside the U.S. DOD provided us with written comments on a draft of this report. DOD concurred with our findings and recommendations and noted some additional actions it took or is taking to address our recommendations. We incorporated these actions in this report where appropriate. DOD's comments appear in appendix III. As requested by your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that point, copies of this report will be sent to interested congressional committees and the Secretary of Defense. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841, or Hilary Sullivan at (214) 777-5652, if you have any questions regarding this report. Major contributors to this report were Vijay Barnabas, David Bennett, Frederick Day, Michael Gorin, Gary Middleton, Pauline Reaves, Sylvia Schatz, and Suzanne Sterling. To determine DOD's assessment of the Test Program's effectiveness, we reviewed legislation, regulations, directives, and policies regarding this program. We also reviewed a July 2002 study conducted by LMI for DOD that looked at the overall results of the Test Program. In addition, we met with officials at DCMA headquarters, district, and field locations as well as officials at selected contractor locations to discuss their views on the advantages and disadvantages of the Test Program. To determine the performance of contractors participating in the Test Program, we collected data on the 15 DOD contractors (i.e., parent companies or their subsidiaries) participating in the Test Program. More specifically, we obtained 5 years of small business goal and performance data, fiscal years 1999 to 2003, on the extent that the contractors were meeting their small business goals from DCMA headquarters and district officials as well as contractor officials. The contractors in the Test Program as of fiscal year 2003 are the following The Boeing Company; General Electric Aircraft Engines; Harris Corporation, Government Communications Systems Division; Lockheed Martin Aeronautics Company; Lockheed Martin Simulation, Training & Support (formerly Lockheed Martin Missiles & Fire Control; Lockheed Martin Space Systems Company; Northrop Grumman Air Combat Systems; Northrop Grumman Electronic Systems and Sensors; Raytheon Company; Textron Systems, a Textron Company; Bell Helicopter Textron Inc.; United Technologies Corp, Hamilton Sundstrand Division; United Technologies Corp, Pratt & Whitney Government Division; and United Technologies Corp, Sikorsky Aircraft Division. To determine DCMA's oversight of contractors' small business subcontracting efforts, we met with officials at DCMA headquarters, district, and field locations as well as officials at selected contractor locations to identify and discuss DCMA's role. We also gathered information on updated policy and guides for monitoring contractors' small business subcontracting programs and new criteria for rating contractor performance. We limited our review of internal controls to reviewing DCMA's plans, methods, and procedures used to meet its small business subcontracting program mission, goals, and objectives. To determine the reasons and extent contractors are subcontracting with businesses performing outside the U.S. we identified the contractors' rationale with officials at the five selected contractor locations. We also gathered information for the most current year that data was available, fiscal year 2002, from contractor officials at same five locations. We did not independently verify this data. In addition, we reviewed the steps DOD had taken to address past database deficiencies and discussed recent changes at DOD's Office of Program Acquisition and International Contracting on their management of the database of subcontracts performed by contractors outside the U.S. We conducted our review between March 2003 and March 2004 in accordance with generally accepted government auditing standards. Appendix II: Small Business Concern Categories A small business concern is one that is independently owned and operated and is not dominant in its field of operation. 15 U.S.C. 632(a)(1). A small business concern is further defined as (1) a business entity that is organized for profit; (2) with a place of business located in the U.S.; and (3) which operates primarily within the U.S. or which makes a significant contribution to the U. S. economy through tax payments or use of American products, materials, or labor; and (4) meets the size standard for its primary business activity or industry as designated by the applicable North American Industry Classification System (NAICS) codes. 13 C.F.R. 121.101(a); 121.105(a); FAR 19.001. A small disadvantaged business is a small business concern that is 51% or more owned by one or more socially and economically disadvantaged persons who manage and operate the concern. 15 U.S.C. 637(d)(3)(C). Black Americans, Hispanic Americans, Asian Pacific Americans, Subcontinent Asian Americans, and Native Americans are presumed by regulation to be socially disadvantaged. 13 C.F.R. 124.103(b). Other individuals can qualify if they show by a "preponderance of the evidence" that they are socially disadvantaged. 13 C.F.R. 124.103(c). A small disadvantaged must also (1) meet SBA's established size standard for its main industry; and (2) have principals who have a net worth, excluding the value of the business and personal home, of less than $750,000. 13 C.F.R. 124.1002(b) (c). A woman-owned business is a small business concern that is 51% owned by one or more women who manage and operate the concern. 15 U.S.C. 637(d)(3)(D); FAR 2.101. A veteran-owned business is a small business concern that is 51% owned by one or more veterans who manage and operate the concern. 15 U.S.C. 637(d)(3)(E); FAR 2.101. A service-disabled veteran-owned business is a small business concern that is 51% owned by one or more service-disabled veterans who manage and operate the concern. 15 U.S.C. 632(q)(2); FAR 2.101. A HUBZone is a small business concern that (1) meets SBA's size standards for its primary industry classification; (2) is owned and controlled by one or more U.S. citizens; (2) has a principal office located in a HUBZone (a historically underutilized business zone, which is in an area located within one or more qualified census tracts, qualified non- metropolitan counties, or lands within the external boundaries of an Indian reservation); and (3) has at least 35 percent of its employees residing in a HUBZone. 15 U.S.C. 632(p)(3) (5); 13 C.F.R. 126.103; 126.203. A historically black college or university means an institution determined by the Secretary of Education to meet the requirements of 34 C.F.R. 608.2. FAR 2.101. A minority institution is an institution of higher education whose enrollment of a single minority or a combination of minorities (American Indian, Alaskan Native, Black, and Hispanic--Mexican, Puerto Rican, Cuban, and Central or South American) exceeds 50 percent of the total enrollment. FAR 2.101; 20 U.S.C. 1067k(2) (3). Joint Strike Fighter Acquisition: Cooperative Program Needs Greater Oversight to Ensure Goals Are Met. GAO-03-775. Washington D.C.: July 21, 2003. Sourcing And Acquisition: Challenges Facing the Department of Defense. GAO-03-574T Washington D.C.: March 19, 2003. Small Business Contracting: Concerns About the Administration's Plan to Address Contract Bundling Issues. GAO-03-559T. Washington D.C.: March 18, 2003. Small Business Administration: The Commercial Marketing Representative Role Needs to Be Strategically Planned and Assessed. GAO-03-54. Washington D.C.: November 1, 2002. Best Practices: Taking a Strategic Approach Could Improve DOD's Acquisition of Services. GAO-02-230. Washington D.C.: January 18, 2002. Small Business Subcontracting Report Validation Can Be Improved. GAO-02-166R. Washington D.C.: December 13, 2001. Small Business: More Transparency Needed in Prime Contract Goal Program. GAO-01-551. Washington D.C.: August 1, 2001. Small Business: Status of Small Disadvantaged Business Certifications. GAO-01-273. Washington D.C.: January 19, 2001. Small Business: Trends in Federal Procurement in the 1990s. GAO-01-119. Washington D.C.: January 18, 2001. Defense Trade: Observations on Issues Concerning Offsets. GAO-01-278T. Washington D.C.: December 15, 2000. Defense Trade: Weaknesses Exist in DOD Foreign Subcontract Data. GAO/NSIAD-99-8. Washington D.C.: November 13, 1998.

More small businesses are turning to subcontracting as a way to participate in the federal government's $250 billion procurement program. DOD, accounting for about two-thirds of federal procurements, has a critical role in providing opportunities to small businesses through subcontracting programs such as the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans (Test Program). In addition, Congress raised concerns about the potential for small businesses to lose opportunities to firms performing work outside of the United States. GAO was asked to review (1) DOD's assessment of the Test Program's effectiveness, (2) the performance of contractors participating in the Test Program, (3) the Defense Contract Management Agency's (DCMA) oversight of contractors' small business subcontracting efforts, and (4) the extent and reasons contractors are subcontracting with businesses performing outside the U.S. In order to foster small business participation in subcontracting, government contractors with larger dollar value contracts are required to have subcontracting plans that establish goals for contractors to award small businesses a percentage of subcontract dollars. DOD created the Test Program to provide more small business opportunities and reduce the administrative burden for contractors in managing their subcontracting programs. Many of DOD's largest contractors participate in the program. A lthough the Test Program was started more than 12 years ago, DOD has yet to establish metrics to evaluate the program's results and effectiveness. As a result, there is no systematic way of determining whether the program is meeting its intended objectives and whether further changes need to be made. DOD contracted for an assessment of the Test Program in 2002, but the results of the assessment are considered preliminary and, therefore, have not been reported. DOD is required to report the results of the Test Program in 2005, when the program is set to expire. DOD contractors participating in the Test Program have experienced mixed success in meeting their various small business subcontracting goals. DOD and contractor officials noted that a changing acquisition environment has added to their challenge in meeting small business goals. Two of the major challenges they identified include (1) the increased breadth, scope, and complexity of DOD prime contracts that require, among other things, teaming arrangements with other, typically large contractors and (2) prime contractors' strategic sourcing decisions to leverage their purchasing power by reducing the number of their suppliers including small businesses. DCMA plays a key role in overseeing the performance of contractors in the Test Program and has made significant changes to its policy and guidance. The revised approach is designed to better monitor contractors' efforts, provide more consistency in assessing contractor performance, and hold contractors accountable for achieving their subcontracting goals. DCMA is still in the process of revamping its oversight activities. GAO could not assess the full extent contractors used firms performing outside the U.S. because of data reliability concerns. Contractors in GAO's review reported several reasons for awarding subcontracts to firms performing outside the U.S., such as fulfilling commitments included in offset agreements or executing teaming arrangements for major defense programs. Without accurate and complete information on subcontracts to firms performing outside the U.S., DOD cannot make informed decisions on industrial base issues.

The TANF block grant was created by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) and was designed to give states the flexibility to provide both traditional welfare cash assistance benefits as well as a variety of other benefits and services to meet the needs of low-income families and children. TANF has four broad goals: (1) provide assistance to needy families so that children may be cared for in their own homes or homes of relatives; (2) end dependence of needy parents on government benefits by promoting job preparation, work, and marriage; (3) prevent and reduce out-of- wedlock pregnancies; and (4) encourage two-parent families. Within these goals, states have responsibility for designing, implementing, and administering their welfare programs to comply with federal guidelines, as defined by federal law and HHS. In creating TANF, the federal government significantly changed its role in financing welfare programs in states. PRWORA ended low-income families' entitlement to cash assistance by replacing the Aid to Families with Dependent Children (AFDC) program-- for which the federal grant amount was based on the amount of state spending--with the TANF block grant, a $16.5 billion per year fixed federal funding stream to states. PRWORA coupled the block grant with an MOE provision, which requires states to maintain a significant portion of their own historic financial commitment to their welfare programs as a condition of receiving their full federal TANF allotments. Importantly, with the fixed federal funding stream, states assume greater fiscal risks in the event of a recession or increased program costs. However, in acknowledgment of these risks, PRWORA also created a TANF Contingency Fund that states could access in times of economic distress. Similarly, during the recent economic recession, the federal government created a $5 billion Emergency Contingency Fund for state TANF programs through the American Recovery and Reinvestment Act of 2009, available in fiscal years 2009 and 2010. The most recent data available, for fiscal year 2010, show that the federal government and states spent almost $36 billion on benefits and services meeting one or more of the TANF goals. In that year, states provided, on average, about 1.9 million families per month with ongoing cash assistance, including about 800,000 families in which the children alone received benefits. This represents a significant drop from the more than 3 million families receiving cash assistance when states implemented TANF in fiscal year 1997. In addition, states provide a broad range of services to other families in need not included in the welfare caseload data. The total number of families assisted is not known, as we have noted in our previous work. These allowable services under TANF can generally include any spending reasonably deemed to meet one or more of the four broad goals of TANF, and can include one-time cash payments, work and training activities, work supports such as child care and transportation, efforts to promote two-parent families or marriage, and child welfare services, among others. When TANF began, cash assistance represented the largest spending category (73 percent in fiscal year 1997). In contrast, cash assistance spending in fiscal year 2010 accounted for 30 percent of total TANF spending. Reducing dependence on government benefits through job preparation and employment is a key goal of TANF, and PRWORA identified the work participation rate as one of the federal measures of state TANF programs' performance. This rate is generally calculated as the proportion of work- eligible TANF cash assistance recipients engaged in allowable work activities. for ensuring that generally at least 50 percent of all families receiving TANF cash assistance benefits participate in one or more of the allowable work activities for a specified number of hours each week. TANF provisions include other features to help emphasize the importance of work and the temporary nature of assistance, such as 60-month time limits on the receipt of aid for many families. 42 U.S.C. SS 607. The 12 work activities are: unsubsidized employment, subsidized private sector employment, subsidized public sector employment, work experience (if sufficient private sector employment is not available), on-the-job training, job search and job readiness assistance, community service programs, vocational educational training, job skills training directly related to employment, education directly related to employment (for recipients who have not received a high school diploma or certificate of high school equivalency), satisfactory attendance at secondary school or in a course of study leading to a certificate of general equivalence (for recipients who have not completed secondary school or received such a certificate), and the provision of child care services to an individual who is participating in a community service program. 42 U.S.C. SS 607(d). The preamble to the final rule issued by HHS in 1999 noted that the MOE cost-sharing arrangement reflected Congress' recognition that state financial participation is essential for the success of welfare reform. The preamble to this final rule also noted that Congress wanted states to be active partners in the welfare reform process. These requirements are an important element of TANF--if a state fails to meet its MOE requirement for any fiscal year, HHS is required by law to reduce dollar- for-dollar the amount of a state's basic TANF grant for the following fiscal year. Maintenance of effort requirements are sometimes found in federal grant programs to prevent states from substituting federal for state dollars. Such provisions can help ensure that federal block grant dollars are used for the broad program area intended by the Congress, in this case the four broad TANF purposes. Without such provisions, federal funds ostensibly provided for these broad areas could, in effect, be transformed into general fiscal relief for the states, as states could use some or all of their federal block grants to replace their own money invested in the program area. To the extent that this occurs, the ultimate impact of these federal dollars would be to increase state spending in other programs, reduce taxes, or some combination of both. A maintenance of effort requirement brings its own challenges--it can be complex to monitor and may lock states into meeting minimum spending levels that may no longer be warranted given changing conditions. Under TANF, while states have significant flexibility in how to spend their own money, several requirements guide the use of these state funds, including how much, for whom, and for what. Each state's amount of MOE is generally based on fiscal year 1994 state spending for a specific set of programs. The 1996 welfare reform law consolidated and replaced programs under which the amount of federal spending was often based on state spending levels, and considerable state dollars contributed to these pre-TANF programs. Figure 1 shows the federal programs with related state spending that were included in establishing the fixed annual amount of the TANF block grant and state maintenance-of-effort level for each state. The required percentages of these previous state spending levels vary under different conditions: 80 percent--To receive its federal TANF funds, a state must generally spend state funds in an amount equal to at least 80 percent of the amount it spent on welfare and related programs in fiscal year 1994. 75 percent--If a state meets its minimum work participation rate requirements, then it generally need expend only 75 percent of the amount it spent in fiscal year 1994. 100 percent--To receive contingency funds, a state must expend 100 percent of that fiscal year 1994 amount. In addition to its own spending, a state may count toward its MOE certain in-kind or cash expenditures by third parties, such as nonprofit organizations, as long as the expenditures meet other MOE requirements, including those related to eligible families and allowable activities, discussed below. In addition, an agreement must exist between the state and the third party allowing the state to count the expenditures toward its MOE. Generally, to count toward a state's MOE, expenditures must be for "eligible families," that is, families who: include a child living with his or her custodial parent or other adult caretaker relative (or a pregnant woman); and meet the financial criteria, such as income and resources limits, established by a state for the particular service or assistance as described in its TANF plan. Each state is required to prepare and provide a biennial TANF plan describing its programs to HHS. Generally, expenditures for eligible families in these areas may count toward MOE: educational activities to increase self-sufficiency, job training and work (except for activities or services that a state makes generally available to its residents without cost and without regard to their income); cash assistance; child care assistance; other activities considered in keeping with a TANF purpose. certain administrative costs; and These expenditures may be made on behalf of families in a state's cash welfare program or for other eligible families through other state programs or initiatives. However, state-funded benefits, services, and activities that were not a part of the pre-reform programs generally may count as MOE only to the extent that they exceed the fiscal year 1995 level of expenditures in the programs. This is referred to as the "new spending" test. For example, if a state has currently spent its own funds on eligible families on an allowable activity, such as a refundable earned income tax credit, it may count toward its MOE only the current amount that exceeds that program's expenditures in fiscal year 1995. State MOE levels remained stable for many years and then increased more recently for several reasons. As shown in figure 2, until fiscal year 2006, MOE levels remained relatively stable, hovering around the 80 percent required minimum or the reduced rate of 75 percent for states that met their work participation rates. From fiscal years 2006 through 2009, they increased each year. In a 2001 report, we examined issues related to the new federal-state fiscal partnership under TANF, noting several issues related to TANF and MOE spending rules. We found at that time that the MOE requirement, in many cases, limited the extent to which states used their federal funds to replace state funds--an intended role for MOE.situation in which many state officials said they were spending more than It also led to a might be expected in the face of the large caseload drop in the earliest years of TANF. However, states have additional flexibility in making spending decisions. While states must meet MOE requirements, federal TANF funds may be "saved for a rainy day," providing states additional flexibility in their budget decisions. they drew down to meet increasing needs in the recent economic downturn. Moreover, states have flexibility to provide a wide variety of services--as long as they are in keeping with the four broad purposes of TANF--to those on the cash welfare rolls and to other eligible families. 42 U.S.C. SS 604(e). Each year, a state may in effect reserve some of its federal TANF funds to help it meet increased needs and costs in later years. A state's unspent funds can "accumulate" as a type of "rainy day fund" for its future use. Since TANF was created in 1996, states have been permitted to spend prior year TANF block grant funds on assistance--a category that includes cash benefits and supportive services for families receiving these benefits. However, the Recovery Act increased states' flexibility to spend prior year TANF block grant funds on all TANF-allowable benefits and services. by almost $2 billion, and much of the increase in expenditures was in areas that had temporarily been broadened. Many states claimed additional MOE to help them meet the work participation rates, as discussed in the next section. In recent years, some states have used their MOE spending to help them meet TANF work participation rates. Generally, states are held accountable for ensuring that at least 50 percent of all families receiving TANF cash assistance and considered work-eligible participate in one or more of the federally defined work activities for a specified number of hours each week. However, most states have not engaged that many recipients in work activities on an annual basis. For example, in fiscal year 2009, the most recent year for which data are available, less than 50 percent of TANF cash assistance families participated in work activities for the specified number of hours each week in 44 states, according to HHS. However, various policy and funding options in federal law and regulations allowed most of these states to meet their work participation rates. Factors that influenced states' abilities to meet the work participation rates included not only the number of families receiving TANF cash assistance who participated in work activities, but also decreases in the number of families receiving TANF cash assistance, and state MOE spending beyond what is required, for example. Since TANF was created, the factor that states have commonly relied on to help them meet their required work participation rates is the caseload reduction credit. Specifically, decreases in the numbers of families receiving TANF cash assistance over a specified period are accounted for in each state's caseload reduction credit, which essentially lowers the states' required work participation rate from 50 percent. For example, if a state's caseload decreases by 20 percent during the relevant time period, the state receives a caseload reduction credit equal to 20 percentage points, which results in the state work participation rate requirement being adjusted from 50 to 30 percent. In each year since TANF was created, many states have used caseload declines to help them lower the required work participation rates. For example, in fiscal year 2009, 38 of the 45 states that met their required work participation rates for all TANF families did so in part because of their caseload decreases (see fig. 3). However, in recent years, the Congress updated the base year for assessing the caseload reduction credit, and as a result, some states also began to rely on state MOE expenditures to increase their caseload reduction credit, which lowers their required work participation rates. Under federal regulations, if states spend in excess of their required MOE amount, they are allowed to correspondingly increase their caseload reduction credits. By doing so, a state reduces its required work participation rate. In fiscal year 2009, 32 of the 45 states that met their required work participation rates for all TANF families claimed excess state MOE spending toward their caseload reduction credits. Sixteen of these states would not have met their rates without claiming these expenditures (see fig. 3). Among the states that needed to rely on excess state MOE spending to meet their work participation rates, most relied on these expenditures to add between 1 and 20 percentage points to their caseload reduction credits (see fig. 4). MOE is now playing an expanded role in TANF programs, as many states' excess MOE spending has helped them meet work participation rates. While one state had used MOE expenditures toward its caseload reduction credit before fiscal year 2007, over half of the states (27) relied on these expenditures to increase their credits and help them meet their required work participation rates in one or more years between fiscal years 2007 and 2009. States may be making programmatic and budgetary decisions to use excess MOE to help them avoid penalties for failure to meet participation rates and possibly losing funds. In our previous work, states have cited concerns about difficulties in engaging a sufficient number of cash recipients in required activities for the required number of hours for several reasons, including limits on the types of activities that count, limited resources for developing and providing appropriate work activities, a lack of jobs particularly during tough economic times, and the characteristics of some cash assistance recipients that make it difficult for them to engage in countable work activities. However, this greater emphasis on the use of MOE increases the importance of understanding whether effective accountability measures are in place to ensure MOE funds are in keeping with requirements. In our 2001 report, some states expressed concerns that this MOE provision could become difficult to enforce. In doing that work, we spoke to many auditors who were in the midst of developing audit plans to address compliance with the new spending test. Several told us that developing these plans was relatively straightforward: the auditor should simply be able to establish a baseline for all the MOE expenditures the state was using and then trace those programs back to 1995 and certify that spending used for MOE was indeed new spending. However, we also noted that these plans could become more complex if states frequently changed the expenditures they were counting from one year to the next (i.e., changed the programs for which they needed baselines). In one state at that time, we were told that all expenditure data were archived after 5 years, and that auditing the annual certification would be especially difficult and time consuming if the state changes the programs it uses to meet its MOE requirement from year to year. We expect that several factors, such as changes in what MOE expenditures states may count, growth in some particular spending areas, as well as the growth in MOE spending overall may have greatly increased the complexities involved in tracking MOE. HHS provided information related to In its final rule published in 1999,its plans for monitoring state MOE and noted that states recognize that they are ultimately accountable for their expenditure claims. HHS stated that states are audited annually or biennially and compliance with the basic MOE provisions is part of the audit. HHS added that it would use the results of the audits, together with its own analysis of state-provided data--required state quarterly expenditure reports and annual descriptive reports on MOE activities--to assess states' compliance. It also said it might undertake additional state reviews based on complaints that arise or requests from the Congress. We have not reviewed existing efforts to monitor MOE and cannot comment on their effectiveness. However, the extent to which states have relied on these expenditures to help them meet work participation rates as well as meeting MOE generally highlights the importance of having reasonable assurances that current oversight is working. If MOE claims do not actually reflect maintaining or increasing service levels, low- income families and children may not be getting the assistance they need in the current environment and federal funds may not be used in the most efficient manner. MOE provisions are important but not without implementation and oversight challenges. Based on our previous work on federal grant design as well as more recent work on some MOE provisions under the Recovery Act, it is clear that such provisions are important mechanisms for helping ensure that federal spending achieves its intended effect. With TANF, what is at stake are billions of federal and state dollars that together represent a federal-state partnership to help needy families provide for their children and take steps toward economic independence. The work also points to administrative, fiscal, and accountability challenges in implementing MOE provisions, both from federal and state perspectives. While MOE provisions may be imperfect tools, with appropriate attention to design, implementation, and monitoring issues, such provisions are one way to help strike a balance between the potentially conflicting objectives of increasing state and local flexibility while attaining certain national objectives, including efficient use of federal resources in today's fiscal environment. We provided drafts of the reports we drew on for this testimony to HHS for its review, and copies of the agency's written responses can be found in the appendixes of the relevant reports. We also provided HHS a draft of this testimony, and officials provided technical comments that we incorporated as appropriate. Chairman Davis, Ranking Member Doggett, and Members of the Subcommittee, this concludes my statement. I would be pleased to respond to any questions you may have. For questions about this statement, please contact Kay E. Brown at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include James Bennett, Robert Campbell, Rachel Frisk, Alex Galuten, Gale Harris, Tom James, Jean McSween, Ronni Schwartz, and Michelle Loutoo Wilson. 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 $16.5 billion TANF block grant, created in 1996, is one of the key federal funding streams targeted to assist low-income families. While the block grant provides states with a fixed amount of federal dollars annually, it also includes state MOE requirements, which require states to maintain a significant portion of their own historic financial commitment to welfare-related programs. Over the last 15 years, this federal-state partnership has seen multiple program and fiscal changes, including a dramatic drop in the number of families receiving monthly cash assistance, as well as two economic recessions. To provide information for its potential extension or reauthorization, this testimony draws primarily on previous GAO work to focus on (1) the key features of the state MOE requirements and (2) how the role of state MOE spending has changed over time. To address these issues, GAO relied on its prior work on TANF block grant and state MOE spending issued between 2001 and 2010, including the May 2010 report examining how state MOE spending affects state TANF programs' work participation rates. To develop the spending-related findings in this body of work, GAO reviewed relevant federal laws, regulations, and guidance, state TANF data reported to the U.S. Department of Health and Human Services (HHS), and related financial data from selected states. GAO also interviewed relevant officials from HHS and selected states. The Temporary Assistance for Needy Families (TANF) block grant's maintenance of effort (MOE) provisions include specified state spending levels and general requirements on the use of funds. For example, these provisions generally require that each state spend at least 80 percent (75 percent if the state meets certain performance standards) of the amount it spent on welfare and related programs in fiscal year 1994, before TANF was created. If a state does not meet its MOE requirements in any fiscal year, the federal government will reduce dollar-for-dollar the state's federal TANF grant in the following year. In order to count state spending as MOE, funds must be spent on benefits and services to families with children that have incomes and resources below certain state-defined limits. Such benefits and services must generally further one of TANF's purposes, which broadly focus on providing financial assistance to needy families; promoting job preparation, work, and marriage; reducing out-of-wedlock births; and encouraging the formation of two-parent families. Within these broad goals, states have significant flexibility to design programs and spend their funds to meet families' needs. Total MOE spending reported by states remained relatively stable around the required minimum spending level of $11 billion through fiscal year 2005, and then increased to about $4 billion higher than this minimum in fiscal years 2009 and 2010. Several reasons likely accounted for these increases, including states' reliance on MOE spending to help them meet TANF work participation rates. Work participation rates identify the proportion of families receiving monthly cash assistance that participate in allowable work activities for a specified number of hours each week. Federal law generally requires that at least 50 percent of families meet the work requirements; however, most states have engaged less than 50 percent of families in required activities in each year since TANF was created, according to HHS data. Various policy and funding options in federal law and regulations, including credit for state MOE expenditures that exceed required spending levels, have allowed most states to meet the rate requirements even with smaller percentages of families participating. States generally began relying on MOE spending to get credit toward meeting TANF work participation rates in fiscal year 2007 because of statutory changes to the rate requirements enacted in 2006. For example, for fiscal year 2009, the most recent data available, 16 of the 45 states that met the TANF work participation rate would not have done so without the credit they received for excess state MOE spending. The expanded role of MOE in state TANF programs highlights the importance of having reasonable assurance that MOE spending reflects the intended commitment to low-income families and efficient use of federal funds. GAO's previous work makes clear that MOE provisions are often difficult to administer and oversee, but can be important tools for helping ensure that federal spending achieves its intended effect. This work also points out that with appropriate attention to design, implementation, and monitoring issues, such provisions are one way to help strike a balance between the potentially conflicting objectives of increasing state and local flexibility while attaining certain national objectives.

The Improper Payments Information Act of 2002 (IPIA)--as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and the Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA)--requires federal executive branch agencies to (1) review all programs and activities, (2) identify those that may be susceptible to significant improper payments,amount of improper payments for those programs and activities, (4) implement actions to reduce improper payments and set reduction targets, and (5) report on the results of addressing the foregoing requirements. IPERA also established a requirement for agency inspectors general (IG) to report annually on agencies' compliance with criteria listed in IPERA. Under Office of Management and Budget (OMB) implementing guidance, these reports should be completed within 120 (3) estimate the annual days of the publication of the federal agencies' annual PARs or AFRs. IPERIA also enacted into law a Do Not Pay (DNP) initiative, elements of which were already being developed under executive branch authority. DNP is a web-based, centralized data-matching service that allows agencies to review multiple databases to determine a recipient's award or payment eligibility prior to making payments. In addition to the laws and guidance noted above, the Disaster Relief Appropriations Act of 2013 requires that all funding received under the act be deemed susceptible to significant improper payments and consequently requires agencies to estimate improper payments, implement corrective actions, and report on their results for these funds. OMB continues to play a key role in the oversight of government-wide improper payments. OMB has set a goal of reaching a government-wide improper payment error rate of 3 percent or less by the end of fiscal year 2016. Further, OMB has established guidance for federal agencies on reporting, reducing, and recovering improper payments as required by IPIA and IPERA and on protecting privacy while reducing improper IPERIA requires that OMB issue payments with the DNP initiative. guidance to agencies for improving estimates of improper payments. OMB has reported that it plans to revise its guidance related to improper payments. Office of Management and Budget, Revised, Financial Reporting Requirements, OMB Circular No. A-136 (Oct. 21, 2013); Protecting Privacy while Reducing Improper Payments with the Do Not Pay Initiative, OMB Memorandum M-13-20 (Washington, D.C.: Aug. 16, 2013); Issuance of Revised Parts I and II to Appendix C of OMB Circular A-123, OMB Memorandum M-11-16 (Washington, D.C.: Apr. 14, 2011); Increasing Efforts to Recapture Improper Payments by Intensifying and Expanding Payment Recapture Audits, OMB Memorandum M-11-04 (Washington, D.C.: Nov. 16, 2010); and Issuance of Part III to OMB Circular A-123, Appendix C, OMB Memorandum M-10-13 (Washington, D.C.: Mar. 22, 2010). Federal agency improper payment estimates totaled $105.8 billion in fiscal year 2013, a decrease of $1.3 billion from the prior year's revised estimate of $107.1 billion. The decrease in the fiscal year 2013 estimate is attributed primarily to a decrease in program outlays for the Department of Labor's (DOL) Unemployment Insurance program and decreases in reported error rates for fiscal year 2013 for the Department of Health and Human Services' (HHS) Medicaid and Medicare Advantage (Part C) programs. The $105.8 billion in estimated federal improper payments reported for fiscal year 2013 was attributable to 84 programs spread among 18 agencies. Five of these 84 programs account for most of the $105.8 billion of reported improper payments. Specifically, these five programs accounted for about $82.9 billion or 78 percent of the total estimated improper payments agencies reported for fiscal year 2013. Table 1 lists the five programs with the highest reported improper payment estimates for fiscal year 2013. OMB reported a government-wide improper payment error rate of 3.5 percent of program outlays in fiscal year 2013 when including the Department of Defense's (DOD) Defense Finance and Accounting Service (DFAS) Commercial Pay program, a decrease from 3.7 percent in fiscal year 2012. When excluding the DFAS Commercial Pay program, the reported government-wide error rate was 4.0 percent of program outlays in fiscal year 2013 compared to the revised 4.3 percent reported in fiscal year 2012. In May 2013, we reported on major deficiencies in DOD's process for estimating fiscal year 2012 improper payments in the DFAS Commercial Pay program and recommended that DOD (1) develop key quality assurance procedures to ensure the completeness and accuracy of sampled populations and (2) revise its sampling procedures to meet OMB guidance and generally accepted statistical standards and produce a statistically valid error rate and dollar estimate with appropriate confidence intervals. According to its fiscal year 2013 AFR, DOD is reevaluating its sampling methodology for fiscal year 2014 for the DFAS Commercial Pay program based on our recommendations. Consequently, the fiscal year 2013 improper payment estimate for the DFAS Commercial Pay program may not be reliable. Additionally, in fiscal year 2013, federal agencies reported improper payment error rates for seven risk-susceptible programs--accounting for more than 50 percent of the government-wide improper payment estimate--that exceeded 10 percent. As shown in table 2, the seven programs with error rates exceeding 10 percent ranged from 10.1 percent to 25.3 percent. Under IPERA, an agency reporting an improper payment rate of 10 percent or greater for any risk-susceptible program or activity must submit a plan to Congress describing the actions that the agency will take to reduce improper payment rates below 10 percent. Since the implementation of IPIA in 2004, federal agencies have continued to identify new programs or activities as risk susceptible and to report estimated improper payment amounts. Federal agencies have also identified programs or activities that they have determined to no longer be risk susceptible and therefore did not report improper payment estimates for these programs. For example, with OMB approval an agency can obtain relief from estimating improper payments if the agency has reported improper payments under the threshold for significant improper payments at least 2 consecutive years. Consequently, the specific programs included in the government-wide improper payment estimate may change from year to year. For example, a net of 10 additional programs were added to the government-wide estimate by OMB in fiscal year 2013 when compared to fiscal year 2012.Department of Education's improper payment estimate for the Direct Loan program, approximately $1.1 billion, was included in the government-wide improper payment estimate for the first time in fiscal year 2013. We view Most notably, the these agencies' efforts as a positive step toward increasing the transparency of the magnitude of improper payments. In addition, agencies have continued efforts to recover improper payments, for example through recovery audits. OMB reported that government-wide, agencies recovered over $22 billion in overpayments through recovery audits and other methods in fiscal year 2013. In our fiscal year 2013 audit of the Financial Report of the United States Government, we reported the issue of improper payments as a material weakness in internal control because the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them.the agency level, we also found that existing internal control weaknesses--such as financial system limitations and information system control weaknesses--heighten the risk of improper payments occurring. We found that not all agencies have developed improper payment estimates for all of the programs and activities they identified as susceptible to significant improper payments. Specifically, four federal agencies did not report fiscal year 2013 estimated improper payment amounts for four risk-susceptible programs. For example, HHS's fiscal year 2013 reporting cited statutory limitations for its state-administered Temporary Assistance for Needy Families (TANF) program, which prohibited it from requiring states to participate in developing an improper payment estimate for the TANF program. Despite these limitations, HHS reported that the agency has taken actions to assist states in reducing improper payments, such as providing guidance related to appropriate uses of TANF program funds. For fiscal year 2013, the TANF program reported outlays of about $16.5 billion. In addition, two programs that reported estimates in fiscal year 2013 were not included in the government-wide totals because their estimation methodologies were not approved by OMB. The two excluded programs were the Department of Transportation's High-Speed Intercity Passenger Rail program, with fiscal year 2013 outlays of $2.3 billion, and the Railroad Retirement Board's Railroad Unemployment Insurance program, with fiscal year 2013 outlays of $119.2 million. Compliance with statutory requirements is another challenge for some federal agencies. For fiscal year 2013, two agency auditors reported on compliance issues with IPIA and IPERA as part of their 2013 financial statement audits. Specifically, auditors of the Department of Agriculture (USDA) reported noncompliance with the requirements of IPERA regarding the design of program internal controls related to improper payments. HHS auditors reported that, as previously noted, HHS did not report an improper payment estimate for its TANF program for fiscal year 2013. In addition to noncompliance reported in financial statement audits, various IGs reported deficiencies related to compliance with the criteria listed in IPERA for fiscal year 2013 at their respective federal agencies, including risk-susceptible programs that did not have reported improper payment estimates, estimation methodologies that were not statistically valid, and risk assessments that may not accurately assess the risk of improper payment. As reported in our March 2014 update to items identified in our annual reports on fragmentation, overlap, and duplication, to determine the full extent of improper payments government-wide and to more effectively recover and reduce them, continued agency attention is needed to (1) identify programs susceptible to improper payments, (2) develop reliable improper payment estimation methodologies, (3) report on improper payments as required, and (4) implement effective corrective actions based on root cause analysis. As previously reported, there are a number of strategies that can help agencies in reducing improper payments, including analyzing the root causes of improper payments and implementing effective preventive and detective controls. Designed and implemented effectively, these strategies could help advance the federal government's efforts to reduce improper payments. Agencies cited a number of causes for the estimated $105.8 billion in reported improper payment estimates for fiscal year 2013, including insufficient documentation, incorrect calculations, and duplicate payments. According to OMB guidance, agencies are required to classify the root causes of estimated improper payments into three general categories for reporting purposes: (1) documentation and administrative errors, (2) authentication and medical necessity errors, and (3) verification errors.improper payments for their respective programs in their fiscal year 2013 financial reports using these categories, a more detailed analysis beyond these general categories regarding the root causes can help agencies to identify and implement more effective preventive, detective, and corrective actions in the various programs. For example, in its fiscal year 2013 AFR, HHS reported diagnosis coding errors as a root cause of improper payments in its Medicaid program and cited corrective actions While some agencies reported the causes of related to provider communication and education. OMB has reported plans to develop more granular categories of improper payments in an upcoming revision to its guidance. Implementing strong preventive controls can serve as the frontline defense against improper payments. Proactively preventing improper payments increases public confidence in the administration of benefit programs and avoids the difficulties associated with the "pay and chase" aspects of recovering overpayments. Many agencies and programs are in the process of implementing preventive controls to avoid improper payments, including overpayments and underpayments.controls may involve a variety of activities such as up-front validation of eligibility, predictive analytic tests, and training programs. Further, addressing program design issues that are a factor in causing improper payments is an effective preventive strategy to be considered. The following are examples of preventive strategies, some of which are currently under way. Up-front eligibility validation through data sharing. Data sharing allows entities that make payments--to contractors, vendors, participants in benefit programs, and others--to compare information from different sources to help ensure that payments are appropriate. When effectively implemented, data sharing can be particularly useful in confirming initial or continuing eligibility of participants in benefit programs and in identifying improper payments that have already been made. Analyses and reporting on the extent to which agencies are participating in data- sharing activities, and additional data-sharing efforts that agencies are currently pursuing or would like to pursue can help to advance the federal government's efforts to reduce improper payments. One example of data sharing is agencies' use of the Do Not Pay (DNP) initiative. DNP is a web-based, centralized data-matching service that allows agencies to review multiple databases to determine a recipient's award or payment eligibility prior to making payments. IPERIA requires entities to review prepayment and preaward procedures and ensure a thorough review of available databases to determine program or award eligibility before the release of any federal funds. IPERIA lists five databases that should be included in the DNP initiative and allows for the inclusion of other databases designated by OMB in consultation with the appropriate agencies. In August 2013, the Director of OMB issued Memorandum No. M-13-20 (M-13-20), Protecting Privacy while Reducing Improper Payments with the Do Not Pay Initiative. As required by IPERIA, M-13-20 sets forth implementation guidance for the DNP initiative to help ensure that the federal government's efforts to reduce improper payments comply with privacy laws and policies. Predictive analytic technologies. The analytic technologies used by HHS's Centers for Medicare & Medicaid Services (CMS) are examples of preventive techniques that may be useful for other programs to consider. The Small Business Jobs Act of 2010 requires CMS to use predictive modeling and other analytic techniques--known as predictive analytic technologies--both to identify and to prevent improper payments under the Medicare Fee-for-Service program. technologies are to be used to analyze and identify Medicare provider networks, billing patterns, and beneficiary utilization patterns and detect those that represent a high risk of fraudulent activity. Through such analysis, unusual or suspicious patterns or abnormalities can be identified and used to prioritize additional review of suspicious transactions before payment is made. Pub. L. No. 111-240, SS 4241 (Sept. 27, 2010). detect improper payments and training providers or beneficiaries on program requirements. For example, in its fiscal year 2013 AFR, HHS reported that it has offered training through its Medicaid Integrity Institute to over 4,000 state employees and officials from fiscal years 2008 through 2013. Program design review and refinement. To the extent that provider enrollment and eligibility verification problems are identified as a significant root cause in a specific program, agencies may look to establish enhanced controls in this area. For example, CMS has taken steps to strengthen standards and procedures for Medicare provider enrollment to help reduce the risk of providers intent on defrauding or abusing the program. Further, exploring whether certain complex or inconsistent program requirements--such as eligibility criteria and requirements for provider enrollment--contribute to improper payments may lend insight to developing effective strategies for enhancing compliance and may identify opportunities for streamlining or changing eligibility or other program requirements. Although strong preventive controls remain the frontline defense against improper payments, effective detection techniques can help to quickly identify and recover those overpayments that do occur. Detection activities play a significant role not only in identifying improper payments but also in providing data on why these payments were made and, in turn, highlighting areas that need strengthened prevention controls. The following are examples of key detection techniques. Data mining. Data mining is a computer-based control activity that analyzes diverse data for relationships that have not previously been discovered. The central repository of data commonly used to perform data mining is called a data warehouse. Data warehouses store tables of historical and current information that are logically grouped. As a tool in managing improper payments, applying data mining to a data warehouse allows an organization to efficiently query the system to identify potential improper payments, such as multiple payments for an individual invoice to an individual recipient on a certain date, or to the same address. For example, CMS has established One Program Integrity, a web-based portal intended to provide CMS staff and contractors with a single source of access to Medicare and other data needed to help detect improper payments as well as tools for analyzing those data. Recovery auditing. While internal control should be maintained to help prevent improper payments, recovery auditing is used to identify and recover overpayments. IPERA requires agencies to conduct recovery audits, if cost effective, for each program or activity that expends $1 million or more annually. In its fiscal year 2013 AFR, HHS reported that the Medicare Fee-for-Service recovery audit program identified approximately $4.2 billion and recovered $3.7 billion in overpayments by the end of the fiscal year. Medicare recovery audit contractors are paid a contingency fee based on both the percentage of overpayments collected and underpayments identified. It is important to note that some agencies have reported statutory or regulatory barriers that affect their ability to pursue recovery auditing. For example, in its fiscal year 2013 AFR, USDA reported that Section 281 of the Department of Agriculture Reorganization Act of 1994 precluded the use of recovery auditing techniques because Section 281 provides that 90 days after the decision of a state, a county, or an area committee is final, no action may be taken to recover the amounts found to have been erroneously disbursed as a result of the decision unless the participant had reason to believe that the decision was erroneous. This statute is commonly referred to as the Finality Rule, and according to USDA, it affects the Commodity Credit Corporation's ability to recover improper payments. IPERA allows agencies to use up to 25 percent of funds recovered, net of recovery costs, under a payment recapture audit program, including providing a portion of funding to state and local governments. improper payments. Incentives and penalties can be helpful to create management reform and to ensure adherence to performance standards. Chairman Mica, Ranking Member Connolly, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. For more information regarding this testimony, please contact Beryl H. Davis, Director, Financial Management and Assurance, at (202) 512-2623 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 statement. GAO staff who made key contributions to this testimony included Phillip McIntyre (Assistant Director), James Healy, and Ricky A. Perry, Jr. Medicare Fraud: Further Actions Needed to Address Fraud, Waste, and Abuse. GAO-14-712T. Washington, D.C.: June 25, 2014. Medicare: Further Action Could Improve Improper Payment Prevention and Recoupment Efforts. GAO-14-619T. Washington, D.C.: May 20, 2014. Medicaid Program Integrity: Increased Oversight Needed to Ensure Integrity of Growing Managed Care Expenditures. GAO-14-341. Washington, D.C.: May 19, 2014. School-Meals Programs: USDA Has Enhanced Controls, but Additional Verification Could Help Ensure Legitimate Program Access. GAO-14-262. Washington, D.C.: May 15, 2014. Financial Audit: U.S. Government's Fiscal Years 2013 and 2012 Consolidated Financial Statements. GAO-14-319R. Washington, D.C.: February 27, 2014. Social Security Death Data: Additional Action Needed to Address Data Errors and Federal Agency Access. GAO-14-46. Washington, D.C.: November 27, 2013. Disability Insurance: Work Activity Indicates Certain Social Security Disability Insurance Payments Were Potentially Improper. GAO-13-635. Washington, D.C.: August 15, 2013. Farm Programs: USDA Needs to Do More to Prevent Improper Payments to Deceased Individuals. GAO-13-503. Washington, D.C.: June 28, 2013. DOD Financial Management: Significant Improvements Needed in Efforts to Address Improper Payment Requirements. GAO-13-227. Washington, D.C.: May 13, 2013. Medicaid: Enhancements Needed for Improper Payments Reporting and Related Corrective Action Monitoring. GAO-13-229. Washington, D.C.: March 29, 2013. Financial Audit: U.S. Government's Fiscal Years 2012 and 2011 Consolidated Financial Statements. GAO-13-271R. Washington, D.C.: January 17, 2013. Foster Care Program: Improved Processes Needed to Estimate Improper Payments and Evaluate Related Corrective Actions. GAO-12-312. Washington, D.C.: March 7, 2012. Improper Payments: Moving Forward with Governmentwide Reduction Strategies. GAO-12-405T. Washington, D.C.: February 7, 2012. Government Operations: Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. 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.

Over the past decade, GAO has issued numerous reports and testimonies highlighting improper payment issues across the federal government as well as at specific agencies. The Improper Payments Information Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010 and the Improper Payments Elimination and Recovery Improvement Act of 2012, requires federal executive branch agencies to (1) review all programs and activities, (2) identify those that may be susceptible to significant improper payments, (3) estimate the annual amount of improper payments for those programs and activities, (4) implement actions to reduce improper payments and set reduction targets, and (5) report on the results of addressing the foregoing requirements. In general, reported improper payment estimates include payments that should not have been made, were made in the incorrect amount, or were not supported by sufficient documentation. This testimony addresses (1) federal agencies' reported estimates of improper payments, (2) remaining challenges in meeting current requirements to estimate and report improper payments, and (3) strategies for reducing improper payments. This testimony is primarily based on GAO's fiscal year 2013 audit of the Financial Report of the United States Government and prior GAO reports related to improper payments issued over the past 3 years. The testimony also includes improper payment information recently presented in federal agencies' fiscal year 2013 financial reports. Federal agencies reported an estimated $105.8 billion in improper payments in fiscal year 2013, a decrease from the prior year revised estimate of $107.1 billion. The fiscal year 2013 estimate was attributable to 84 programs spread among 18 agencies. The specific programs included in the government-wide estimate may change from year to year. For example, with Office of Management and Budget (OMB) approval, an agency can obtain relief from estimating improper payments if the agency has reported improper payments under a certain threshold for at least 2 consecutive years. A net of 10 additional programs were added to the government-wide estimate by OMB in fiscal year 2013 when compared to fiscal year 2012. For fiscal year 2013, GAO identified the federal government's inability to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them as a material weakness in internal control. In addition, existing internal control weaknesses at the agency level continued to increase the risk of improper payments occurring. In fiscal year 2013, four agencies did not report estimates for four risk-susceptible programs, including the Department of Health and Human Services' (HHS) Temporary Assistance for Needy Families (TANF) program. HHS cited a statutory barrier that prevents it from requiring states to estimate improper payments for TANF. Estimates reported for two programs were also not included in the government-wide total because their estimation methodologies were not approved by OMB. Further, inspectors general reported deficiencies related to compliance with criteria listed in the Improper Payments Elimination and Recovery Act of 2010 for fiscal year 2013, such as the use of estimation methodologies that were not statistically valid. As GAO has previously found, a number of strategies across government, some of which are currently under way, could help to reduce improper payments. For example Analysis of the root causes of improper payments can help agencies target effective corrective actions. Some agencies reported root causes of improper payments using three error categories required by OMB (documentation and administrative, authentication and medical necessity, and verification). However, because the three categories are general, more detailed analysis to understand the root causes could help agencies identify and implement more effective corrective actions. Designing and implementing strong preventive controls can help defend against improper payments, increasing public confidence and avoiding the difficult "pay and chase" aspects of recovering improper payments. Preventive controls involve activities such as up-front validation of eligibility through data sharing, predictive analytic tests, and training programs. Implementing effective detection techniques to quickly identify and recover improper payments after they have been made is also important to a successful reduction strategy. Detection activities include data mining and recovery audits. Another area for further exploration is the broader use of incentives to encourage and support states in efforts to implement effective preventive and detective controls in state-administered programs.

Military ranges and training areas are used primarily to test weapon systems and train military forces. Required facilities include air ranges for air-to-air, air-to-ground, drop zone, and electronic combat training; live-fire ranges for artillery, armor, small arms, and munitions training; ground maneuver ranges to conduct realistic force-on-force and live-fire training at various unit levels; and sea ranges to conduct ship maneuvers for training. According to DOD officials, there has been a slow but steady increase in encroachment issues that have limited the use of training facilities, and the gradual accumulation of these issues increasingly threatens training readiness. DOD has identified eight such encroachment issues: Designation of critical habitat under the Endangered Species Act of 1973. Under the Act, agencies are required to ensure that their actions do not destroy or adversely modify habitat that has been designated for endangered or threatened species. Currently, over 300 such species are found on military installations. In 1994, under the previous administration 14 agencies signed a federal memorandum of understanding for implementing the Endangered Species Act. The agencies agreed to establish or use existing regional interagency working groups to identify geographic areas within which the groups would coordinate agency actions and overcome barriers to conserve endangered species and their ecosystems. Such cooperative management could help DOD share the burden of land use restrictions on military installations that are caused by encroachment issues, but implementation of this approach has been limited. We are currently reviewing this issue. Application of environmental statutes to military munitions. DOD believes that the Environmental Protection Agency could apply environmental statutes to the use of military munitions, shutting down or disrupting military training. According to DOD officials, uncertainties about future application and enforcement of these statutes limit their ability to plan, program, and budget for compliance requirements. Competition for radio frequency spectrum. The telecommunications industry is pressuring for the reallocation of some of the radio frequency spectrum from DOD to commercial control. DOD reports that over the past decade, it has lost about 27 percent of the frequency spectrum allocated for aircraft telemetry. And we previously reported additional allocation of spectrum could affect space systems, tactical communications, and combat training. Marine regulatory laws that require consultation with regulators when a proposed action may affect a protected resource. Defense officials say that the process empowers regulators to impose potentially stringent measures to protect the environment from the effects of proposed training in marine environments. Competition for airspace. Increased airspace congestion limits the ability of pilots to train as they would fly in combat. Clean Air Act requirements for air quality. DOD officials believe the Act requires controls over emissions generated on Defense installations. New or significant changes in range operations also require emissions analyses, and if emissions exceed specified thresholds, they must be offset with reductions elsewhere. Laws and regulations mandating noise abatement. DOD officials stated that weapon systems are exempt from the Noise Control Act of 1972, but DOD must assess noise impact under the National Environmental Policy Act. As community developments have expanded closer to military installations, concerns over noise from military operations have increased. Urban growth. DOD says that unplanned or "incompatible" commercial or residential development near training ranges compromises the effectiveness of training activities. Local residents have filed lawsuits charging that military operations lowered the value or limited the use of their property. To the extent that encroachment adversely affects training readiness, opportunities exist for the problems to be reported in departmental and military service readiness reports. The Global Status of Resources and Training System is the primary means units use to compare readiness against designed operational goals. The system's database indicates, at selected points in time, the extent to which units possess the required resources and training to undertake their wartime missions. In addition, DOD is required under 10 U.S.C. 117 to prepare quarterly readiness reports to Congress. The reports are based on briefings to the Senior Readiness Oversight Council, a forum assisted by the Defense Test and Training Steering Group. In June 2000, the council directed the steering group to investigate encroachment issues and develop a comprehensive plan of action. The secretaries of the military services are responsible for training personnel and for maintaining their respective training ranges and facilities. Within the Office of the Secretary of Defense, the Under Secretary of Defense for Personnel and Readiness develops policies, plans, and programs to ensure the readiness of the force and provides oversight on training; the Deputy Under Secretary of Defense for Installations and Environment develops policies, plans, and programs for DOD's environmental, safety, and occupational health programs, including compliance with environmental laws, conservation of natural and cultural resources, pollution prevention, and explosive safety; and the Director, Operational Test and Evaluation, provides advice on tests and evaluations. On the basis of what we have seen, the impact of encroachment on training ranges has gradually increased over time, reducing some training capabilities. Because most encroachment problems are caused by urban development and population growth, these problems are expected to increase in the future. Although the effects vary by service and by individual installation, encroachment has generally limited the extent to which training ranges are available or the types of training that can be conducted. This limits units' ability to train as they would expect to fight and causes workarounds that may limit the amount or quality of training. Installations overseas all reported facing similar training constraints. Some of the problems reported by installations we visited last year were those related to urban growth, radio frequency spectrum interference, air quality, noise, air space, and endangered species habitat. For example, in response to local complaints, Fort Lewis, Washington, voluntarily ceased some demolitions training. Eglin Air Force Base, Florida, officials reported the base's major target control system received radio frequency spectrum interference from nearby commercial operators. Nellis Air Force Base, Nevada, officials reported that urban growth near the base and related safety concerns had restricted flight patterns of armed aircraft, causing mission delays and cancellations. They also reported that they receive approximately 250 complaints about noise each year. About 10 percent of Marine Corps Base Camp Pendleton, California, had been designated as critical habitat for endangered species. Atlantic Fleet officials reported encroachment problems stemming from endangered marine mammals and noise. They said that the fleet's live-fire exercises at sea were restricted, and night live-fire training was not allowed. More recently, in January 2003, DOD's Special Operations Command reported that its units encounter a number of obstacles when scheduling or using training ranges. According to the report, the presence of endangered species and marine mammals on or near ranges result in restrictions on training for at least part of the year--closing the area to training, prohibiting live fire, or requiring modified operations. For example, a variety of endangered species live on the training areas of the Navy Special Warfare Command in California, particularly on Coronado and San Clemente islands. Due to environmental restrictions, Navy Special Warfare units report that they can no longer practice immediate action drills on Coronado beaches; they cannot use training areas in Coronado for combat swimmer training; and they cannot conduct live-fire and maneuver exercises on much of San Clemente Island during some seasons. In addition, the Special Operations Command owns no training ranges of its own and largely depends on others for the use of their training ranges. As a result, command officials advised us that they must train under operational and scheduling restrictions imposed by its host commands. For example, the command normally trains at night; and because range management personnel are not often available at night, this prevents such training. Also, on many ranges, the command reported that priority is given to larger units than special operations units causing it to postpone or cancel training. According to the report, ranges are also inadequately funded for construction, maintenance, repairs, and upgrades. This results in some commanders using their own funds in order to prevent the ranges from becoming dangerous or unusable. The Special Operations Command, while expressing concern for the future, reported that none of the eight encroachment issues identified by DOD had yet stopped military training, due mostly to the creativity and flexibility of its commanders and noncommissioned officers. In general, when obstacles threaten training, the unit will find a workaround to accomplish the training. In some instances, the unit may travel to another training facility, costing additional money for transportation and potentially requiring an extended stay at the training site. By sending units away to train, the command limits its ability to send people on future travel for training or missions due to efforts to control the number of days per year that servicemembers are deployed away from home. Other workarounds consist of commands using different equipment, such as plastic-tipped bullets; changing maneuvering, firing, and training methods to overcome training obstacles; and using facilities that need repair. According to the Special Operations Command, all of these workarounds expend more funds and manpower in order to accomplish its training mission. DOD and military service officials said that many encroachment issues are related to urban growth around military installations. They noted that most, if not all, encroachment issues result from urban and population growth and that around DOD installations this is increasing at a rate higher than the national average. Figure 1 illustrates the increase in urban growth encroachment near Fort Benning, Georgia, while the fort has remained relatively unchanged. According to DOD officials, new residents near installations often view military activities as an infringement on their rights, and some groups have organized in efforts to reduce operations such as aircraft and munitions training. At the same time, according to Defense officials, the increased speed and range of weapon systems are expected to increase training range requirements. Despite the loss of some training range capabilities, service readiness data did not show the impact of encroachment on training readiness. However, DOD's January 2003 quarterly report to Congress did tie an Air Force training issue directly to encroachment. Even though DOD officials in testimonies and many other occasions have repeatedly cited encroachment as preventing the services from training to standards, DOD's primary readiness reporting system did not reflect the extent to which encroachment was a problem. In fact, it rarely cited training range limitations at all. Similarly, DOD's quarterly reports to Congress, which should identify specific readiness problems, hardly ever mentioned encroachment as a problem. This is not surprising to us because we have long reported on limitations in DOD's readiness reporting system and the need for improvements; our most recent report was issued just last week. Furthermore, on the basis of our prior reports on readiness issues and our examination of encroachment, we do not believe the absence of data in these reports concerning encroachment should be viewed simply as "no data, no problem!" Rather, as with other readiness issues we have examined over time, it suggests a lack of attention on the part of DOD in fully assessing and reporting on the magnitude of the encroachment problem. However, DOD's most recent quarterly report did indicate a training issue that is tied directly to encroachment. The January 2003 Institutional Training Readiness Report showed that the Air Force has rated itself as C-2 for institutional flight training. This indicates that it is experiencing some deficiencies with limited impact on capabilities to perform required institutional training. The Air Force attributed this to training range availability and encroachment combined with environmental concerns that are placing increasing pressure on its ability to provide effective and realistic training. The Air Force also reported that sortie cancellations are becoming a more common occurrence and may soon adversely impact the quality of training. For example, the spotting of a Sonoran Pronghorn on the Barry M. Goldwater Range forces immediate cancellation or relocation of scheduled missions. Readiness reporting can and should be improved to address the extent of training degradation due to encroachment and other factors. However, it will be difficult for DOD to fully assess the impact of encroachment on its training capabilities and readiness without (1) obtaining more complete information on both training range requirements and the assets available to support those requirements and (2) considering to what extent other complementary forms of training may help mitigate some of the adverse impacts of encroachment. The information is needed to establish a baseline for measuring losses or shortfalls. We previously reported that the services did not have complete inventories of their training ranges and that they do not routinely share available inventory data with each other (or with other organizations such as the Special Operations Command). DOD officials acknowledge the potential usefulness of such data and have some efforts underway to develop these data. However, since there is no complete directory of DOD- wide training areas, commanders sometimes learn about capabilities available on other military bases by chance. All this makes it extremely difficult for the services to leverage assets that may be available in nearby locations, increasing the risk of inefficiencies, lost time and opportunities, delays, added costs, and reduced training opportunities. Although the services have shared training ranges, these arrangements are generally made through individual initiatives, not through a formal or organized process that easily and quickly identifies all available infrastructure. Last year, for example, our reported on encroachment noted that the Navy Special Operations forces recently learned that some ranges at the Army's Aberdeen Proving Grounds in Maryland are accessible from the water--a capability that is a key requirement for Navy team training. Given DOD's increasing emphasis on joint capabilities and operations, having an inventory of defense-wide training assets would seem to be a logical step toward a more complete assessment of training range capabilities and shortfalls that may need to be addressed. This issue was recently reinforced by the January 2003 range report by the Special Operations Command, which found that none of the services had joint databases or management tools to combine all training ranges into a single tool accessible to all commands. The command concluded that such a centralized database would contribute to improving unit readiness and mission success for all components. At the same time, we cannot be sure of the extent to which recent military operations in the Middle East could impact future training requirements. DOD will need to reassess lessons learned from these operations. Each service has, to varying degrees, assessed its training range requirements and limitations due to encroachment. For example, the Marine Corps has completed one of the more detailed assessments of the degree to which encroachment has affected the training capability of Camp Pendleton, California. The assessment determined to what extent Camp Pendleton could support the training requirements of two unit types and two specialties by identifying the tasks that could be conducted to standards in a "continuous" operating scenario (e.g., an amphibious assault and movement to an objective) or in a fragmented manner (tasks completed anywhere on the camp). The analysis found that from 60 to 69 percent of continuous tasks and from 75 to 92 percent of the other training tasks could be conducted to standards. Some of the tasks that could not be conducted to standards were the construction of mortar- and artillery- firing positions outside of designated areas, cutting of foliage to camouflage positions, and terrain marches. Marine Corps officials said they might expand the effort to other installations. At the same time, the Air Force has funded a study at Shaw Air Force Base, South Carolina, which focuses on airspace requirements; and the Center for Navy Analysis is reviewing encroachment issues at Naval Air Station Fallon, Nevada. We have not had an opportunity to review the progress or the results of these efforts. In its 2003 range study report, the Special Operations Command compiled a database identifying the training ranges it uses, type of training conducted, and restrictions on training. In its study, the command recommended that a joint training range database be produced and made available throughout DOD so that all training ranges, regardless of service ownership, may be efficiently scheduled and utilized. While recent efforts show increased activity on the part of the services to assess their training requirements, they do not yet represent a comprehensive assessment of the impacts of encroachments. We have also previously reported that the services have not incorporated an assessment of the extent that other types of complementary training could help offset shortfalls. We believe these assessments, based solely on live training, may overstate an installation's problems and do not provide a complete basis for assessing training range needs. A more complete assessment of training resources should include assessing the potential for using virtual or constructive simulation technology to augment live training. However, based on our prior work I must emphasize, Mr. Chairman, that these types of complementary training cannot replace live training and cannot fully eliminate the impact of encroachment, though they may help mitigate some training range limitations. In addition, while some service officials have reported increasing costs because of workarounds related to encroachment, the services' data systems do not capture these costs in any comprehensive manner. In its January 2003 report, the Special Operations Command noted that the services lacked a metric-base reporting system to document the impact of encroachment or track the cost of workarounds in either manpower or funds. We noted last year that DOD's overall environmental conservation funding, which also covers endangered species management, had fluctuated, with an overall drop (except for the Army) in obligations since 1999. If the services are indeed conducting more environmental assessments or impact analyses as a result of encroachment, the additional costs should be reflected in their environmental conservation program obligations. DOD has made some progress in addressing individual encroachment issues, including individual action plans and legislative proposals. But more will be required to put in place a comprehensive plan that clearly identifies steps to be taken, goals and milestones to track progress, and required funding. Senior DOD officials recognized the need to develop a comprehensive plan to address encroachment issues back in November 2000, but efforts to do so are still evolving. To their credit, DOD and the services are increasingly recognizing and initiating steps to examine range issues more comprehensively and in a less piecemeal fashion. Recent efforts began in 2000 when a working group of subject matter experts was tasked with drafting action plans for addressing the eight encroachment issues. The draft plans include an overview and analysis of the issues; and current actions being taken, as well as short-, mid-, and long-term strategies and actions to address the issues. Some of the short- term actions implemented include the following. DOD has finalized, and the services are implementing, a Munitions Action Plan--an overall strategy for addressing the life-cycle management of munitions to provide a road map that will help DOD meet the challenges of sustaining its ranges. DOD formed a Policy Board on Federal Aviation Principles to review the scope and progress of DOD activities and to develop the guidance and process for special use air space. DOD formed a Clean Air Act Services' Steering Committee to review emerging regulations and to work with the Environmental Protection Agency and the Office of Management and Budget to protect DOD's ability to train. DOD implemented an Air Installation Compatible Use Zone Program to assist communities in considering aircraft noise and safety issues in their land use planning. Some future strategies and actions identified in the draft plans addressing the eight encroachment issues include the following. Enhancing outreach efforts to build and maintain effective working relationships with key stakeholders by making them aware of DOD's need for training ranges, its need to maintain readiness, and its need to build public support for sustaining training ranges. Developing assessment criteria to determine the cumulative effect of all encroachment restrictions on training capabilities and readiness. The draft plan noted that while many examples of endangered species/critical habitat and land use restrictions are known, a programmatic assessment of the effect these restrictions pose on training readiness has never been done. Ensuring that any future base realignment and closure decisions thoroughly scrutinize and consider the potential encroachment impact and restrictions on operations and training of recommended base realignment actions. Improving coordinated and collaborative efforts between base officials and city planners and other local officials in managing urban growth. In December 2001, the Deputy Secretary of Defense established a senior- level Integrated Product Team to act as the coordinating body for encroachment efforts and to develop a comprehensive set of legislative and regulatory proposals by January 2002. The team agreed on a set of possible legislative proposals for clarifying some encroachment issues. After internal coordination deliberations, the proposals were submitted in late April 2002 to Congress for consideration. According to DOD, the legislative proposals sought to "clarify" the relationship between military training and a number of provisions in various conservation and compliance statutes, including the Endangered Species Act, the Migratory Bird Treaty Act, the Marine Mammal Protection Act, and Clean Air Act. DOD's proposals would, among other things, do the following: Preclude designation under the Endangered Species Act of critical habitat on military lands for which Sikes Act Integrated Natural Resources Management Plans have been completed. At the same time, the Endangered Species Act requirement for consultation between DOD and other agencies on natural resource management issues would remain. Permit DOD to "take" migratory birds under the Migratory Bird Treaty Act without action by the Secretary of the Interior, where the taking would be in connection with readiness activities, and require DOD to minimize the taking of migratory birds to the extent practicable without diminishment of military training or other capabilities, as determined by DOD. Modify the definition of "harassment" under the Marine Mammal Protection Act as it applies to military readiness activities. Modify the conformity provisions of the Clean Air Act. The proposal would maintain the Department's obligation to conform military readiness activities to applicable state implementation plans but would give DOD 3 years to demonstrate conformity. In the meantime, DOD could continue military readiness activities. Change the definition of solid waste under the Solid Waste Disposal Act to generally exclude explosives, unexploded ordnance, munitions, munition fragments, or constituents when they are used in military training, research, development, testing and evaluation; when not removed from an operational range; when promptly removed from an off-range location; or when recovered, collected, and destroyed on range at operational ranges. Solid waste would not include buried unexploded ordnance when burial was not a result of product use. Of the above proposals, Congress passed, as part of the fiscal year 2003 defense authorization legislation, a provision related to the Migratory Bird Treaty Act. Under that provision, until the Secretary of the Interior prescribes regulations to exempt the armed forces from incidental takings of migratory birds during military readiness activities, the protections provided for migratory birds under the Act do not apply to such incidental takings. In addition, Congress authorized DOD to enter agreements to purchase property or property interests for natural resource conservation purposes, such as creating a buffer zone near installations to prevent encroachment issues, such as urban growth. In February 2003, DOD submitted to Congress the Readiness and Range Preparedness Initiative for fiscal year 2004. In it, the department restates a number of legislative proposals from 2002 and includes a proposal concerning the Marine Mammal Protection Act. In the 2004 initiative, the department seeks to reconcile military readiness activities with the Marine Mammal Protection Act by adding language to sections of title 16 of the U.S. Code. We are aware that consideration of these legislative proposals affecting existing environmental legislation will need to include potential tradeoffs among multiple policy objectives and issues on which we have not taken a position. At the same time, we also understand that DOD recently asked the services to develop procedures for invoking the national security exceptions under a number of environmental laws. Historically, DOD and the services have been reluctant to seek such exceptions; and we are aware of only a couple of instances where this has been done. Our two reports last year both recommended that DOD develop reports that accurately capture the causes of training shortfalls and objectively report units' ability to meet their training requirements. At the time we completed our reviews in 2002, DOD's draft action plans for addressing the eight encroachment issues had not been finalized. DOD officials told us that they consider the plans to be working documents and stressed that many concepts remain under review and may be dropped, altered, or deferred, while other proposals may be added. No details were available on overall actions planned, clear assignments of responsibilities, measurable goals and time frames for accomplishing planned actions, or funding requirements--information that would be needed in a comprehensive plan. Our report on stateside encroachment problems also recommended that DOD develop and maintain a full and complete inventory of service and department-wide training infrastructure; consider more alternatives to live training; and ensure that the plan for addressing encroachment includes goals, timelines, responsibilities, and projected costs. Our recently issued report on overseas training also recommended that DOD develop reports that accurately capture the causes of training shortfalls and objectively report units' ability to meet their training requirements. Following our reports, DOD issued a range sustainment directive to establish policy and assign responsibilities for the sustainment of test and training ranges, and the Special Operations Command developed a database identifying the training ranges it uses, type of training conducted, and restrictions on training. In addition, DOD is working with the other regulatory agencies in the federal government to manage the way in which laws are enforced and plans to issue four more directives that cover outreach, range clearance, community noise, and Air Installation Compatibility Use Zone.

DOD faces growing challenges in carrying out realistic training at installations and training ranges--land, air, and sea--because of encroachment by outside factors. These include urban growth, competition for radio frequencies or airspace, air or noise pollution, unexploded ordnance and munition components, endangered species habitat, and protected marine resources. Building on work reported on in 2002, GAO assessed (1) the impact of encroachment on training ranges, (2) DOD's efforts to document the effect on readiness and cost, and (3) DOD's progress in addressing encroachment. Encroachment was reported as having affected some training range capabilities, requiring workarounds--or adjustments to training events--and sometimes limiting training, at all stateside installations and major commands GAO visited. GAO has identified similar effects abroad. Encroachment generally limits the time that training ranges are available and the types of training conducted. This in turn limits units' ability to train as they would fight. Most encroachment issues are caused by population growth and urban development. Because both are expected to increase, as are the speed and range of weapon systems used on training ranges, the problems are also expected to increase. Despite DOD--voiced concerns about encroachment's effects on training, service readiness data in 2002 did not show the impact of encroachment on training readiness or costs, although DOD's most recent quarterly report to Congress on readiness did tie a training issue directly to encroachment. While individual services are making some assessment of training requirements and limitations imposed by encroachment, comprehensive assessments remain to be done. Likewise, complete inventories of training ranges are not yet available to foster sharing of ranges on an interservice or joint basis. This increases the risk of inefficiencies, lost time and opportunities, delays, and added cost. Also, although some services have reported higher costs because of encroachment-related workarounds for training, service data systems do not capture the costs comprehensively. DOD has made some progress in addressing individual encroachment issues, such as implementing some short-term actions, proposing legislation to clarify the relationship between training and conservation statutes, and issuing a range sustainment directive. But more is required for a comprehensive plan, as recommended by GAO earlier, that clearly identifies steps to be taken, goals and milestones to track progress, and required funding.

Since 2004, Congress has authorized over $8 billion for medical countermeasure procurement. The Project BioShield Act of 2004 authorized the appropriation of $5.6 billion to be available from fiscal year 2004 through fiscal year 2013 for the Project BioShield Special Reserve The act Fund, and funds totaling this amount were appropriated.facilitated the creation of a government countermeasure market by authorizing the government to commit to making the Special Reserve Fund available to purchase certain medical countermeasures, including those countermeasures that may not yet be approved, cleared, or licensed by the Food and Drug Administration (FDA). In 2013, PAHPRA authorized an additional $2.8 billion to be available from fiscal year 2014 through fiscal year 2018 for these activities, and $255 million was appropriated in fiscal year 2014. Congress has also made funding available through annual and supplemental appropriations to respond to influenza pandemics, including developing vaccines and other drugs. HHS is the primary federal department responsible for public health emergency planning. Within HHS, several offices have specific responsibilities for medical countermeasure development and procurement. HHS's ASPR leads PHEMCE and the federal medical and public health response to public health emergencies, including strategic planning and support for developing and securing medical countermeasures. As part of these activities, HHS develops priorities for which medical countermeasures are needed. Within ASPR, BARDA--established by the Pandemic and All-Hazards Preparedness Act of 2006--coordinates and supports advanced research and development, manufacturing, and initial procurement of medical countermeasures for CBRN threats, pandemic influenza, and emerging infectious diseases into the Strategic National Stockpile--the national repository for medications, medical supplies, and equipment for use in a public health emergency. As part of these responsibilities, BARDA oversees HHS's efforts to develop flexible manufacturing capabilities for medical countermeasures. HHS's PHEMCE, which was established in 2006, is composed of officials from ASPR, BARDA, the Centers for Disease Control and Prevention (CDC), FDA, and the National Institutes of Health (NIH), in addition to officials from other federal departments, including the Departments of Agriculture, Defense, Homeland Security, and Veterans Affairs. In 2007, HHS published the PHEMCE Implementation Plan, which identified HHS's priorities for CBRN countermeasure procurement using the 2004 Special Reserve Fund appropriation. In December 2012, HHS published an updated PHEMCE Implementation Plan, which describes the capabilities HHS wants to establish to support countermeasure development and procurement, including activities to support flexible manufacturing. The 2012 PHEMCE Implementation Plan also identifies HHS's priorities for developing and procuring medical countermeasures, such as anthrax vaccine, smallpox antivirals, chemical agent antidotes, and diagnostic devices for radiological and nuclear agents. (See app. I for HHS's advanced development priorities for CBRN countermeasures.) Flexible manufacturing generally refers to the equipment and technologies that allow a facility to rapidly develop or manufacture a number of products simultaneously or in quick succession. These technologies include the use of disposable equipment, such as growing cell cultures in disposable plastic bag systems rather than in stainless steel tanks that require more time to clean and sterilize prior to the next use and the use of modular sterile rooms to allow for the manufacture of multiple products simultaneously within a given facility. Other technologies include alternatives to more traditional methods of making influenza vaccine, such as using cell-based or recombinant technologies to make vaccine, rather than the traditional egg-based technology, or using adjuvants to enhance the immune response to vaccines. In addition to alternative vaccine development technologies, platform technologies provide flexible systems that have the potential to produce medical countermeasures for multiple threats. The use of flexible manufacturing technologies also has the potential to help provide surge capacity production in a public health emergency. We previously reported on the barriers industry faces in developing and manufacturing CBRN and pandemic influenza medical countermeasures, which create challenges for HHS. In April 2011, we found that the barriers HHS identified in the PHEMCE review continued to exist. Specifically, we found that the lack of a commercial market continued to hinder large pharmaceutical companies from developing medical countermeasures. As a result, less-experienced biotechnology companies became the primary developers of such products, but these companies needed more scientific and regulatory assistance for testing the safety and efficacy of their countermeasures in development. In its 2010 PHEMCE review, HHS stated that new approaches to vaccine manufacturing, such as the use of flexible manufacturing technologies, offered promising ways to meet the demands of pandemic vaccine production while simultaneously meeting needs related to other public health emergency threats. In our June 2011 review, HHS officials told us that the CIADMs are intended to support countermeasure developers by providing needed resources for and expertise about manufacturing and to reduce the technical risks of researching and developing medical countermeasures. In addition, HHS officials indicated that such assistance by the CIADMs could reduce the research and development costs of smaller, less-experienced companies. In fiscal years 2012 and 2013, HHS's BARDA awarded nearly $440 million to establish its CIADMs and a network of facilities to provide packaging support to ready the product for distribution, known as the Fill Finish Manufacturing Network. The CIADM contractors are required to develop three activities to support flexible manufacturing: pandemic influenza surge capacity, core services for CBRN medical countermeasure developers, and workforce training programs. According to BARDA officials, the Fill Finish Manufacturing Network will supplement the CIADMs' pandemic influenza surge capacity and CBRN core services activities. HHS's BARDA awarded approximately $400 million in fiscal year 2012 to three contractors to establish the CIADMs. Under the terms of the CIADM contracts, the three contractors must retrofit existing facilities or build new ones to incorporate flexible, innovative manufacturing equipment and technologies that can be used to develop and manufacture more than one medical countermeasure either simultaneously or in quick succession. BARDA characterizes the CIADMs as public-private partnerships because the contractors are required to provide their own funds to supplement those awarded by HHS under a cost-sharing arrangement. For example, the total investment in pandemic influenza vaccine surge capacity could include up to $194 million in contractor funding to supplement the $400 million government award amount, for a total of about $594 million in public and contractor funding. An option is a unilateral right in a contract by which, for a specified time, the government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the term of the contract. CIADMs are required to design, construct, and commission their facilities. These facilities are intended to establish a warm base for pandemic influenza surge capacity. A warm base refers to facilities that, once constructed and commissioned, would be operationally ready to quickly manufacture vaccine during an influenza pandemic. These facilities are also intended to establish the capacity to provide core services for the development of CBRN countermeasures. (See table 1 for information on the CIADM base period amounts, including the government award and contractor cost-share.) Contractors may be awarded additional amounts beyond the base period award through the issuance of task orders. Under the CIADM contracts, HHS may issue task orders to purchase (1) core services for CBRN medical countermeasure developers, (2) medical countermeasure vaccine production (including vaccine for pandemic influenza), and (3) workforce training activities. The contracts outline the procedures that HHS is to follow to give contractors a fair opportunity to be considered for the award of task orders. BARDA anticipates issuing task orders in the three service areas, including core services for CBRN countermeasures, during the annual option periods. As shown in Table 1, option periods may overlap the base period for the contracts. The filling and finishing of medical countermeasures refers to the process by which individual drugs are packaged for use, such as in vials and syringes, and includes labeling, patient instructions, outside packaging, transport, and promotional materials. contract amount is intended to fund the necessary up front activities (e.g., formulation and technology transfer) to establish warm base facilities that can be used to provide fill and finish services during both pandemic and nonpandemic periods. After the contractors have completed these start-up activities to establish the fill and finish network, BARDA plans to award additional funding through the issuance of task orders. These task orders may include funding for materials, spare parts, equipment, staffing, and fees necessary to complete the task order. BARDA's CIADMs are intended to provide three activities--surge capacity for manufacturing pandemic influenza vaccine, core services for the development of CBRN medical countermeasures, and workforce training--to support HHS's flexible manufacturing activities. According to HHS, the primary goal of the CIADMs is to provide core service assistance to CBRN medical countermeasure developers, their ability to provide some core services depends on the retrofitting of existing, or building of new, facilities that are also needed to provide surge capacity. The Fill Finish Manufacturing Network is to supplement the CIADMs' pandemic influenza surge capacity and CBRN core services activities. The three CIADMs are required under their contracts with BARDA to establish surge capacity to quickly manufacture influenza vaccine in a pandemic and secure a pandemic influenza vaccine candidate currently under development. The CIADMs plan to establish surge capacity as follows: Emergent: Under the CIADM award, Emergent is to design, construct, and commission a biologics development and manufacturing suite in Baltimore, Maryland, intended to support core services for CBRN medical countermeasures on a routine basis and support manufacturing of medical countermeasure vaccines for an influenza pandemic or other public health threats. In addition, Emergent is to design, renovate, and commission a pilot plant at its existing facility in Gaithersburg, Maryland, that is also intended to support core services for CBRN medical countermeasure developers. Novartis Vaccines and Diagnostics (Novartis). Under the CIADM award, Novartis is to design, renovate, and commission a pilot plant to produce and fill clinical investigational lots of CBRN medical countermeasures in its existing plant in Holly Springs, North Carolina. Also, Novartis is to design, construct, and commission a technical services building in Holly Springs, North Carolina, to house administrative staff and provide maintenance services for the pilot plant. Texas A&M University System (TAMUS). Under the CIADM award, TAMUS is to design, construct or renovate, and commission a number of facilities on the Texas A&M campus in College Station, Texas. These facilities are to include a biologics development and manufacturing facility that is intended to provide core services for CBRN medical countermeasures, with the added capability of developing and manufacturing live virus vaccine candidates; a current Good Manufacturing Practices vaccine bulk manufacturing facility dedicated to large-scale surge manufacturing of pandemic influenza vaccines; a laboratory and office building to support process development and technology transfer of CBRN medical countermeasures into the CIADM; and a facility to support the fill and finish requirements for medical countermeasures. The establishment of the TAMUS fill and finish facility is being funded under the CIADM contract and is not a part of BARDA's Fill Finish Manufacturing Network, for which HHS issued separate contracts. Each of the CIADMs has taken a different approach to acquiring pandemic influenza vaccine candidates: Emergent has partnered with VaxInnate, which is developing a pandemic influenza vaccine using recombinant protein technology. Novartis has developed a pandemic influenza vaccine candidate using cell-based vaccine production, which involves growing flu viruses in mammalian cell cultures instead of the conventional method of making influenza vaccine in chicken eggs. TAMUS has partnered with GlaxoSmithKline to obtain a pandemic influenza vaccine candidate. GlaxoSmithKline plans to grow the vaccine using a proprietary line of cells. A vaccine using the same adjuvant received FDA approval in November 2013 for pandemic response purposes. According to BARDA officials, FDA licensed the vaccine, using this adjuvant, to be manufactured in Canada using egg-based technology. However, the TAMUS CIADM is using GlaxoSmithKline's cell-based influenza vaccine technology to meet HHS surge manufacturing requirements. The CIADMs are scheduled to have completed construction, acquired an influenza pandemic vaccine candidate, and validated their vaccine surge capacity with FDA by the end of their contract base period (2020, 2016, and 2017, respectively for Emergent, Novartis, and TAMUS). Each of the three CIADMs are to be able and, in the event of an influenza pandemic, be required to produce 50 million doses of vaccine within four months of receipt of the influenza virus strain, with the first doses for the public available to HHS within 12 weeks. BARDA officials told us that they anticipate that at least one CIADM would be able to manufacture pandemic influenza vaccine upon request starting in 2017, and that all of the centers would be capable of manufacturing pandemic influenza vaccine by the end of 2020. BARDA anticipates placing task orders for pandemic influenza vaccine, if needed, during the annual contract option periods available to extend the contracts at the end of the respective base periods. Once the CIADMs' influenza vaccine surge capacity is operational, the centers are expected to maintain readiness for surge manufacturing, even in nonpandemic periods. According to BARDA officials, in these nonpandemic periods, the CIADMs may use their surge capacity for other activities, including commercial manufacturing, provided they make their influenza vaccine surge capacity available upon request from HHS during an influenza pandemic to produce the required 50 million doses in the specified time period. While surge capacity at the CIADMs is intended for pandemic influenza vaccine production, BARDA officials told us this capacity could be used to manufacture other medical countermeasures, such as an anthrax vaccine, in a public health emergency. BARDA officials told us that based on FDA requirements to maintain the license for the pandemic influenza vaccine, the CIADMs may need to produce one annual lot of the vaccine. BARDA will provide payment for activities required to maintain pandemic readiness. According to BARDA officials, the four companies that were awarded contracts to establish the Fill Finish Manufacturing Network will provide additional fill and finish surge capacity in an influenza pandemic to supplement the CIADMs and allow for the fill and finish of 117 million additional doses of pandemic influenza vaccine in 12 weeks. The companies in the Fill Finish Manufacturing Network are encouraged to collaborate with the three CIADMs as well as partner with domestic influenza vaccine manufacturers in order to transfer the fill and finish technology into the Fill Finish Manufacturing Network contractors' facilities, which will become alternate locations on the vaccine manufacturers' licenses for fill finish activities. The network is also expected to provide its services to HHS for production of clinical investigational lots of medical countermeasures that are in development. BARDA anticipates that the Fill Finish Manufacturing Network will be available to receive task orders for core services by the end of fiscal year 2014. For the core services activity, the CIADMs are to provide services for the development and production of CBRN medical countermeasures, such as assisting CBRN medical countermeasure developers in manufacturing small amounts of products that can be used in clinical trials. In the CIADM request for proposals, BARDA outlined a list of core services it expects the CIADMs to provide. (See app. II for a list and description of these core services.) These core services may be provided by the CIADMs directly or by subcontractors. Once the CIADMs are operational, BARDA will issue task orders to the CIADMs for core services using the fair opportunity process outlined in the contracts. For example, BARDA may issue a task order for a CIADM to provide regulatory or technical assistance for a specific CBRN medical countermeasure to a developer with a current BARDA contract. Under the terms of the contracts, the CIADMs are required to make their core services available to HHS for 50 percent of the time, or 6 months per annual contract option period. If HHS does not issue a task order to use a CIADM for core services, or issues a task order for core services for less than 6 months of an annual option period, HHS will provide the CIADM with a facility readiness reimbursement for up to 6 months of that facility's capacity for that option period. BARDA officials told us that some of the CIADMs may begin providing some core services during 2014, and that each of the CIADMs should be capable of providing each of the core services by the end of 2015. Once the new or retrofitted CIADM facilities are operational, a CIADM may begin providing core services, such as producing sufficient amounts of a specific countermeasure at a small scale to be tested in clinical trials for safety and efficacy. BARDA officials told us that the Fill Finish Manufacturing Network is also intended to provide these fill and finish services to CBRN medical countermeasure developers to supplement the core services provided by the CIADMs. This would be in cases such as when one or more of the CIADMs is at capacity or for countermeasures that may not be eligible for CIADM core services. According to BARDA officials the CIADMs and the Fill Finish Manufacturing Network are part of BARDA's overall core service assistance programs, which, since 2011, also include an animal studies network and, since 2014, a new clinical studies network to assist developers of CBRN medical countermeasures. For the workforce training activity, the CIADMs are to develop programs to enhance and maintain U.S. capabilities and expertise to develop and produce CBRN medical countermeasures. These workforce training programs are intended to develop a highly-skilled biotechnology and pharmaceutical workforce proficient in bioprocess engineering, production and quality systems, and regulatory affairs. Through these workforce training programs, the CIADMs are to offer training through means such as certificate programs, workshops, industry short courses, and internships. The CIADMs may provide training in subjects such as an introduction to biotechnology, good manufacturing practices procedures and documentation, facility operations and safety, regulatory compliance, and bioprocess control. BARDA officials told us that during the contract base period, the CIADMs are required to develop their workforce training programs, and that the agency may begin to request workforce training activities through task orders in fiscal year 2014. HHS established the CIADMs to provide needed core services to support the development and production through flexible manufacturing of certain CBRN medical countermeasures that were identified as priorities by PHEMCE. The agency followed the recommendation in the PHEMCE review to establish CIADMs capable of providing such core services. However, it is too early to tell how effective this approach will be because HHS has not begun to issue task orders to CIADMs for core services. Of the three flexible manufacturing activities undertaken at the CIADMs, BARDA officials told us that the provision of core services is the primary activity intended to support the development of certain CBRN medical countermeasures. The core services are specifically designed to provide CBRN developers with needed experience, facilities, and technology to help develop and produce certain medical countermeasures that HHS and PHEMCE identified as priorities. According to BARDA, the three CIADM contractors are entities that have experience in developing, manufacturing, and licensing pharmaceutical products in the United States. BARDA officials told us that the core services to be provided by the CIADMs are the types of services that HHS, PHEMCE, and industry representatives identified as necessary. The 2010 PHEMCE review indicated that services such as regulatory support, animal testing, and, if appropriate, clinical trials were needed to help less-experienced countermeasure developers to get through the challenging advanced development phase. Further, the 2012 PHEMCE implementation plan identified, as a programmatic priority, that CIADMs provide experienced biopharmaceutical development staff at the CIADMs to aid in the development of medical countermeasures. Each of the three CIADMs are to provide 24 core services, directly or by subcontract, to assist countermeasure developers in moving their products through advanced development and production. In addition, BARDA officials indicated that each center can provide specific and slightly different expertise in developing products using alternate technologies, such as recombinant proteins or insect cells. For example, Emergent has experience developing products for infectious disease and biodefense. It has developed BioThrax, the only FDA-licensed anthrax vaccine, and has had several medical countermeasure development contracts with U.S. government agencies. Novartis has experience in developing a novel influenza cell culture as well as in other areas, and has an additional contract with BARDA to produce pandemic influenza vaccine. TAMUS is a large university system with access to a network of experienced partners including GlaxoSmithKline and a highly-rated veterinary school. TAMUS officials told us that their flexible manufacturing capabilities include modular "clean" rooms that can be tailored to each biopharmaceutical product's specifications. According to BARDA officials, the CIADMs are designed to provide developers with access to a variety of core services all in the same facility and the project management experience needed to manage the CBRN medical countermeasure development process. BARDA officials indicated that they envision a countermeasure developer working with a single CIADM on a product's development. Core services provided by the CAIDMs would have the potential to support only the development of medical countermeasures that are biologics-based, such as vaccines and recombinant proteins, but not small molecule countermeasures, such as antibiotics or antivirals. Examples of biologics-based countermeasures for CBRN threats include anthrax vaccine, recombinant protein chemical antidotes, and products to diagnose or treat the effects of exposure to radiological or nuclear agents. BARDA officials told us that the CIADMs are intended to assist in developing biologics-based countermeasures because a 2008 study commissioned by HHS and DOD examining vaccine manufacturing facility alternatives found that there is a sufficient domestic supply of contract manufacturing organizations that could be called upon in a public health emergency to produce small molecule countermeasures. The CIADMs' services are intended to support countermeasure developers who have existing contracts with BARDA and countermeasure developers who have contracts with other PHEMCE partners, such as DOD and NIH. based CBRN countermeasure contracts that are eligible, in whole or in part, to receive core services from the CIADMs. BARDA officials indicated that the CBRN medical countermeasures to be developed under these contracts are consistent with the countermeasures identified as HHS priorities in the 2012 PHEMCE implementation plan. For example, the PHEMCE implementation plan identified the development of an anthrax vaccine as a priority, and 4 of the 23 eligible CBRN medical countermeasure projects focus on developing anthrax vaccine. DOD is also developing an advanced development and manufacturing center for medical countermeasure developers. BARDA officials told us that once the DOD facility is built and operational, the HHS and DOD centers' services will be available under a unified umbrella to provide medical countermeasure development and manufacturing assistance. BARDA has not issued any task orders for core services to date, as the CIADMs are still completing activities associated with the contract base periods. Therefore, it is too early to tell the extent to which countermeasure developers may use CIADM services and how helpful the core services may be to support medical countermeasure development. Under the CIADM contracts, amounts awarded during the contract base period are to fund the construction of physical infrastructure, either the building of new facilities or the retrofitting of existing ones, and other preparations necessary to provide core services to countermeasure developers. As such, the base period of the contract provides a framework to help support countermeasure development, but no direct provision of core services. After the CIADM contractor establishes this framework, BARDA is to award task orders to CIADMs to provide core services to countermeasure developers. Because the CIADMs have not yet completed base period activities, BARDA has not yet issued task orders to provide core services. BARDA officials told us that two CIADMs may be able to provide core services as soon as 2014, a year earlier than planned. According to BARDA officials, once each of the CIADMs have completed construction or retrofitting, so that there is sufficient space to conduct core service activities, BARDA will evaluate and confirm the technical capabilities and capacity of each CIADM to provide core services prior to issuing task orders for these services. Once the CIADMs are operational, BARDA and other agencies that participate in PHEMCE are to select eligible countermeasure development projects for those developers who want to access the CIADMs and issue task orders for core services. In order to select eligible contracts and issue task orders, HHS and PHEMCE have created a CIADM steering committee consisting of senior level officials from BARDA, CDC, FDA, NIH, and DOD. HHS has completed documents that provide governance for this process: a signed charter for the steering committee, preliminary criteria for selecting eligible contracts, and a signed governance document describing how the process will operate. Under the process, the steering committee issues a data call, and in response, medical countermeasure project managers from BARDA, NIH, and DOD are to submit proposals for current medical countermeasure contracts that would benefit from core services provided by the CIADMs to the CIADM steering committee.review the proposals and select the countermeasure projects and developers to which it will offer access to the CIADMs' core services. Next, HHS plans to issue task order requests for each selected project, and the CIADMs will be required to submit proposals in response to the task order requests. Finally, according to BARDA officials, BARDA plans to issue a task order to the CIADM contractor whose proposal best satisfies the selection factors for award under the task order. BARDA officials told us that the CIADM steering committee met in January 2014 and plans to meet at least semiannually. The steering committee is to then While it is too early to tell how effective HHS's approach to providing core services to CBRN medical countermeasure developers through the CIADMs will be, some industry stakeholders we interviewed expressed concerns about demand, availability of funding, and communication with BARDA. For example, some stakeholders questioned whether there would be a sufficient number of countermeasure developers who need advanced development support and who might choose to receive those services from the CIADMs. BARDA officials told us that they have conducted surveys of developers with current BARDA contracts about their interest in receiving core services from the CIADMs. As a result, according to officials, BARDA anticipates having a greater demand for core services than the CIADMs will be able to supply. Additionally, industry stakeholders we spoke to expressed concern that insufficient funding for task orders may affect the success of the CIADMs. BARDA officials told us that funding for task orders will either come from BARDA's budget for specific medical countermeasures, or from other agencies, such as NIH, through interagency agreements, but that the availability of funds for specific development projects would play a role in deciding which projects would receive core services. BARDA officials told us that they expect to have sufficient funding for task orders in fiscal years 2014 and 2015. Some industry stakeholders that we talked to also indicated that BARDA has not yet provided detailed information to industry partners about how countermeasure developers will request and use core services from the CIADMs. BARDA officials told us that BARDA featured the CIADMs and explained CIADM operations at its November 2013 Industry Days. At this time, the eligible countermeasure developers are only those who have current development contracts with BARDA, NIH, and DOD. We provided a draft of this report to HHS, and its comments are reprinted in appendix III. In its comments, HHS acknowledged that it is too early to determine whether the Centers are meeting their prescribed goals because their intended core service activities have not yet begun. However, HHS noted that the CIADMs are nearly a year ahead of schedule in completing construction and ramping up activities in anticipation of providing services once HHS begins issuing task orders in 2014. HHS also noted that the CIADMs are a new model for public- private partnerships, and represent one component of BARDA's comprehensive, integrated approach to supporting advanced research and development, innovation, acquisition, and manufacturing of countermeasures for public health emergency threats. In addition to its overall comments, HHS provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services. 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 this report. GAO staff who made key contributions to this report are listed in appendix IV. Developing the appropriate requirements for growing cells upstream (media) and preparing ingredients for downstream purification (buffers) In addition to the contact named above, Sheila K. Avruch, Assistant Director; Matt Byer; Britt Carlson; Shana R. Deitch; Cathy Hamann; and Tracey King made significant contributions to this report. National Preparedness: HHS is Monitoring the Progress of Its Medical Countermeasure Efforts but Has Not Provided Previously Recommended Spending Estimates. GAO-14-90. Washington, D.C.: December 27, 2013. National Preparedness: Efforts to Address the Medical Needs of Children in a Chemical, Biological, Radiological, or Nuclear Incident. GAO-13-438. Washington, D.C.: April 30, 2013. National Preparedness: Countermeasures for Thermal Burns. GAO-12-304R. Washington, D.C.: February 22, 2012. National Preparedness: Improvements Needed for Acquiring Medical Countermeasures to Threats from Terrorism and Other Sources. GAO-12-121. Washington, D.C.: October 26, 2011. Influenza Pandemic: Lessons from the H1N1 Pandemic Should Be Incorporated into Future Planning. GAO-11-632. Washington, D.C.: June 27, 2011. Influenza Vaccine: Federal Investments in Alternative Technologies and Challenges to Development and Licensure. GAO-11-435. Washington, D.C.: June 27, 2011. National Preparedness: DHS and HHS Can Further Strengthen Coordination for Chemical, Biological, Radiological, and Nuclear Risk Assessments. GAO-11-606. Washington, D.C.: June 21, 2011. Public Health Preparedness: Developing and Acquiring Medical Countermeasures Against Chemical, Biological, Radiological, and Nuclear Agents. GAO-11-567T. Washington, D.C.: April 13, 2011.

Public health emergencies, such as the 2001 anthrax attacks and the 2009 H1N1 influenza pandemic, raise concerns about the nation's vulnerability to threats from CBRN agents and new or reemerging infectious diseases, such as pandemic influenza. HHS is the federal agency primarily responsible for identifying medical countermeasures needed to address the potential health effects from exposure to CBRN agents and emerging infectious diseases. HHS conducted a review to assess how to better address these concerns. Its August 2010 review concluded that the advanced development and manufacture of CBRN medical countermeasures needed greater support. The review recommended that HHS develop centers to provide such support, in part by using flexible manufacturing technologies, such as disposable equipment, to aid in the development and rapid manufacture of products. The Pandemic and All-Hazards Preparedness Reauthorization Act of 2013 requires GAO to examine HHS's flexible manufacturing initiatives and the activities these initiatives will support. This report addresses (1) how much funding HHS has awarded for flexible manufacturing activities for medical countermeasures, and (2) the extent to which these activities will support the development and production of CBRN medical countermeasures. To address these objectives, GAO examined HHS documents and interviewed HHS officials, contractors, and stakeholders. In comments on a draft of the report, HHS agreed with its findings and provided additional information. In fiscal years 2012 and 2013, the Department of Health and Human Services (HHS) Biomedical Advanced Research and Development Authority (BARDA) awarded nearly $440 million in contracts to establish three Centers for Innovation in Advanced Development and Manufacturing (CIADM) and a network of facilities to provide packaging support for medical countermeasure distribution, known as the Fill Finish Manufacturing Network (FFMN). The contracts require the CIADMs to develop three activities to support flexible manufacturing for medical countermeasure development and production: the manufacture of pandemic influenza vaccines during an emergency; core services to support the development and production of chemical, biological, radiological, and nuclear (CBRN) medical countermeasures; and workforce training. During the contract base periods, each CIADM is to retrofit existing or build new facilities able to produce 50 million doses of pandemic influenza vaccine within 4 months of receipt of the influenza virus strain and to establish the capacity to provide core services, such as assisting countermeasure developers by manufacturing products to be used for clinical trials. The CIADMs are also required to develop workforce training programs, which are intended to increase expertise in CBRN medical countermeasure development. The CIADM base contracts are intended to retrofit or build facilities to stand ready to provide these three activities and maintain this readiness through annual contract option periods. Once the facilities are prepared to provide these activities, BARDA may place task orders for provision of CIADM vaccine surge capacity, core services, or training, and BARDA, through the task orders, would provide additional payments to obtain these services. The FFMN is to supplement CIADMs' pandemic influenza surge capacity, packaging up to 117 million doses of pandemic influenza vaccine in 12 weeks, if needed, and can also provide core services as CIADM subcontractors. HHS's CIADM core services activities are designed to support the development and production of certain CBRN medical countermeasures, but it is too early to tell how effective this approach will be. BARDA's establishment of the CIADMs implements a recommendation from HHS's review of the Public Health Emergency Medical Countermeasures Enterprise (PHEMCE)--a federal interagency body that advises HHS on medical countermeasure priorities. The CIADMs are to support the development of biologics-based countermeasures only, which are products like vaccines that are derived from living sources such as cells, because BARDA considers these countermeasures to need the greatest support. BARDA has identified some of its current biologics-based countermeasure development contracts that could use core services' support and are priorities for PHEMCE. However, the CIADMs are still completing activities associated with their contract base period. Thus, BARDA has not issued any task orders for core services to date, but has created a CIADM steering committee and completed guidance to govern the task order process once the CIADMs are operational. Until the CIADM core services are used, it will be unclear how effectively they will support the development and production of CBRN medical countermeasures. Stakeholders we interviewed were uncertain about the demand for and availability of funding for core services. BARDA officials said that they anticipate having sufficient demand for the services and funding for task orders in fiscal years 2014 and 2015.

Assisted living is usually viewed as a residential care setting for persons who can no longer live independently and who require some supervision or help with activities of daily living (ADL) but may not need the level of skilled care provided in a nursing home. It is promoted by assisted living advocates as a long-term care setting that emphasizes residents' autonomy, independence, and individual preferences and that can meet their scheduled and unscheduled needs for assistance. Typically, assisted living facilities provide housing, meals, supervision, and assistance with some ADLs and other needs such as medication administration. However, there is no uniform assisted living model, and considerable variation exists in the types of facilities or settings that hold themselves out to be an assisted living facility. In some cases, assisted living facilities may serve residents who meet the level-of-care criteria for admission to a nursing home. Unlike residents of nursing homes, the majority of whom receive some support from Medicaid or Medicare, most residents of assisted living facilities pay for care out of pocket or through other private funding.However, public sources of funding are available to help pay for services for some residents. For example, some states are attempting to control rising Medicaid costs by encouraging the use of assisted living as an alternative to more expensive nursing home care. Currently, 32 states use Medicaid funds to reimburse for services provided to Medicaid beneficiaries residing in assisted living facilities. However, Medicaid payments do not cover the cost of room and board in assisted living facilities. A combination of individuals' personal resources, residents' Supplemental Security Income (SSI) payments, and optional state payments pay for these costs. The states have the primary responsibility for overseeing the care that assisted living facilities provide residents, and few federal standards or guidelines govern assisted living. The four states we reviewed vary widely in what they require of these facilities. Generally, state regulations focus on three main areas--requirements for the living unit, admission and retention criteria, and the types and levels of services that may be provided. Some states have set very general criteria for the type of resident who can be served and the maximum level of care that can be provided, while other states have set more specific limits in these areas, such as not serving residents who require 24-hour skilled nursing care. provide housekeeping, laundry, meals, transportation to medical appointments, special diets, and assistance with medications. Many facilities also provide skilled nursing services, skilled therapy services, and hospice care for their residents. More specialized services, such as intravenous (IV) therapy and tube feeding, are least likely to be available. Some services may be provided by facility staff or by staff under contract to the facility. In other cases, the facility may arrange with an outside provider to deliver some services, with residents paying the provider directly, or residents may arrange and pay for services on their own. We found considerable variation among facilities and among states in the needs of the residents they serve. The facilities we visited have some residents who are completely independent and ambulatory, some who have severe cognitive impairments, and some who are bedridden and require significant amounts of skilled nursing care. Residents of assisted living facilities typically need the most assistance from facility staff with medications and bathing. Assistance with dressing and toileting or incontinence care are the next most frequently cited needs, and assistance is needed to a lesser extent with eating, transferring, and walking. The highest level of resident need for staff assistance with ADLs was reported among facilities in Oregon and those in Florida licensed as extended congregate care facilities. In addition, residents often have some degree of cognitive impairment, such as significant short-term memory problems, disorientation much of the time, or Alzheimer's disease or another form of dementia. incontinent but can manage on their own or with some assistance, have a short-term need for nursing care, or need oxygen supplementation. Less than 10 percent of the facilities admit residents who are bedridden, require ongoing tube feeding, need a ventilator to assist with breathing, or require IV therapy, and most facilities discharge residents who develop these needs. Most facilities in Oregon indicated that they do not admit people who are bedridden, but half typically retain anyone who becomes bedridden while a resident. Given the variation in what is labeled assisted living, prospective residents must rely primarily on information supplied to them by facilities to select one that best meets their needs and preferences. They can obtain information in a variety of ways, including written materials, facility tours, personal interviews, and personal recommendations. However, in order to help prospective residents compare facilities and select the most appropriate setting for their needs, key information should be provided in writing and in advance of their decision to apply for admission. Yet we found that written material often does not contain key information; facilities do not routinely provide prospective residents with important documents, such as a copy of the contract, to use as an aid in decisionmaking; and written materials that are available are sometimes confusing or even misleading. According to consumer advocates and provider associations, consumers need to be informed about the services that will be provided, their costs, and the respective obligations of both the resident and the provider. Such information should include the cost of the basic service package and what it includes; the availability of additional services, who will provide them, and their cost; the circumstances under which costs may change; how the facility monitors resident health care; the qualifications of staff who provide personal care, medications, and health services; discharge criteria, such as when a resident may be required to leave the facility, and the procedures for notifying and relocating the resident; and grievance procedures. The majority of facilities responding to our survey said they generally provide prospective residents with written information about many of their services and costs in advance of their choosing to apply for admission. However, as shown in figure 1, only about half indicated that they provide information on the circumstances under which the cost of services may change, their policy on medication assistance, or their practice for monitoring residents' needs, and less than half indicated that they provide written information in advance about discharge criteria, staff training and qualifications, or services not covered or available from the facility. residents. Contracts range from a one-page standard form lease to a 55-page document with attachments. Some are written in very fine print, while others are prepared in large, easy-to-read type. Some contracts are complex documents written in specialized legal language, while others are not. Marketing and other written material provided by the facilities also vary widely from a one-page list of basic services and monthly rent to multiple documents of more than 100 pages. We examined written marketing materials and contracts from 60 of the facilities that responded to our survey to determine whether they were complete, clear, and consistent with state laws. While most of the facility materials we reviewed were specific and relatively clear, we found that materials from 20 of the 60 facilities contained language that was unclear or potentially misleading, usually concerning the circumstances under which a resident could be required to leave a facility. Contracts and other written materials we reviewed were often unclear or inconsistent with each other or with requirements of state regulation regarding how long residents could remain as their needs change, resident notification requirements, and other procedural requirements for discharge. For example, the contract from a California facility was vague regarding the circumstances under which a resident could be required to move. It stated that the facility can discharge a resident for good and sufficient cause without elaborating on what the cause might be. The contract also failed to refer to state regulations that provide specific criteria for discharge or eviction. As shown in figure 2, the marketing material one Florida facility uses is potentially misleading in specifying that residents can be assured that if their health changes, the facility can meet their needs and they will not have to move again. However, the facility's contract specifies a range of health-related criteria for immediate discharge, including changes in a resident's condition or need for services that the facility cannot provide. The contract of an Oregon facility is inconsistent with requirements of state regulation regarding notification of residents before discharging them. Oregon regulations specify that residents may not be asked to leave without 14 days' written notice that a facility cannot provide the services they need. However, the facility's contract specifies that residents can be required to move immediately if they need more care than is available at the facility. So you can be assured if health changes occur, we can meet your needs. And you won't have to deal with the hassles of moving again. Resident may not be asked to leave without 14 days' written notice stating reasons for the request. ... may terminate this Residency Agreement immediately ... Due to changes in your physical or mental condition, supplies, services or procedures are required that ... by certification, licensure, design or staffing cannot provide. similar requirements regarding the type and level of services that assisted living facilities must provide residents. In addition to basic accommodations such as room, board, and housekeeping, all the states require facilities to provide residents with basic services, including assistance with ADLs, ongoing health monitoring, and either the provision of or arrangement for medical services, including transportation to and from those services as needed. All four states require assisted living facilities to conduct an initial assessment of a resident's health, functional ability, and needs for assistance. They also require that facilities provide residents with reasonable advance notice of discharge or eviction, and they specify certain rights and procedures for residents to appeal or contest a facility's decision to discharge them. State regulations also generally contain other consumer protection provisions such as those governing resident contracts, criminal background checks for staff, and residents' rights. All four states require that facilities enter into contracts with residents, but they differ in the level of detail they require in these agreements. In addition, all four states require criminal background checks for direct care staff, and three states--California, Florida, and Oregon--require them for facility administrators as well. State regulations often differ, however, with respect to the level of skilled nursing or medical care that facilities can provide to residents and in the circumstances under which it can be provided. For example, California regulations contain a list of services that facility staff are generally not allowed to provide, such as catheter care, colostomy care, and injections. In contrast, Oregon has no explicit restrictions on the care that facility staff may provide, except that certain nursing tasks must be either assigned or delegated to a caregiver by a registered nurse. In addition, while all four states require facilities to provide some degree of supervision with medications, they differ in the degree to which facility staff can be directly involved in administering medications to residents. For example, in California, facility staff may not administer medications but may only assist residents to take their own medications. Requirements for staff levels, qualifications, and training also vary among the states. For example, Florida requires facilities to maintain a minimum number of full-time staff that is based on the total number of residents, California and Ohio require only that the number of staff be adequate to meet the needs of residents, and Oregon does not have any minimum staffing requirement. To ensure that assisted living facilities comply with the various licensing requirements, all four states conduct periodic inspections or surveys of facilities, and they may also conduct more frequent inspections in response to specific complaints. However, the four states vary in the frequency and content of assisted living facility inspections. The frequency of required licensing inspections ranges from at least twice a year for extended congregate care facilities in Florida to at least once every 2 years for assisted living facilities in Oregon. The content of periodic state surveys is driven primarily by the requirements in state regulations. To assist surveyors, Florida and Ohio have developed detailed guidelines, similar to those used for nursing home inspections. In contrast, surveyors in California and Oregon use a checklist that covers a subset of the regulations and focuses on a few selected elements. In addition to the state licensing agency, other state agencies play a role in the oversight of assisted living facilities. In the four states we examined, the state ombudsman agency has a role in overseeing the quality of care and consumer protection of residents in assisted living. The ombudsmen are intended to serve as advocates to protect the health, safety, welfare, and rights of elderly residents of long-term care facilities and to promote their quality of life. One of their primary responsibilities is to investigate and resolve complaints of residents in long-term care facilities, such as nursing homes, board and care homes, and assisted living facilities. Ombudsmen in Florida are also required to inspect each facility annually to evaluate the residents' quality of care and quality of life. In two of the four states, Florida and Oregon, APS agencies are responsible for investigating reports of alleged abuse, neglect, or exploitation of assisted living residents; determining their immediate risk and providing necessary emergency services; evaluating the need for and referrals for ongoing protective services; and providing ongoing protective supervision. Given that the states vary in their licensing requirements for assisted living facilities and in their approaches to oversight, the type and frequency of quality-of-care and consumer protection problems identified by the states may not fully portray the care and services the facilities actually provide. Facilities in states with more licensing standards, more frequent inspections, or more agencies involved in oversight may be more likely to have more problems identified and verified. Using available data and reports from state licensing, ombudsman, and APS agencies in the four states, we determined that 27 percent of the 753 facilities in our sample were cited for five or more quality-of-care or consumer protection related problems during 1996 and 1997. Most of these verified problems pertained to quality-of-care rather than consumer protection issues. As table 1 shows, 22 percent of the facilities we sampled had 5 or more verified quality-of-care problems during the period, and 9 percent of the facilities had 10 or more. The most commonly cited quality-of-care problems included inadequate care, staffing, and medication issues. These problems included instances in which a facility was found to be providing inadequate care to residents as well as instances in which a facility did not demonstrate the capacity to provide sufficient care. For example, staffing problems included cases in which residents suffered harm as a result of insufficient numbers of staff in the facility, as well as cases in which facilities had no documentation to substantiate that required caregiver training had been provided. qualifications and training and facilities not having sufficient staff to care for the residents. For example, in an Oregon facility, family members routinely assisted residents by changing soiled garments because the facility did not have enough staff. The third most frequently cited problem concerned medication-related issues, such as not providing residents their prescribed medication, providing them the wrong medication, or storing medication improperly. For example, an Oregon facility was found to have numerous medication problems, including (1) staff inconsistently and inaccurately transcribing physicians' medication orders to the residents' medication administration records, (2) medications often being borrowed or shared between residents, (3) one staff member signing out narcotics but another staff member on a different shift administering them to residents, and (4) unlicensed caregivers altering residents' prescription labels. Commonly cited consumer protection problems included those related to circumstances under which a resident could be required to leave a facility for health or financial reasons and those related to provisions in resident contracts. For example, a resident of an Oregon facility was told on admission that she could stay until she died. However, the facility issued her an eviction notice when she began to wander within the facility, and it raised her monthly charge from approximately $1,600 to more than $6,400. In Florida, a facility was cited for not having all state-required elements in the resident contract, such as the basic daily, weekly, or monthly rates and a list of available services and fees not included in the basic rate. In Florida and Oregon, the two states in which APS agencies have some responsibility for oversight of residents in assisted living facilities, resident abuse was also often cited. In Oregon, the APS agency verified 48 cases of abuse in 21 of the state's 83 assisted living facilities during 1996 and 1997. In one case, a resident was left on the toilet for 2 hours because the caregiver forgot to return to the resident's room, and there was no call button within reach. In Florida, the APS agency verified 39 cases of abuse in 25 facilities and 103 cases of neglect in 32 facilities during the 2-year period. Florida cases included an instance in which a 90-year-old resident was admitted to a hospital with a stage IV pressure ulcer and found to be dehydrated and poorly nourished. As a growing number of elderly Americans reach the point where they can no longer live independently, many look to assisted living facilities as a viable, homelike setting to meet their long-term care needs. While many residents may enter assisted living facilities with relatively few or minimal needs for supportive or health services, these needs generally increase with age or with declining health. Some assisted living facilities may be able to accommodate these changing and more intensive needs, while others may not. Fully understanding the strengths and limitations of facilities is important as consumers and their families attempt to make the best choice for what is often a difficult decision. care and protect consumers, on appropriate approaches to ensure compliance with those standards, and on the adequacy of information available to help inform consumers' choices and decisions. Mr. Chairman, this concludes my statement. I will be happy to answer any questions that you or other 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 quality-of-care and consumer protection issues in assisted living facilities in California, Florida, Ohio, and Oregon, focusing on: (1) residents' needs and the services provided in assisted living facilities; (2) the extent to which facilities provide consumers with sufficient information for them to choose a facility that is appropriate for their needs; (3) the four states' approaches to oversight of assisted living; and (4) the types of quality-of-care and consumer protection problems they identify. GAO noted that: (1) assisted living facilities vary widely in the types of services they provide and the residents they serve; (2) they range from small, freestanding, independently-owned homes with a few residents to large, corporately owned communities that offer both assisted living and other levels of care to several hundred residents; (3) some assisted living facilities offer only meals, housekeeping, and limited personal assistance, while others provide or arrange for a range of specialized health and related services; (4) they also vary in the extent to which they admit residents with certain needs and whether they retain residents as their needs change; (5) given the variation in what is labelled assisted living, prospective residents must rely on information supplied to them by facilities to select one that best meets their needs and preferences; (6) in many cases, assisted living facilities did not routinely give consumers sufficient information to determine whether a particular facility could meet their needs, for how long, and under what circumstances; (7) moreover, GAO identified numerous examples of vague, misleading, or even contradictory information contained in written materials that facilities provide to consumers; (8) the states have the primary responsibility for the oversight of care furnished to assisted living facility residents; (9) all four states reviewed have licensing requirements that must be met by most facilities providing assisted living services, and state licensing agencies routinely inspect or survey facilities to ensure compliance with state regulations; (10) however, the licensing standards as well as the frequency and content of the periodic inspections vary across the states; (11) given the absence of any uniform standards for assisted facilities across the states and the variation in their oversight approaches, the results of state licensing and monitoring activities on quality-of-care and consumer protection issues also vary, including the frequency of identified problems; (12) however, using available inspection surveys and reports from the other oversight agencies in the four states, GAO determined that the states cited more than 25 percent of the 753 facilities in its sample for five or more quality-of-care or consumer-protection related deficiencies or violations during 1996 and 1997; and (13) state officials attributed most of the common problems identified in assisted living facilities to insufficient staffing and inadequate training, exacerbated by high staff turnover and low pay for caregiver staff.

Geothermal energy is literally the heat of the earth. This heat is abnormally high where hot and molten rocks exist at shallow depths below the earth's surface. Water, brines, and steam circulating within these hot rocks are collectively referred to as geothermal resources. Geothermal resources often rise naturally to the surface along fractures to form hot springs, geysers, and fumaroles. For centuries, people have used naturally occurring hot springs as places to bathe, swim, and relax. More recently, some individuals have constructed buildings over these springs, transforming them into elaborate spas and resorts, thereby establishing the first direct use of geothermal resources for business purposes. Businesses have also established other direct uses of geothermal resources by drilling wells into the earth to tap the hot water for heating buildings, drying food, raising fish, and growing plants. Where the earth's temperature is not high enough to supply businesses with geothermal resources for direct use, people have made use of the ground's heat by installing geothermal heat pumps. Geothermal heat pumps consist of a heat exchanger and a loop of pipe extending into the ground to draw on the relatively constant temperature there for heat in the winter and air conditioning in the summer. Geothermal resources can also generate electricity, and this is their most economically valuable use today. Only the highest temperature geothermal resources, generally above 200 degrees Fahrenheit, are suitable for electricity generation. When companies are satisfied that sufficient quantities of geothermal resources are present below the surface at a specific location, they will drill wells to bring the geothermal fluids and steam to the surface. Upon reaching the surface, steam separates from the fluids as their pressure drops, and the steam is used to spin the blades of a turbine that generates electricity. The electricity is then sold to utilities in a manner similar to sales of electricity generated by hydroelectric, coal- fired, and gas-fired power plants. In the United States, geothermal resources are concentrated in Alaska, Hawaii, and the western half of the country, primarily on public lands managed by the Bureau of Land Management (BLM). The Congress set forth procedures in the Geothermal Steam Act of 1970 for leasing these public lands, developing the geothermal resources, and collecting federal royalties. Today, BLM leases these lands and sets the royalty rate, and the Minerals Management Service (MMS)--another agency within the Department of the Interior (DOI)--collects the federal geothermal royalties and disburses to the state governments its share of these royalties as required by law. In 2005, MMS collected $12.3 million in geothermal royalties, almost all of which was derived from the production of electricity. Geothermal resources currently account for about 0.3 percent of the annual electricity produced in the United States, or 2,534 megawatts-- enough electricity to supply 2.5 million homes. Even though the percentage of electricity generated from geothermal resources is small nationwide, it is locally important. For example, geothermal resources provide about 25 percent of Hawaii's electricity, 5 percent of California's electricity, and 9 percent of northern Nevada's electricity. As of January 2006, 54 geothermal power plants were producing electricity, and companies were constructing 6 additional geothermal power plants in California, Nevada, and Idaho that collectively will produce another 390 megawatts of electricity. Over half of the nation's electricity generated from geothermal resources comes from geothermal resources located on federal lands in The Geysers Geothermal Field of northern California; in and near the Sierra Nevada Mountains of eastern California; near the Salton Sea in the southern California desert; in southwestern Utah; and scattered throughout Nevada. Industry and government estimates of the potential for electricity generation from geothermal resources vary widely, due to differences in the date by which forecasters believe the electricity will be generated, the methodology used to make the forecast, assumptions about electricity prices, and the emphasis placed on different factors that can affect electricity generation. Estimates published since 1999 by the Department of Energy, the California Energy Commission, the Geothermal Energy Association, the Western Governor's Association, and the Geo-Heat Center at the Oregon Institute of Technology indicate that the potential for electrical generation from known geothermal resources over the next 9 to 11 years is from about 3,100 to almost 12,000 megawatts. A more comprehensive and detailed study of electricity generation from all geothermal resources in the United States was published in 1978 by the U.S. Geological Survey (USGS). This assessment estimated that known geothermal resources could generate 23,000 megawatts if all of them were developed. The USGS estimate is greater because it did not consider how much electricity could be economically produced, given competing commercial sources of electricity. In addition, the USGS estimated that undiscovered resources could generate an additional 72,000 to 127,000 megawatts. In short, geothermal resources that could generate electricity are potentially significant but largely untapped. In 2005, over 2,300 businesses and heating districts in 21 states used geothermal resources directly for heat and hot water. Nearly all of these are on private lands. About 85 percent of these users are employing geothermal resources to heat homes, businesses, and government buildings. While most users heat one or several buildings, some users have formally organized heating districts that pipe hot water from geothermal wells to a central facility that then distributes it to heat many buildings. The next most plentiful direct use application is for use by resorts and spas, accounting for over 10 percent of sites. About 244 geothermally heated resorts and spas offer relaxation and therapeutic treatments to customers in 19 states. Two percent of geothermal direct use applications consist of heated greenhouses in which flowers, bedding plants, and trees are grown. Another two percent of geothermal direct use applications are for aquaculture operations that heat water for raising aquarium fishes for pet shops; catfish, tilapia, freshwater shrimp and crayfish for human consumption; and alligators for leather products and food. Other direct use geothermal applications include dehydrating vegetables, like onions and garlic, and melting snow on city streets and sidewalks. The potential for additional direct use of geothermal resources in the United States is uncertain due to the geographically widespread nature of low-temperature geothermal resources and the many different types of applications. USGS preformed the first national study of low-temperature geothermal sites in 1982, but this study was not specific enough to identify individual sites for development. In 2005, the Geo-Heat Center at the Oregon Institute of Technology identified 404 wells and springs that might be commercially developed for direct use applications--sites that had the appropriate temperatures and are within 5 miles of communities. Geothermal heat pumps have become a major growth segment of the geothermal industry. They make use of the earth's warmer temperature in the winter to heat buildings and use the earth's cooler temperature in the summer for air conditioning. The Geothermal Heat Pump Consortium estimated that 1 million units were in operation in all 50 states as of January 2006. Because geothermal heat pumps are effective where ground temperatures are between 40 and 70 degrees F, they can be installed in almost any location in the United States and, therefore, constitute the most widespread geothermal application and represent the greatest potential for future development. The development of geothermal resources for electricity production faces major challenges, including high risk and financial uncertainty, insufficient transmission capacity, and inadequate technology. Geothermal groups reported that most attempts to develop geothermal resources for electricity generation are unsuccessful, that costs to develop geothermal power plants can surpass $100 million, and that it can take 3 to 5 years for plants to first produce and sell electricity. Although some geothermal resources are easy to find because they produce tell-tale signs such as hot springs, most resources are buried deep within the earth--at depths sometimes exceeding 10,000 feet--and finding them often requires an in- depth knowledge of the area's geology, geophysical surveys, remote sensing techniques, and at least one test well. The risks and high initial costs associated with exploring for and developing geothermal resources limit financing. Moreover, few lenders will finance a geothermal project until a contract has been signed by a utility or energy marketer to purchase the anticipated electricity. Geothermal industry officials describe the process of securing a contract to sell electricity as complicated and costly. In addition, lack of available transmission creates a significant impediment to developing geothermal resources for electricity production. In the West where most geothermal resources are located, many geothermal resources are far from existing transmission lines, making the construction of additional lines economically prohibitive, according to federal, state, and industry officials. Finally, inadequate technology adds to the high costs and risky nature of geothermal development. For example, geothermal resources are hot and corrosive and often located in very hard and fractured rocks that wear out and corrode drilling equipment and production casing. Developing geothermal resources for direct use also faces a variety of business challenges, including obtaining capital, overcoming specific challenges unique to their industry, securing a competitive advantage, distant locations, and obtaining water rights. While the amount of capital to start a direct-use business that relies on geothermal resources is small compared to the amount of capital necessary to build a geothermal power plant, this capital can be substantial relative to the financial assets of the small business owner or individual, and commercial banks are often reluctant to loan them money. Challenges that are unique to certain industries include avoiding diseases in fish farms; combating corrosive waters used in space heating; and controlling temperature, humidity, and light according to the specifications of the various plant species grown in greenhouses. Even when overcoming these unique challenges, successful operators of direct use businesses may need to secure a competitive advantage, and some developers have done so by entering specialty niches, such as selling alligator meat to restaurants and constructing an "ice museum" in Alaska where guests can spend the night with interior furnishings sculptured from ice. Furthermore, developing direct uses of geothermal resources is also constrained because geothermal waters cannot be economically transported over long distances without a significant loss of heat. Even when these resources need not be moved, obtaining the necessary state water rights to geothermal resources can be problematic. In areas of high groundwater use, the western states generally regulate geothermal water according to some form of the doctrine of prior appropriations, under which specific amounts of water may have already been appropriated to prior users, and additional water may not be available. Developing geothermal power plants on federal lands faces additional challenges. Power plant developers state that the process for approving leases and issuing permits to drill wells and construct power plants has become excessively bureaucratic. BLM and Forest Service officials often have to amend or rewrite resource or forest management plans, which can add up to 3 years to the approval process. Delays in finalizing the resource and forest management plans and in conducting other environmental reviews have resulted in backlogs of lease applications in California and Nevada, particularly when the public has raised more environmental issues. Geothermal applications, permits, and environmental reviews are also delayed by a lack of staff and budgetary resources at the BLM state and field offices that conduct the necessary work and when BLM must coordinate with the Forest Service, which manages land in some project areas. In addition, developers of geothermal resources for both power plants and direct uses faced a challenging federal royalty system prior to the Energy Policy Act. While developers of geothermal power plants generally did not consider the federal royalty system to be a major obstacle in constructing a geothermal power plant, some described paying royalties as burdensome and reported expending considerable time and expense on royalty audits. On the other hand, some developers of geothermal resources for direct use stated that the federal royalty system was a major obstacle and no longer economically feasible. The Energy Policy Act of 2005 includes a variety of provisions designed to help address the challenges of developing geothermal resources, including the high risk and financial uncertainty of developing renewable energy projects and the lack of sufficient transmission capacity. Provisions within the Act address high risk and financial uncertainty by providing tax credits and other incentives. For example, starting on January 1, 2005, the Act extends for 10 years a tax credit on the production of electricity from geothermal resources for already existing plants and for any new plants producing by December 31, 2007. The Act also provides a financial incentive for tax-exempt entities, such as municipalities and rural electric cooperatives, by allowing the issuance of clean renewable energy bonds for the construction of certain renewable energy projects, including geothermal electricity plants. Investors can purchase the bonds, which pay back the original principal and also provide a federal tax credit instead of an interest payment. Another provision in the Act may decrease the high risk of geothermal exploration by directing the Secretary of the Interior to update USGS's 1978 Assessment of Geothermal Resources, which is in need of revision because significant advancements in technology have occurred since its publication. The Act addresses transmission challenges by providing the Federal Energy Regulatory Commission (FERC) with new authorities in permitting transmission facilities and in developing incentive-based rates for electricity transmission in interstate commerce. FERC can now approve new transmission lines in certain instances when a state fails to issue a permit within 1 year of a company's filing of an application, and companies that acquire FERC permits for transmission facilities can acquire rights of way through eminent domain proceedings. In November 2005, FERC initiated the rulemaking process for establishing these rates. State governments are also addressing the financial uncertainty of developing renewable energy projects by creating additional markets for their electricity through Renewable Portfolio Standards (RPS). An RPS is a state policy directed at electricity retailers, including utilities, that either mandates or encourages them to provide a specific amount of electricity from renewable energy sources, which may include geothermal resources. To date, 22 states plus the District of Columbia have RPSs, and three other states have set RPS targets, although not all states have significant geothermal resources. Additional state programs also provide tax credits and other financial incentives for renewable energy development, including electricity generation from geothermal resources. These incentives include property tax incentives, sales tax incentives, and business tax credits. To address technological challenges, the state of California and the Department of Energy provide financial assistance and grants to the geothermal industry. California's Geothermal Resources Development Account competitively awards grants to promote research, development, demonstration, and commercialization of geothermal resources. California's Public Interest Energy Research Program also funds awards for renewable resource projects, including geothermal projects. On the federal side, the Department of Energy's Geothermal Technologies Program competitively awards cost-sharing grants to industry for research and development. In the past, program funds have been used to pioneer new drill bits, demonstrate the large scale use of low-temperature geothermal resources to generate electricity, produce new seismic interpretation methods, commercialize geothermal heat pumps, develop slimhole (reduced diameter) drilling for exploration, and produce a strategy for reinjection at The Geysers Geothermal Field. The program's budget was $23 million in fiscal year 2006. However, the President's budget contains no funding for fiscal year 2007, and the House's proposal for fiscal year 2007 is to appropriate a substantially reduced amount of $5 million. In contrast to these funding decisions, the Senate Energy and Water Appropriations Subcommittee just recently approved a budget of $22.5 million for geothermal research and development. While the future impacts of reduced or eliminated funding for geothermal technology is uncertain, industry representatives believe that this funding is necessary to address the near-term need to expand domestic energy production and the long-term need to find the breakthroughs in technology that could revolutionize geothermal power production. The Energy Policy Act also contains provisions aimed at addressing the challenges of developing geothermal resources on federal lands. Specific provisions are aimed at streamlining or simplifying the federal leasing system, combining prospective federal lands into a single lease, and improving coordination between DOI and the Department of Agriculture. The Act also requires the Secretary of the Interior and the Secretary of Agriculture to enter into a memorandum of understanding that establishes an administrative procedure for processing geothermal lease applications and that establishes a 5-year program for leasing of Forest Service lands and reducing its backlog of lease applications, as well as establishing a joint data retrieval system for tracking lease and permit applications. Finally, the Act also contains provisions that simplify and/or reduce federal geothermal royalties on resources that generate electricity and on resources put to direct use. MMS is in the early stages of implementing these provisions, and hence it is too early to assess their overall effectiveness. A royalty provision of the Energy Policy Act redistributes the federal royalties collected from geothermal resources--cutting in half the overall geothermal royalties previously retained by the federal government. Established by the Geothermal Steam Act of 1970, as amended, the prior distribution provided that 50 percent of geothermal royalties be retained by the federal government and the other 50 percent be disbursed to the states in which the federal leases are located. While the Energy Policy Act continues to provide that 50 percent of federal geothermal royalties be disbursed to the states in which the federal leases are located, an additional 25 percent will now be disbursed to the counties in which the leases are located, leaving only 25 percent to the federal government. The Act also changes how the federal government's share of geothermal royalties can be used. Prior to passage of the Act, 40 percent of the federal government's share was deposited into the reclamation fund created by the Reclamation Act of 1902, and 10 percent was deposited into the general fund of the Department of the Treasury. For the first 5 fiscal years after passage of the Act, the federal government's share is now to be deposited into a separate account within the Department of the Treasury that the Secretary of the Interior can use without further appropriation and fiscal year limitation to implement both the Geothermal Steam Act and the Energy Policy Act. While, for most leases, the Energy Policy Act directs that the Secretary of the Interior seek to maintain the same level of royalty revenues as before the Act, our analysis suggests that this will be difficult because changing electricity prices could significantly affect the percentage of future royalty revenues collected. Electricity prices are not possible to predict with certainty, and as discussed below, changing prices could significantly impact royalty revenues because electricity sales account for about 99 percent of total geothermal royalty revenues. The Act contains provisions for each of three specific types of leases that generate electricity: (1) leases that currently produce electricity, (2) leases that were issued prior to passage of the Act and will first produce electricity within 6 years following the Act's passage, and (3) leases that have not yet been issued. For leases that currently produce electricity, future geothermal royalty revenues will depend on electricity prices. The Act specifies that the Secretary of the Interior is to seek to collect the same level of royalties from these leases over the next 10 years as it had before the Act's passage but under a simpler process. Prior to passage of the Act, lessees of most geothermal electricity projects paid federal royalties according to a provision within MMS's geothermal valuation regulations referred to as the "netback process." To arrive at royalties due under this process, lessees are to first subtract from the electricity's gross sales revenue their expenses for generation and transmission and then multiply that figure by the royalty rate specified in the geothermal lease, which is from 10 to 15 percent. The Act simplifies the process by allowing lessees, within a certain time period, the option to request a modification to their royalty terms if they were producing electricity prior to passage of the Act. This modification allows for royalties to be computed as a smaller percentage of the gross rather than the net sales revenues from the electricity so long as this percentage is expected to yield total royalty payments equal to what would have been received before passage of the Act. Royalty revenues from a geothermal lease currently producing electricity will remain the same if the lessee elects not to convert to the new provision of the Act. On the other hand, if the lessee converts to the new provision, royalty revenues should remain about the same only if DOI negotiates with the lessee a future royalty percentage based on past royalty history and if electricity prices remain relatively constant. If royalties are based on historic percentages of gross sales revenues and electricity prices increase, however, royalty revenues will actually decrease relative to what the federal government would have collected prior to passage of the Act. The federal government will receive less revenue under this situation because expenses for generation and transmission do not increase when electricity prices increase, and the higher royalty rate specified in the lease is not applied to the increase in sales revenues. For the second type of lease--leases that were issued before the Act and that will first produce electricity within 6 years after the Act's passage-- royalty revenues are likely to drop somewhat because lessees are likely to take advantage of an incentive within the Act. The Act allows for a 50 percent decrease in royalties for the first 4 years of production so long as the lessee continues to use the netback process. Because of the substantial reduction in royalties, it is likely that lessees owning leases issued before passage of the Act will elect to pay only 50 percent of the royalties due on new production for the 4- year period allowed by the Act. This incentive also applies to sales revenues from the expansion of a geothermal electricity plant, so long as the expansion exceeds 10 percent of the plant's original production capacity. Owners of geothermal electricity plants currently paying royalties under the netback process may elect to take the production incentive for new plant expansions if they perceive that the royalty reduction is worth the additional effort and expense in calculating payments under the netback process and worth the possibility of being audited. It is difficult to predict exactly how royalty revenue from the third type of lease--leases that have not yet been issued--will change, but it appears that revenue impacts are likely to be minor, based on our review of historic royalty data. The Act specifies that the Secretary of the Interior should seek to collect the same level of royalty revenues over a 10-year period as before passage of the Act. The Act also simplifies the calculation of royalty payments by providing that, for future leases, royalties on electricity produced from federal geothermal resources should be not less than 1 percent and not greater than 2.5 percent of the sales revenue from the electricity generated in the first 10 years of production. After 10 years, royalties should be not less than 2 percent and not greater than 5 percent of the sales revenue from the electricity. Our analysis of data for seven geothermal projects showed that lessees were paying a wide range of percentages after 10 years of production--from 0.2 to 6.3 percent. Three of the seven projects paid under the minimum 2 percent royalty rate prescribed in the Act, suggesting that some projects in the future could pay more under the Act's new provisions than they would otherwise have paid. On the other hand, one project paid greater than the maximum 5 percent prescribed in the Act, suggesting that it is possible for a plant to pay less in the future than it would otherwise have paid. However, neither the amount that the one plant would have overpaid nor the amounts that the three plants would have underpaid are significant. Even though provisions of the Energy Policy Act may decrease royalties on direct use applications, the impact of these provisions is likely to be small because total royalty collections from direct use applications are minimal. In fiscal years 2000 through 2004, MMS reported collecting annually about $79,000 from two direct use projects, or less than 1 percent of total geothermal royalties. While a provision of the Act may encourage the use of federal geothermal resources for direct use by lowering the federal royalty rate, we believe based on challenges facing developers that it is unlikely that this royalty incentive alone will stimulate substantial new revenues to compensate for the loss in revenue due to the lower royalty rate. We believe that in order to substantially increase the development of federal direct use applications, developers must overcome the relatively high capital costs for investors, unique business challenges, and water rights issues. Finally, MMS does not routinely collect data from the sales of electricity that are necessary to demonstrate that MMS is seeking to maintain the same level of royalty collections from geothermal resources, as directed by the Energy Policy Act. For most geothermal leases, MMS will need to calculate the percentage of gross sales revenues that lessees will pay in future royalties from electricity sales and compare this to what lessees would have paid prior to the Act. However, MMS does not routinely collect these data. Accordingly, we are recommending that the Secretary of the Interior instruct the appropriate managers within MMS to collect from royalty payors the gross sales revenues from the electricity they sell. MMS has agreed to do so. The Energy Policy Act of 2005 addresses a wide variety of challenges facing developers of geothermal resources. The Act incorporates many of the lessons learned by state governments and federal agencies in an attempt to provide financial incentives for further development and make federal processes more efficient. However, the Act was only recently adopted, and insufficient time has passed to assess its effectiveness. Several of the Act's major provisions will be left to the federal agencies within DOI for implementation, and the drafting and public comment period for regulations that implement these provisions will not occur overnight. Agencies will also need to spend considerable time and effort in working out the details for implementation and securing the necessary budgets. Hence, the fate of a significant portion of our nation's geothermal resources depends on the actions of these federal agencies. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee may have at this time. For further information about this testimony, please contact me, Jim Wells, at 202-512-3841 or [email protected]. Contributors to this testimony include Ron Belak, John Delicath, Dan Haas, Randy Jones, Frank Rusco, Anne Stevens, and Barbara Timmerman. 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 Energy Policy Act of 2005 (Act) contains provisions that address challenges to developing geothermal resources, including the high risk and uncertainty of developing geothermal power plants, lack of sufficient transmission capacity, and delays in federal leasing. Among the provisions are means to simplify federal royalties on geothermal resources while overall collecting the same level of royalty revenues. This testimony summarizes the results of a recent GAO report, GAO-06-629 . In this testimony, GAO describes: (1) the current extent of and potential for geothermal development, (2) challenges faced by developers of geothermal resources, (3) federal, state, and local government actions to address these challenges, and (4) how provisions of the Act are likely to affect federal geothermal royalty disbursement and collections. Geothermal resources currently produce about 0.3 percent of our nation's total electricity and heating needs and supply heat and hot water to about 2,300 direct-use businesses, such as heating systems, fish farms, greenhouses, food-drying plants, spas, and resorts. Recent assessments conclude that future electricity production from geothermal resources could increase by 25 to 367 percent by 2017. The potential for additional direct-use businesses is largely unknown because the lower temperature geothermal resources that they exploit are abundant and commercial applications are diverse. One study identified at least 400 undeveloped wells and hot springs that have the potential for development. In addition, the sales of geothermal heat pumps are increasing. The challenges to developing geothermal electricity plants include a capital-intensive and risky business environment, technological shortcomings, insufficient transmission capacity, lengthy federal review processes for approving permits and applications, and a complex federal royalty system. Direct-use businesses face numerous challenges, including challenges that are unique to their industry, remote locations, water rights issues, and high federal royalties. The Act addresses many of these challenges through tax credits for geothermal production, new authorities for the Federal Energy Regulatory Commission, and measures to streamline federal leasing and simplify federal royalties, which totaled $12.3 million in 2005. In addition, the Department of Energy and the state of California provide grants for addressing technology challenges. Furthermore, some state governments offer financial incentives, including investment tax credits, property tax exclusions, sales tax exemptions, and mandates that certain percentages of electricity within the state be generated from renewable resources. Under the Act, federal royalty disbursement will significantly change because half of the federal government's share will now go to the counties where leases are located. Although the Act directs the Secretary of the Interior to seek to maintain the same level of royalty collections, GAO's analysis suggests this will be difficult because changing electricity prices could significantly affect royalty revenues. Finally, MMS does not collect sales data that are necessary to monitor these royalty collections.

In passing the Federal Mine Safety and Health Act of 1977 (the "Mine Act"), Congress gave much of the responsibility for ensuring the safety and health of mine workers to MSHA. Under the stringent requirements of the Mine Act, MSHA must protect the health and safety of miners by thoroughly inspecting each underground coal mine at least four times a year, citing mine operators for violations of the Mine Act, ensuring that hazards are quickly corrected, restricting operations or closing mines for more serious violations, and investigating serious mine accidents. In addition, MSHA must approve the initial plans that mine operators prepare for essential systems that protect mine workers--such as ventilation and roof support systems--and revisions to the plans. To carry out these responsibilities, in 2003, MSHA had approximately 350 inspectors and 210 specialists in eleven district offices. At the end of 2002, the United States had approximately 2,050 coal mines--about 700 underground coal mines and 1,350 surface mines. From 1993 to 2002, the number of underground and surface coal mines in the United States declined and the number of mine workers decreased. Despite this decrease in the number of mines and miners, production remained constant because of the increased use of mechanized mining equipment and more efficient mining techniques. In addition, over the past several decades, coal production has shifted from primarily underground mines to large surface mines, including mines in Wyoming and other areas west of the Mississippi that produce millions of tons of coal annually. Underground coal mines are more dangerous than surface mines for several reasons. One critical factor that contributes to the hazardous working conditions is highly explosive methane gas, which is often produced in large quantities when coal is extracted from underground mines. Additional factors are the geological conditions in many areas of the country that make the roofs of mines unstable, the danger posed by fire in an underground mine, coal and silica dust that can cause silicosis and pneumoconiosis (black lung disease), and the close proximity of unknown areas of abandoned mines, which can lead to flooding of the mine. As shown in figure 1, for the 10-year period from 1993 to 2002, fatality rates for underground coal mines were much higher than those for surface mines. MSHA had extensive procedures and highly qualified staff for approving two of the three types of plans we reviewed--ventilation and roof support plans--and most of these plans were reviewed and approved on a timely basis. However, MSHA headquarters did not adequately monitor completion of required inspections of the ventilation and roof support plans; data maintained by the district offices indicates that some districts were not completing these inspections as required. In addition, MSHA headquarters had not provided clear guidance to the districts on coordinating inspections related to mine plans with quarterly inspections of underground coal mines in order to avoid duplication of effort by district staff. Finally, staffing shortages prevented MSHA from reviewing and approving plans for containing debris produced by the mines on a timely basis. MSHA had extensive procedures for approving ventilation and roof support plans. Mine operators were required to submit their initial ventilation and roof support plans to the MSHA district in which the mine was located for approval prior to operating a mine and were required to submit revised plans to the district for approval at least every 6 months. The district managers were ultimately responsible for approving ventilation and roof support plans submitted to their districts. Generally, districts were required to approve ventilation and roof support plans within 45 days of receipt unless problems are found that must be resolved. In some of the districts we visited, state mine agencies were also required to approve the mine plans. We reviewed this information for a 5-year period, 1998 to 2002, and found that most districts approved these plans on a timely basis. However, MSHA headquarters did not adequately monitor completion of required inspections of ventilation and roof support plans by the district offices. Districts were required to conduct inspections at least once every 6 months of the ventilation and roof support plans in order to ensure that mine operators were following the requirements of the plans and that they were updating the plans to reflect changes in the ventilation and roof support systems. The specialists who reviewed the mine plans during the approval process also conducted many of these inspections. Our analysis of the information submitted by the district offices to MSHA headquarters on the completion of these inspections for the 5-year period from 1998 to 2002 indicated that several districts had not completed the inspections as required. As a result of districts not completing these inspections, some mines may have been operating without adequate ventilation or roof support plans. Inspections of the mines' ventilation and roof support plans are essential in ensuring adequate airflow and controlling the accumulation of dust particles in underground coal mines as well as ensuring that the roofs are adequately supported. Inadequate ventilation systems or roof support systems can directly affect the safety and health of mine workers. For example, our review of MSHA's data on fatalities at underground coal mines from 1998 to 2002 showed that problems related to ventilation and roof support systems accounted for high proportions of fatalities in underground coal mines. For this 5-year period, ignitions or explosions from excessive gas or coal dust accounted for the third largest percentage of all fatalities--14 percent--and roof falls accounted for the largest percentage--34 percent. In addition, MSHA did not always effectively coordinate its inspections of mine plans with the comprehensive quarterly inspections of underground coal mines in order to avoid duplication of effort by district staff. In two of the five districts we visited, we found that, in some instances, the specialists who conduct the inspections of mine plans and inspectors who conduct quarterly inspections were duplicating each other's work, resulting in an inefficient use of MSHA's resources. MSHA is also responsible for approving plans for containing mine debris, called impoundment plans. As of 2003, MSHA had responsibility for approximately 600 coal impoundments. Many of these plans are extremely complex and require highly qualified engineers who are familiar with technical areas such as dam building techniques, hydrology, and soil conditions. Failure of an impoundment can be devastating to nearby communities, which may be flooded with water and sludge, and to the environment, affecting streams and water supplies for years afterwards. Because of the potential for failure, such as the impoundment dam failure in 1972 in Buffalo Creek, West Virginia, in which 125 people were killed and 500 homes were destroyed, MSHA is extremely careful about approving impoundment plans. At the time of our 2003 report, MSHA had conducted two reviews of its procedures for approving impoundment plans, and has begun to take steps for improving the process. One review identified several weaknesses in the procedures, including the need for the agency to develop guidance for determining which impoundment plans should receive expedited review as well as evaluating the staffing levels needed to ensure timely and complete review of the plans. MSHA officials acknowledged that the delays in the review and approval of impoundment plans had been a problem for a number of years. They also told us that they had taken a number of steps to alleviate these delays, such as hiring additional engineers to review impoundment plans and provide assistance to staff in its district offices. MSHA's procedures for conducting inspections of underground coal mines were comprehensive; its inspectors were highly qualified; and it conducted almost all quarterly inspections as required, but the agency's inspection process could be improved in a number of ways. Although MSHA had extensive inspection procedures, some of them were unclear, while others were difficult to locate because they were contained in so many different sources. In addition, MSHA conducted over 96 percent of required quarterly inspections each year over the 10-year period from 1993 to 2002, but MSHA headquarters did not provide adequate oversight to ensure that its district offices followed through to make sure that unsafe conditions identified during inspections were corrected by the deadlines set by inspectors. And, although MSHA had highly qualified inspectors, as of 2003, it had no plan for addressing the fact that about a large percentage of them (44 percent) were going to be eligible to retire within 5 years. Finally, MSHA did not collect all of the information it needed to assess the effectiveness of its enforcement efforts because it did not collect data on contractor staff who work at each mine. Although MSHA had extensive inspection procedures, we found that some of them were unclear and were located in so many different sources that they could be difficult to find. Some procedures did not clearly specify the criteria inspectors should use in citing violations. For example, several district officials in two of the districts we visited told us that the lack of specific criteria for floating coal dust made it difficult to determine what was an allowable level. As a result, mine inspectors had to rely on their own experience and personal opinion to determine if the accumulation of floating coal dust was a safety hazard that constituted a violation. In some instances, according to the inspectors and district managers, this led to inconsistencies in inspectors' interpretations of the procedures; inspectors have cited violations for levels of floating coal dust that have not brought citations from other inspectors. In addition, the inspections procedures were located in so many different handbooks, manuals, policy bulletins, policy letters, and memorandums that it could be difficult for inspectors to make sure that they were using the most recent guidance and procedures. MSHA headquarters officials told us that they were working to clarify the agency's procedures and consolidate the number of sources in which they were located. MSHA's data on its quarterly inspection completion rates indicated that, from fiscal year 1993 to 2002, its district offices completed over 96 percent of these inspections as required. However, MSHA headquarters did not monitor district office performance to ensure that inspectors followed up with mine operators to determine that unsafe conditions identified during these inspections were corrected. The deadlines that inspectors set for mine operators to correct safety and health hazards varied based on a number of factors, including the degree of danger to miners affected by the violation. They ranged from 15 minutes from the time the inspector wrote the citation to 27 days afterwards. MSHA's procedures required inspectors to follow up with mine operators within the deadline set or to extend the deadline. Inspectors could extend the deadlines under certain circumstances, such as when a mine had temporarily shut down its operations or when a mine operator was unable to obtain a part needed to correct a violation cited for a piece of equipment. Our analysis of MSHA's data for the 10-year period from 1993 to 2002 showed that, for almost half of the 536,966 citations for which a deadline was established, inspectors did not follow up in a timely manner to make sure mine operators had corrected the hazards. However, as shown in figure 2, of the citations for which the inspectors did not follow up on a timely basis, they followed up on most within 4 days of the deadline and, for all but 11 percent of the citations, they followed up within 14 days. The more serious type of violations--"significant and substantial" violations--accounted for a significant proportion of the citations for which inspectors did not follow up by the deadlines. For the over 235,447 significant and substantial violations from 1993 to 2002 for which a deadline was specified, inspectors did not follow up on more than 48 percent of the citations by the deadline. However, inspectors followed up on all but about 10 percent of the citations for significant and substantial violations within 14 days of the deadline. MSHA headquarters and district officials told us that there were many different reasons why inspectors may not have followed up by the deadlines specified in their citations. One of these, according to several district officials, was scheduling conflicts that prevented inspectors from visiting the mine within the specified deadline. In addition, there were circumstances in which inspectors were not able to follow up, such as when a mine operator suspended a mine's operations. However, in these instances, the inspector should have updated the database to show that the deadline was extended. In addition, although we found that, as of 2003, about 44 percent of MSHA's highly trained and experienced underground coal mine inspectors would be eligible to retire within 5 years--and the agency's historic attrition rates indicated that many of them would actually retire--the agency had not developed a plan for replacing these inspectors. MSHA also had fewer inspector trainees on board than vacancies that would need to be filled when inspectors retired. MSHA headquarters officials told us that it would be difficult for them quickly hire and train replacements for the inspectors who retired. In addition to the fact that at least 18 months were needed to train each new inspector, it took the agency several months from the date an individual retired to advertise and fill each vacant position. As a result of losing these inspectors, MSHA may find it difficult to complete all quarterly inspections of underground coal mines. MSHA also did not collect all of the information on contractor staff who work in underground coal mines needed to assess the effectiveness of its enforcement activities. Because MSHA does not collect information on injuries to or hours worked by contractor staff who mine coal in each underground coal mine, it cannot calculate accurate fatality or nonfatal injury rates for mines that use contractor staff to mine coal--rates used to evaluate the effectiveness of its enforcement efforts. In addition, MSHA could not track trends in fatal or nonfatal injury rates at specific mines to use to target its enforcement resources. The fact that MSHA did not track the number of contractor staff who worked in each mine was important because the proportion of miners who work for contractors had grown significantly since 1981, when they represented only 5 percent of all mine workers. Our analysis showed that the percentage of underground coal miners who work for contractors increased from 13 percent in 1993 to 18 percent in 2002, and the percentage who incurred nonfatal injuries also increased over this period. MSHA had extensive guidance and thorough procedures for conducting accident investigations, but it did not use these investigations to the fullest extent to improve the future safety of mine workers. Although MSHA had detailed policies and rigorous requirements for how investigations must be conducted and reported, weaknesses in its databases made it difficult for MSHA to track key data on mine hazards and potentially useful indicators of its own performance. We made several recommendations in our report designed to improve MSHA's operations. We recommended that the Secretary of Labor direct the Assistant Secretary for Mine Safety and Health to monitor the timeliness of inspections of ventilation and roof control plans to ensure that all inspections are completed by district offices as required; monitor follow-up actions taken by its district offices to ensure that mine operators are correcting hazards identified during inspections on a timely basis; update and consolidate guidance provided to its district offices on plan approval and inspections to eliminate inconsistencies and outdated instructions, including clarifying guidance on coordinating regular quarterly inspections of mines with other inspections; develop a plan for addressing anticipated shortages in the number of qualified inspectors due to upcoming retirements, including considering options such as streamlining the agency's hiring process and offering retention allowances; amend the guidance provided to independent contractors engaged in high-hazard activities requiring them to report information on the number of hours worked by their staff at specific mines so that MSHA can use this information to compute the injury and fatality rates used to measure the effectiveness of its enforcement efforts; and revise the systems MSHA uses to collect information on accidents and investigations to provide better data on accidents and make it easier to link injuries, accidents, and investigations. MSHA did not comment on the recommendations in its written response to the report and disagreed with some of our findings. However, MSHA later agreed to implement all of the recommendations and provided us with information on how it had implemented or was in the process of implementing them. We are pleased that MSHA has taken action to implement these recommendations but note that we have not examined the effectiveness of the agency's actions or the extent to which these actions have addressed the issues we reported in 2003. For further information, please contact Robert E. Robertson at (202) 512- 7215. Individuals making key contributions to this testimony include Revae Moran and Karen Brown. 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 Chairman, Subcommittee on Labor, HHS and Education, Senate Committee on Appropriations, asked GAO to submit a statement for the record highlighting findings from our 2003 report on how well the Department of Labor's Mine Safety and Health Administration (MSHA) oversees its process for reviewing and approving critical types of mine plans and the extent to which MSHA's inspections and accident investigations processes help ensure the safety and health of underground coal miners. As of 2003, to help ensure the safety and health of underground coal miners, MSHA staff reviewed and approved mine plans, conducted inspections, and investigated serious accidents. In these three areas, MSHA had extensive procedures and qualified staff. However, we concluded that MSHA could improve its oversight, guidance, and human-capital-planning efforts. We found that MSHA was not effectively monitoring a few key areas. MSHA headquarters did not ensure that 6-month inspections of ventilation and roof support plans were being completed on a timely basis. This failure could have led to mines operating without up-to-date plans or mine operators not following all requirements of the plans. Additionally, MSHA officials did not always ensure that hazards found during inspections were corrected promptly. Gaps were found in the information that MSHA used to monitor fatal and nonfatal injuries, limiting trend analysis and agency oversight. Specifically, the agency did not collect information on hours worked by independent contractors staff needed to compute fatality and nonfatal injury rates for specific mines, and it was difficult to link information on accidents at underground coal mines with MSHA's investigations. We also concluded that the guidance provided by MSHA management to agency employees could be strengthened. Some inspections procedures were unclear and were contained in many sources, leading to differing interpretations by mine inspectors. The guidance on coordinating inspections conducted by specialists and regular inspectors was also unclear, resulting in some duplication of effort. Finally, as of 2003, although about 44 percent of MSHA's underground coal mine inspectors were going to be eligible to retire within 5 years, the agency had no plan for replacing them or using other human capital flexibilities available to retain its highly qualified and trained inspectors.

In the absence of generally accepted standards, individual states decide how they will do market analysis and perform market conduct examinations. While all states do market analysis in some form, few have established formal programs that look at companies in a consistent and routine manner. States also have no generally agreed upon standards for how many examinations to perform, which companies to examine and how often, and what the scope of the examination should be. As a result of the lack of common standards for market analysis and the lack of consistency in the application of the guidelines for examinations, states find it difficult to depend on other states' oversight of companies' market behavior. NAIC and some states have a growing awareness that better market analysis can be a significant tool for monitoring the marketplace behavior of insurance companies and deciding which insurers to examine. All states perform some type of market analysis. In many states, however, it consists largely of monitoring complaints and complaint trends; and reacting to significant issues that arise. Three states that we visited--Missouri, Ohio, and Oregon--have established a proactive market analysis program. These programs for market analysis have established processes for monitoring company behavior to identify trends, companies that vary from the norm (outliers), and potential market conduct problems. In general, an established program would have dedicated staff and protocols for gathering data and conducting analysis at the department offices. Each of the three states with an analysis process that we visited approached market analysis in a different way. Ohio's program consisted of special data calls to obtain extensive information from selected company files, and using computerized audit tools to analyze specific aspects of companies' operations relative to norms identified by peer analysis and to state law. For example, Ohio did 184 "desk audits" in 2001 using data requested from companies doing business in the state. Missouri relied on routinely collecting market data from all licensed companies. Missouri has developed a market data report that companies submit as a supplement to their annual financial reports. This data is then used to evaluate market trends and conditions, as well as to identify individual companies that were outliers. Oregon's newly established program involved maintaining files on companies in which all available data was collected to facilitate a broad and ongoing review of company behavior. Both Ohio and Oregon told us that their market analysis programs were still in an experimental stage of development. When properly done, market analysis can allow states to focus attention on the high-risk companies rather than selecting companies for examination based primarily on criteria such as market share, which does not directly correlate to market behavior problems. Missouri officials added that market analysis is not a substitute for market conduct examinations but should interact and be integrated with the examination process. Each state has between 900 and 2,000 licensed insurance companies. Because in general states do not currently depend upon other states' regulation of companies' market behavior, most states feel a responsibility for overseeing all the companies selling in their state. The impossibility of examining so many companies requires regulators to identify and prioritize which companies they will examine. The states we visited used a variety of factors to choose companies for a market conduct examination. The most commonly used factors for choosing from among the companies deemed eligible for a market conduct examination were complaints, market share, and time since the last examination. Some states chose to do market conduct exams for only a subset of licensed companies, even though other companies could comprise a majority of the insurers selling in the state. For example, of the states we visited, Arkansas focused primarily on domestic companies--that is, on companies chartered in their state. In Arkansas, 245 of 1,668 licensed companies in 2001 were domestic. As a consequence, 1,423 non-domestic companies, or 85 percent of all the companies licensed in Arkansas in 2001, were not examined in Arkansas in spite of the fact that they may or may not have been examined by some other state. All the states we visited limited the scope of their examinations to customers from within their particular state. That is, examiners looked only at files of state residents. Moreover, most states further limited the scope of their examinations by focusing on only one or a few of a company's area of operations. While some states still do comprehensive market conduct examinations, the trend is to conduct targeted examinations of limited scope and in a specific area of concern. State officials we interviewed indicated that targeted examinations are being used more often because these examinations do not take as long as comprehensive examinations, allowing states to conduct more. Of the 9 states we visited, Arkansas, Missouri, and New Mexico continued to conduct some comprehensive examinations as well as targeted examinations. Arkansas officials told us that they believed comprehensive examinations were important because such examinations provided the greatest assurance that companies were complying with insurance laws and regulations. According to NAIC, 49 states and the District of Columbia reported performing some market conduct activities in 2001. Of these, 15 completed only targeted examinations, 4 did only comprehensive examinations, and 22 completed some of both types of examination. The remaining nine did not complete any market conduct examinations in 2001. The requirements for and level of training for examiners also varied widely among the states. Each of the states we visited provided some type of training for their examiners. However, there are no generally accepted standards for what constitutes adequate training for a market conduct examiner across the states. Several levels of certifications for market conduct examiners are available, but only 2 of the states we visited, Oregon and New Mexico, required their examiners to certify or become certified in a specified period. As can be seen in table 1, there is considerable variation in the number of examinations completed in 2001 by the states we visited. Variation in the number of examinations consistent with the size of the insurance market would be expected. However, as shown in the table, the number of examinations completed bore little relationship to the size of the insurance market in each state. This comparison should not necessarily be taken as an indicator of the relative regulatory performance of the nine states we visited, because during another year the ranking of the states could be different. However, together with the variations in how states select companies for examinations and how they do them, this added variability helps further explain why the states may be reluctant to depend on other states to examine companies selling insurance to their citizens. plans, efforts, and results could improve regulation and, at the same time, reduce the regulatory burden on companies. Many insurance companies, particularly the largest ones, report that they undergo frequent, sometimes simultaneous, market conduct examinations. We asked 40 of the largest national insurance companies to provide information about their market conduct examination experience for the years 1999 to 2001. Of the 25 companies that responded, 19 were examined a total of 130 times by multiple insurance regulators during the 3-year period. Six were examined once or twice during the period, and just over half the responding companies were examined between one and five times. However, three companies were each examined 17 or more times during the 3 years, with one company receiving 20 examinations--an average of seven nearly every year. These results appear to be consistent with concerns expressed by the insurance industry about excessively frequent and possibly duplicative market conduct examinations. One of the most common complaints from the 25 insurers that responded to our questionnaire was that states did not coordinate their examinations with other states. Some companies reported that, on occasion, multiple states had conducted on-site examinations at the same time. The companies told us that such examinations create difficulties for them and limited the resources they had available to assist the examiners. For example, one insurer wrote, "It takes an insurer a tremendous amount of effort to prepare for and deal with individual state insurance department's exams (every one is different, plus states generally do not accept others exams in place of another similar exam being done). The duplication of effort is wasteful by the states." In contrast, six companies, or nearly one-quarter of those responding, had not been examined by any state during the period. Of these six companies, two were last examined in 1997 and the other four did not report having any market conduct examinations. These companies--like others that reported--are large multi-state insurance companies. Since in many states a primary criterion for selecting a company for examination is market share, these responses suggest that the proportion of medium-size and small insurers that rarely, if ever, receive a market conduct examination may be much higher. Groups of states, as well as NAIC, have taken actions to improve the coordination and efficiency of the market conduct examination process. One effort involves improving the sharing of examination information by providing notice of upcoming examinations and sharing results through NAIC's Examination Tracking System. However, the Examination Tracking System is incomplete and often ignored by the state regulators, in part, because it has been inconvenient and difficult to use for scheduling and reporting the results of market conduct examinations. As a result, states are not fully utilizing the system. NAIC's survey of states' use of the Examination Tracking System concluded that no more than 66 percent of the states, or 36 states, consistently reported their market conduct or combined market conduct/financial examination schedules to NAIC. Moreover, only 31 percent of the states reported back to NAIC when the examination had been completed. Another avenue of coordination being pursued by NAIC and some states is joint, or collaborative, examinations. Based on our review of nine states and of NAIC information, some states do conduct collaborative examinations. For example, Ohio officials told us that they had started to conduct collaborative examinations with Illinois, Nebraska, and Oregon. Indiana officials indicated that they had recently completed an examination of a large insurer jointly with another state. Such efforts, however, have not been consistent among states, nor is there a policy or standard procedure about when or how such examinations should occur. Furthermore, while collaborative examinations could reduce the total number of duplicative exams and may result in somewhat more efficient use of regulatory resources, they still require that each state send examiners into the company. In effect, collaborative examinations are a way for multiple states to do a market conduct examination of a company at the same time. Such an examination may be to the benefit of the company. However, if each state's examiners still ask for samples of files for only their own state's insurance consumers, the benefit may be reduced. The NAIC identified the need for uniformity in market conduct regulation as early as the 1970s. Since then NAIC has launched a number of market conduct efforts intended to identify and address the issues and concerns caused by the lack of uniformity in states' market conduct examination processes, and more recently in the market analysis area. Although progress has been slow in establishing more uniformity in market conduct regulation, NAIC has had some successes. One of the earliest was the development of the market conduct examination handbook containing guidance on conducting and reporting examination results. In general, most states use the handbook as an examination guide, but they can still choose not to follow the handbook in an examination or to modify it. For example, although the handbook lays out the steps for conducting an exam, such as notice of an exam, use of sampling techniques, and preparation of an examination report, each state can go about those steps differently. Moreover, the handbook in not intended to cover some aspects of examinations, including examination frequency and company selection criteria. One challenge to establishing voluntary uniform national standards for examinations and examination processes is that states are free to adopt the NAIC's model laws, regulations, and procedures; to modify them to meet their perceived needs and conditions; or even to ignore them entirely. Once NAIC as an organization agrees on recommendations that would create more uniform regulatory statutes, two additional challenges to uniformity remain. First, when proposed changes affect state law, state legislatures must approve the recommendations without significant changes. Second, each state insurance department must successfully implement the recommendations. These challenges to establishing voluntary uniform national standards for examinations can clearly be seen in the number of states adopting the model laws and regulation that NAIC identified in 1995 as the essential elements for a market conduct examination program. By 2003, only nine models had been adopted by more than half the states, while two models had been adopted by five or fewer states. Achieving uniformity in market regulation will be a difficult process for NAIC and the states. However, a similar problem that existed in solvency regulation over a decade ago was solved by creating the Financial Regulation Standards and Accreditation Program. The program's overall goal was to achieve a consistent, state-based system of solvency regulation throughout the country. The program was designed to make monitoring and regulating the solvency of multistate insurance companies more consistent by ensuring that states adopt and adhere to agreed-upon standards, which establish the basic recommended practices for an effective regulatory department. To be accredited, states had to show that they had adopted specific solvency laws and regulations that protected insurance consumers, established defined financial analysis and examination processes, and used appropriate organizational and personnel practices. While the quality of regulation is still not consistent, the Accreditation Program has improved financial regulation across the states. As a result, states are now willing, in most cases, to depend on the solvency regulation of other states. While the process used by state insurance regulators to oversee solvency could provide a model for oversight of market conduct as well, there are structural differences in market regulation that will undoubtedly affect the ultimate design of an improved market conduct oversight system. These differences will have to be addressed by NAIC and the states in order to move forward. First, market conduct oversight involves many different activities and operations of insurance companies. This fact has broad implications for regulatory consistency and mutual dependence, including requirements for the necessary training of market conduct examiners and analysts. Second, regulators told us that life insurers tend to use a company-wide business plan and organizational structure. That is, a life company's operations tend to be relatively consistent across the entire company. Property-casualty insurers, on the other hand, tend to use a regional business model and organizational structure. As a result, a property- casualty insurer's operations could differ, perhaps substantially, from region to region. Clearly, the life insurer model is more directly amenable to domiciliary-state oversight than the property-casualty model. However, any regional or state-by-state variances in a company's operations and procedures would reduce the effectiveness of domiciliary-state oversight. Some aspects of market conduct oversight will always be state (or region) specific because of the differences between life and property-casualty insurers, but also because there will always be differences between some of the specific laws and requirements of individual states. As a result, even when greater uniformity of regulatory oversight is achieved, it is likely that states will always have to devote some attention to the activities of insurers not domiciled in their state. Nevertheless, if a state insurance department knew that the domiciliary state was doing consistent market oversight on the company with agreed-upon processes, appropriate scope, and well-trained examiners and analysts, the level of attention needed, even for a property-casualty company, could be substantially lessened. Finally, even to the extent that properly designed and competently performed market conduct oversight can effectively monitor and regulate insurance company practices, it will extend to the sales practices of insurance agents only to the extent that the company takes responsibility for and exercises control of the behavior of the agents that sell its products. In the current environment of market regulation, most insurance regulators believe they need to oversee the market behavior of all companies selling insurance in their state because they cannot depend on the oversight of the other states. State regulators think this way in part because important elements of market regulation are characterized by a lack of even the most fundamental consistency. Formal and rigorous market analysis is in its infancy among state regulators, and whether, when, and how states do market conduct examinations vary widely. As a result, state regulators are now using the resources that they have in the area of market analysis and examinations inefficiently. Regulators from different states examine some insurers often, while other insurers are examined infrequently or not at all. More importantly, because market analysis is weak, regulators may not be finding and focusing on the companies that most need to have an examination. We support the goal of increasing the effectiveness of market conduct regulation through the development and implementation of consistent, nationwide standards for market analysis and market conduct examinations across the states in order to better protect insurance consumers. The emphasis placed on these issues by NAIC has increased substantially over the last 3 years. We believe that NAIC has taken a first step in the right direction. Much work, however, remains, as NAIC and the states have not yet identified or reached agreement on appropriate laws, regulations, processes, and resource requirements that will support the goal of an effective, uniform market oversight program. Such a program, consisting of strong market analysis and effective market conduct examinations, will facilitate the development of an atmosphere of increasing trust among the states. However, at present it remains uncertain whether the NAIC and the states can agree on and implement a program that will accomplish this goal. Madam Chairwoman, this concludes my statement. I would be pleased to answer any questions 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.

This testimony provides information on two important tools state insurance regulators use to oversee the market activities of insurance companies--market analysis and market conduct examinations. Market analysis is generallly done in the state insurance departments. It consists of gathering and integrating information about insurance companies' operations in order to monitor market behavior and identify potential problems at an early stage. Market conduct examinations, which are generally done on site, are a review of an insurer's marketplace practices. The examination is an opportunity to verify data provided to the department by the insurer and to confirm that companies' internal controls and operational processes result in compliance with state laws and regulations. Specifically, this testimony focuses on (1) the states' use of market analysis and examinations in market regulation, and (2) the effectiveness of the National Association of Insurance Commissioners' (NAIC) efforts to improve these oversight tools and encourage the states to use them. We found that while all states do some level of market analysis, few states have established formal market analysis programs to maintain a systematic and rigorous overview of companies' market behavior and to more effectively identify problem companies for more detailed review. The way state insurance regulators approach and perform market conduct examinations also varied widely across the states. While NAIC has developed a handbook for market conduct examiners, states are not required to use it, and we found that it is not consistently applied across states. Moreover, the handbook is not intended to provide guidance for some important aspects of market conduct examinations--for example, how often examinations should be performed or what criteria states should use to select companies to examine. We also found that the number of market conduct examiners differed widely among states and that there were no generally accepted standards for training and certifying examiners. These differences make it difficult for states to depend on other states' oversight of market activities. Most of the states that we visited told us that they felt responsible for regulating the behavior of all companies that sold insurance in their state. With anywhere from 900 to 2,000 companies operating within each state, the pool of companies is simply too large for any one insurance department to handle. Attempts to do so are neither efficient nor effective. Moreover, since many states do not coordinate their examinations with other states, some large multistate insurance companies reported being examined by multiple states, while other companies were examined infrequently or never. We also found that since the mid 1970s, NAIC has taken a variety of steps to improve the consistency and quality of market conduct examinations. However, despite the NAIC's long-standing efforts and some limited successes, progress toward a more effective process has been slow. Recently, NAIC has increased the emphasis it places on market analysis and market conduct examinations as regulatory tools that could improve states' ability to oversee market conduct. With more consistent implementation of routine market analysis, states should be better able to use the resources they already have available to target companies requiring immediate attention. Also, by consistently applying common standards for market conduct examinations, states should be able to rely on regulators in other states for assessments of an insurance company's operations. These improvements should in turn increase the efficiency of the examination process and improve consumer protection by reducing existing overlaps and gaps in regulatory oversight. However, if NAIC cannot convince the various states to adopt and implement common standards for market analysis and examinations, current efforts to strengthen these consumer protection tools are unlikely to result in any fundamental improvement. While we focus on the states' use of market analysis and market conduct examinations, market regulation includes several other important regulatory tools, including complaint handling and investigation, policy rate and form review, agent and company licensing, and consumer education. Most states have functioning programs addressing each of these four regulatory areas. Ideally, all regulatory tools, including market analysis and market conduct examinations, should work together in an integrated and interrelated way.

EPA is required by the Clean Air Act to conduct reviews of the National Ambient Air Quality Standards (NAAQS) for the six criteria pollutants, including particulate matter, every 5 years. The overarching purpose of such reviews is to determine whether the current standards are sufficient to protect public health and welfare at large, with an adequate margin of safety, given the latest scientific information available at the time of the review. Major steps in the NAAQS process include the following: developing a criteria document that synthesizes new research on health preparing a staff paper that assesses the policy implications of the scientific information in the criteria document, which also discusses possible ranges for air quality standards; and determining whether and how EPA should revise the NAAQS. If EPA decides to revise the NAAQS, the agency proposes the changes in the Federal Register. As part of the federal rule-making process, EPA is to comply with Executive Order 12866, which directs federal agencies to analyze the costs and benefits of proposed and final rules expected to affect the economy by $100 million or more per year. In September 2003, the Office of Management and Budget (OMB) issued its Circular A-4, which presents guidance and best practices and states that agencies should analyze the costs and benefits in accordance with the principles of full disclosure and transparency. Further, in cases such as the particulate matter rule, where expected economic impacts exceed $1 billion annually, Circular A-4 also states that agencies should conduct a comprehensive assessment of key uncertainties in their analyses of costs and benefits, which EPA also refers to as regulatory impact analyses. EPA's January 2006 regulatory impact analysis presents estimates of the costs and benefits for the proposed particulate matter rule. The focus of the National Academies' 2002 report was on how EPA estimates the health benefits of its proposed air regulations. To develop such estimates, EPA conducts analyses to quantify the expected changes in the number of deaths and illnesses that are likely to result from proposed regulations. The regulatory impact analyses also estimate the costs associated with implementing proposed air regulations, although, under the Clean Air Act, EPA is not permitted to consider costs in setting health- based standards for the criteria air pollutants, such as particulate matter. Soon after the National Academies issued its report in 2002, EPA staff identified key recommendations and developed a strategy, in consultation with OMB, to apply some of the recommendations to benefit analyses for air pollution regulations under consideration at the time. EPA roughly approximated the time and resource requirements to respond to the recommendations, identifying those the agency could address within 2 or 3 years and those that would take longer. According to EPA officials, the agency focused primarily on the numerous recommendations related to analyzing uncertainty. Both the National Academies' report and the OMB guidance emphasize the need for agencies to account for uncertainties and to maintain transparency in the course of conducting benefit analyses. Identifying and accounting for uncertainties in these analyses can help decision makers evaluate the likelihood that certain regulatory decisions will achieve the estimated benefits. Transparency is important because it enables the public and relevant decision makers to see clearly how EPA arrived at its estimates and conclusions. In prior work on regulatory impact analyses, we have found shortcomings in EPA's analyses of uncertainty and the information the agency provides with its estimates of costs and benefits. EPA applied--either wholly or in part--approximately two-thirds of the Academies' recommendations to its January 2006 regulatory impact analysis and continues to address the recommendations through ongoing research and development. The January 2006 regulatory impact analysis demonstrated progress toward an expanded analysis of uncertainty and consideration of different assumptions. EPA officials cited time and resource constraints, as well as the need to mitigate complex technical challenges, as the basis for not applying other recommendations. According to EPA officials, the agency did not apply some of the more complex recommendations because it had not achieved sufficient progress in the research and development projects under way. The January 2006 regulatory impact analysis on particulate matter represents a snapshot of an ongoing EPA effort to respond to the National Academies' recommendations on developing estimates of health benefits for air pollution regulations. Specifically, the agency applied, at least in part, approximately two-thirds of the recommendations--8 were applied and 14 were partially applied--by taking steps toward conducting a more rigorous assessment of uncertainty for proposed air pollution regulations by, for example, evaluating the different assumptions about the link between human exposure to particulate matter and health effects and discussing sources of uncertainty not included in the benefit estimates. According to EPA officials, the agency focused much of its time and resources on the recommendations related to uncertainty. In particular, one overarching recommendation suggests that EPA take steps toward conducting a formal, comprehensive uncertainty analysis--the systematic application of mathematical techniques, such as Monte Carlo simulation-- and include the uncertainty analysis in the regulatory impact analysis to provide a "more realistic depiction of the overall uncertainty" in EPA's estimates of the benefits. A number of the other recommendations regarding uncertainty are aimed at EPA's developing the information and methodologies needed to carry out a comprehensive uncertainty analysis. Overall, the uncertainty recommendations suggest that EPA should determine (1) which sources of uncertainties have the greatest effect on benefit estimates and (2) the degree to which the uncertainties affect the estimates by specifying a range of estimates and the likelihood of attaining them. In response, EPA devoted significant resources to applying an alternative technique called expert elicitation in a multiphased pilot project. The pilot project was designed to systematically obtain expert advice to begin to better incorporate in its health benefit analysis the uncertainty underlying the causal link between exposure to particulate matter and premature death. EPA used the expert elicitation process to help it more definitively evaluate the uncertainty associated with estimated reductions in premature death--estimates that composed 85 percent to 95 percent of EPA's total health benefit estimates for air pollution regulations in the past 5 years, according to the agency. EPA developed a range of expected reductions in death rates based on expert opinion systematically gathered in its pilot expert elicitation project and provided the results of this supplemental analysis in an appendix to the regulatory impact analysis. However, the National Academies had recommended that EPA merge such supplemental analyses into the main benefit analysis. Moreover, the Academies recommended that EPA's main benefit analysis reflect how the benefit estimates would vary in light of uncertainties. In addition to the uncertainty underlying the causal link between exposure and premature death that EPA analyzed, other key uncertainties can influence the estimates. For example, there is uncertainty about the effects of the age and health status of people exposed to particulate matter, the varying composition of particulate matter, and the measurements of actual exposure to particulate matter. EPA's health benefit analysis, however, does not account for these key uncertainties by specifying a range of estimates and the likelihood of attaining them, similar to estimates derived from the expert elicitation addressing causal uncertainty. For these reasons, EPA's responses reflect a partial application of the Academies' recommendation. In addition, the Academies recommended that EPA both continue to conduct sensitivity analyses on sources of uncertainty and expand these analyses. In the particulate matter regulatory impact analysis, EPA included a new sensitivity analysis regarding assumptions about thresholds, or levels below which those exposed to particulate matter are not at risk of experiencing harmful effects. EPA has assumed no threshold level exists--that is, any exposure poses potential health risks. Some experts have suggested that different thresholds may exist and the National Academies recommended that EPA determine how changing its assumption--that no threshold exists--would influence the estimates. The sensitivity analysis EPA provided in the regulatory impact analysis examined how its estimates of expected health benefits would change assuming varying thresholds. Another recommendation that EPA is researching and partially applied to the draft regulatory impact analysis concerns alternative assumptions about cessation lags--the time between reductions in exposure to particulate matter and the health response. The National Academies made several recommendations on this topic, including one that EPA incorporate alternative assumptions about lags into a formal uncertainty analysis to estimate benefits that account for the likelihood of different lag durations. In response, EPA has sought advice from its Advisory Council on Clean Air Compliance Analysis on how to address this recommendation and has conducted a series of sensitivity analyses related to cessation lags. EPA is also funding research to explore ways to address lag effects in its uncertainty analysis. According to an EPA official, specifying the probability of different lag effects is computationally complex, and the agency is working to resolve this challenge. In response to another recommendation by the National Academies, EPA identified some of the sources of uncertainty that are not reflected in its benefit estimates. For example, EPA's regulatory impact analysis disclosed that its benefit estimates do not reflect the uncertainty associated with future year projections of particulate matter emissions. EPA presented a qualitative description about emissions uncertainty, elaborating on technical reasons--such as the limited information about the effectiveness of particulate matter control programs--why the analysis likely underestimates future emissions levels. EPA also applied the Academies' recommendation on the presentation of uncertainty, which encouraged the agency to present the results of its health benefit analyses in ways that convey the estimated benefits more realistically by, for example, placing less emphasis on single estimates and rounding the numbers. EPA's regulatory impact analysis presented ranges for some of the benefit estimates. Also, EPA sought to convey the overall uncertainty of its benefit estimates in a qualitative manner by clearly stating that decision makers and the public should not place significant weight on the quantified benefit estimates in the regulatory impact analysis because of data limitations and uncertainties. Another example of EPA's response to the National Academies' recommendations involves exploring the various regulatory choices available to decision makers. The Academies recommended that EPA estimate the health benefits representing the full range of regulatory choices available to decision makers. In the particulate matter analysis, EPA presented health benefits expected under several regulatory options targeting fine particulate matter. Citing a lack of data and tools needed to conduct an accurate analysis, EPA did not estimate the benefits expected under the proposed regulatory options for coarse particulate matter but, consistent with the National Academies' recommendation, presented its rationale for not doing so. Overall, we considered this a partial application of the recommendation. (See app. II for more detail on the recommendations that EPA has applied or partially applied to the draft particulate matter regulatory impact analysis.) EPA did not apply the remaining 12 recommendations to the analysis for various reasons. While EPA applied some recommendations--either wholly or in part--that require additional studies, methodologies, or data to its particulate matter analysis, the agency had not made sufficient progress in addressing others and therefore did not apply them to the analysis. EPA officials viewed most of these recommendations as relevant to its health benefit analyses and, citing the need for additional research and development, emphasized the agency's commitment to continue to respond to the recommendations. According to a senior EPA official, insufficient resources impeded the agency's progress in applying the recommendations. This official cited limited availability of skilled staff, time, and other resources to conduct the required analyses and research and development. According to EPA, some of the more complex, long-term recommendations include the following: relying less on simplifying assumptions, such as the assumption that the various components of particulate matter have equal toxicity; conducting a formal assessment of the uncertainty of particulate matter emissions; and assessing the expected reduction of any harmful effects other than air pollution or human health problems. For example, EPA is in the process of responding to a recommendation involving the relative toxicity of components of particulate matter, an emerging area of research that has the potential to influence EPA's regulatory decisions in the future. Specifically, the agency could, hypothetically, refine national air quality standards to address the potentially varying health consequences associated with different components of particulate matter. The National Academies recommended that EPA strengthen its benefit analyses by evaluating a range of alternative assumptions regarding relative toxicity and incorporate these assumptions into sensitivity or uncertainty analyses as more data become available. EPA did not believe the state of scientific knowledge on relative toxicity was sufficiently developed at the time it prepared the draft regulatory impact analysis to include this kind of analysis. However, EPA is sponsoring research on this issue. For example, EPA is supporting long- term research on the relative toxicity of particulate matter components being conducted by EPA's intramural research program, its five Particulate Matter Research Centers, and the Health Effects Institute, an organization funded in part by EPA. In addition, an EPA contractor has begun to investigate methods for conducting a formal analysis that would consider sources of uncertainty, including relative toxicity and lag effects. To date, the contractor has created a model to assess whether and how much these sources of uncertainty may affect benefit estimates in one urban area. The National Academies also recommended that EPA incorporate an assessment of uncertainty into the early stages of its benefit analyses by characterizing the uncertainty of its emissions estimates on which the agency is going to base its benefit estimates. While the agency is investigating ways to assess or characterize this uncertainty, EPA did not conduct a formal uncertainty analysis for particulate matter emissions for the draft regulatory impact analysis because of data limitations. These limitations stem largely from the source of emissions data, the National Emissions Inventory, an amalgamation of data from a variety of entities, including state and local air agencies, tribes, and industry. According to EPA, these entities use different methods to collect data, which have different implications for how to characterize the uncertainty. Furthermore, the uncertainty associated with emissions varies by the source of emissions. For example, the analytical methods for evaluating the uncertainty of estimates of emissions from utilities would differ from those for car and truck emissions because the nature of these emissions and the data collection methods differ. In sum, to apply this recommendation, EPA must determine how to characterize the uncertainty of the estimates for each source of emissions before aggregating the uncertainty to a national level and then factoring that aggregation into its benefit estimates. According to EPA officials, the agency needs much more time to resolve the complex technical challenges of such an analysis. EPA officials also noted that the final particulate matter analysis will demonstrate steps toward this recommendation by presenting emissions data according to the level emitted by the different kinds of sources, such as utilities, cars, and trucks. Another recommendation that EPA is researching but did not apply to the draft regulatory impact analysis concerns whether the proposed revisions to the particulate matter standards would have important indirect impacts on human health and the environment. According to an EPA official, the agency could not rule out the possibility that the revisions could have indirect impacts on the environment, such as whether reductions to particulate matter emissions would reduce the amount of particulate matter deposited in water bodies, thereby decreasing water pollution. EPA has considered indirect impacts of air pollution regulations on sensitive water bodies in the past and plans to include a similar analysis in the final particulate matter rule. An agency official further noted that ongoing research about environmental impacts could reveal additional indirect impacts for future analyses. Other recommendations that EPA did not apply to its benefit estimates in the regulatory impact analysis concern issues such as transparency and external review of EPA's benefit estimation process. For example, the National Academies recommended that EPA clearly summarize the key elements of the benefit analysis in an executive summary that includes a table that lists and briefly describes the regulatory options for which EPA estimated the benefits, the assumptions that had a substantial impact on the benefit estimates, and the health benefits evaluated. EPA did not, however, present a summary table as called for by the recommendation or summarize the benefits in the executive summary. As EPA stated in the particulate matter analysis, the agency decided not to present the benefit estimates in the executive summary because they were too uncertain. Specifically, officials said the agency was not able to resolve some significant data limitations before issuing the draft regulatory impact analysis in January 2006--a deadline driven by the need to meet the court- ordered issue date for the final rule in September 2006. According to EPA officials, EPA has resolved some of these data challenges by, for example, obtaining more robust data on anticipated strategies for reducing emissions, which will affect the estimates of benefits. The officials also said that EPA intends to include in the executive summary of the regulatory impact analysis supporting the final rule a summary table that describes key analytical information. EPA officials also acknowledged other presentation shortcomings, including references to key analytical elements that were insufficiently specific, that officials attributed to tight time frames and the demands of working on other regulatory analyses concurrently. They said they plan to address these shortcomings in the final regulatory impact analysis. Regarding external review, the National Academies recommended that EPA establish an independent review panel, supported by permanent technical staff, to bolster EPA's quality control measures for its regulatory impact analyses, such as the one for particulate matter. The National Academies noted that peer review of EPA's regulatory impact analyses would be advantageous when the agency designs and conducts its economic analysis. EPA has not directly addressed this recommendation. According to the Director of the Office of Policy Analysis and Review in EPA's Office of Air and Radiation, establishing and supporting independent committees is costly, making it important for EPA to take advantage of existing panels rather than set up new ones. Further, an official in the Office of Air and Radiation who oversees the development of regulatory impact analyses said that the cost of reviewing all regulatory impact analyses would be substantial. In this regard, EPA officials identified peer reviews the agency received from its existing independent committees, such as the Clean Air Scientific Advisory Committee and the Advisory Council on Clean Air Compliance. For example, to respond to the Academies' recommendations about lag effects, EPA sought independent advice on the assumptions it was developing regarding the time between reduced exposure to particulate matter and reductions in incidences of health effects. Finally, EPA officials noted that although the agency does not have each regulatory impact analysis peer reviewed, EPA typically does have the methodologies that will be applied to regulatory impact analyses peer reviewed. (See app. III for more detail on these recommendations and others that EPA did not apply to the draft particulate matter regulatory impact analysis.) While EPA has taken a number of steps to respond to the Academies' recommendations on estimating health benefits, continued commitment and dedication of resources will be needed if EPA is to fully implement the improvements endorsed by the National Academies. In particular, the agency will need to ensure that it allocates resources to needed research on emerging issues, such as the relative toxicity of particulate matter components; assessing which sources of uncertainty have the greatest influence on benefit estimates; and estimating other benefits, such as environmental improvements. In addition, it is important for EPA to continue to improve its uncertainty analysis in accordance with the Academies' recommendations. The agency's draft regulatory impact analysis illustrates that estimates of health benefits can be highly uncertain. In fact, EPA officials viewed these estimates as so uncertain that they chose to not present them in the executive summary of the regulatory impact analysis. While EPA officials said they expect to reduce the uncertainties associated with the health benefit estimates in the final particulate matter analysis, robust uncertainty analysis will nonetheless be important for decision makers and the public to understand the likelihood of attaining the estimated health benefits. According to EPA officials, the final regulatory impact analysis on particulate matter will reflect further responsiveness to the Academies' recommendations by, for example, providing additional sensitivity analysis and improving the transparency of the regulatory impact analysis by highlighting key data and assumptions in the executive summary. Moreover, these officials emphasized the agency's commitment to further enhancing the transparency of the analysis by presenting clear and accurate references to the supporting technical documents, which detail the analytical assumptions and describe the data supporting the estimates. To the extent EPA continues to make progress addressing the Academies' recommendations, decision makers and the public will be able to better evaluate the basis for EPA's air regulations. We provided a draft of this report to EPA for review. EPA provided technical comments that we incorporated, as appropriate. Officials from the Office of Policy Analysis and Review within EPA's Office of Air and Radiation noted in their technical comments that the report provides a fair and balanced representation of EPA's efforts to apply the National Academies' recommendations to the draft particulate matter regulatory impact analysis. However, these officials also cited progress made in applying the National Academies' recommendations through analyses of other air programs and through research and development efforts. We note that this report does identify, as appropriate, EPA's research and development efforts for recommendations EPA did not apply to the draft particulate matter analysis, its plans to apply some additional recommendations to the final particulate matter regulatory impact analysis, and the agency's responses to recommendations in prior rule- making analyses of air programs. 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 EPA Administrator and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. We were asked to determine whether and how the Environmental Protection Agency (EPA) applied the National Academies (Academies) recommendations in its estimates of the health benefits expected from the January 2006 proposed revisions to the particulate matter national ambient air quality standards. In response to this objective, we assessed EPA's response to the Academies' recommendations and present an overview of the agency's completed, ongoing, and planned actions addressing the recommendations. To develop this overview, we reviewed EPA's particulate matter regulatory impact analysis, EPA's economic analysis guidelines, and Office of Management and Budget (OMB) guidance on regulatory impact analysis. We also analyzed documentation addressing current and future agency efforts to address the recommendations, such as project planning memorandums and technical support documents discussing the application of economic techniques. In addition, we met with senior officials from EPA's Office of Air and Radiation, which was responsible for developing the proposed rule and analyzing its economic effects, and with officials from EPA's Office of Policy, Economics, and Innovation to discuss the agency's responses to the recommendations. We interviewed several experts outside EPA, including (1) the Chair and other members of the National Academies' Committee on Estimating the Health-Risk-Reduction Benefits of Proposed Air Pollution Regulations, to clarify the basis for their recommendations; and (2) economists at Resources for the Future, to discuss the technical issues underlying the recommendations on uncertainty analysis. While the 2002 National Academies' report is generally applicable to EPA air pollution regulations, our review focused on the application of the recommendations to the proposed revisions to the particulate matter standards, as requested. Our work focused on broadly characterizing EPA's progress toward applying the recommendations; we did not evaluate the effectiveness or quality of the scientific and technical actions the agency has taken to apply them. To assess whether and how EPA has made progress in responding to the recommendations, we developed the following recommendation classification continuum: applied, partially applied, and not applied. The applied and partially applied categories refer to completed and initiated actions in EPA's health benefit analysis of particulate matter that corresponds to components of the National Academies' recommendations. The not applied category includes recommendations that EPA did not apply when conducting the analysis for the January 2006 particulate matter regulatory impact analysis and identifies those for which ongoing research and development efforts were not far enough along to apply to the particulate matter analysis. We performed our work from January 2006 to July 2006 in accordance with generally accepted government auditing standards. Table 1 provides a summary of the National Academies' recommendations that EPA has applied or partially applied to its draft regulatory impact analysis (RIA) for particulate matter (PM). This table also provides GAO's assessment of EPA's progress in applying each recommendation, in terms of steps EPA has taken thus far to address issues highlighted in the National Academies' report. The final column characterizes EPA's comments regarding each recommendation, including, as pertinent, contextual information, potential impediments to application, and intended next steps. Table 2 provides a summary of the National Academies' recommendations that EPA has not applied to its draft regulatory impact analysis (RIA) for particulate matter (PM). This table provides GAO's assessment of EPA's progress to date regarding recommendations that required additional research and development, were deemed as not relevant to the PM National Ambient Air Quality Standards (NAAQS) by the agency, or were not included in the draft PM RIA due to time and resource constraints. The final column characterizes EPA's comments regarding each recommendation, including contextual information, potential impediments to application, justification for not addressing the recommendation, and intended next steps, if applicable. In addition to the contact named above, Christine Fishkin, Assistant Director; Kate Cardamone; Nancy Crothers; Cindy Gilbert; Tim Guinane; Jessica Lemke; and Meaghan K. Marshall made key contributions to this report. Timothy Bober, Marcia Crosse, and Karen Keegan also made important contributions.

A large body of scientific evidence links exposure to particulate matter--a widespread form of air pollution--to serious health problems, including asthma and premature death. Under the Clean Air Act, the Environmental Protection Agency (EPA) periodically reviews the appropriate air quality level at which to set national standards to protect the public against the health effects of particulate matter. EPA proposed revisions to these standards in January 2006 and issued a draft regulatory impact analysis of the revisions' expected costs and benefits. The estimated benefits of air pollution regulations have been controversial in the past. A 2002 National Academies report generally supported EPA's approach but made 34 recommendations to improve how EPA implements its approach. GAO was asked to determine whether and how EPA applied the Academies' recommendations in its estimates of the health benefits expected from the January 2006 proposed revisions to the particulate matter standards. GAO examined the draft analysis, met with EPA officials, and interviewed members of the National Academies' committee. In providing technical comments on the report, EPA officials said it was fair and balanced and noted the agency's progress in addressing recommendations via research and development and other analyses. EPA has begun to change the way it conducts and presents its analyses of health benefits in response to recommendations from the National Academies. Specifically, EPA applied, at least in part, 22--or about two-thirds--of the Academies' recommendations to its health benefit analysis of proposed revisions to particulate matter standards. For example, in response to some of the recommendations, EPA took steps toward conducting a more rigorous assessment of uncertainty by, for instance, evaluating how benefits could change under different assumptions and discussing sources of uncertainty not included in the benefit estimates. In one case, EPA applied an alternative technique, called expert elicitation, for evaluating uncertainty by systematically gathering expert opinion about the uncertainty underlying the causal link between exposure to particulate matter and premature death. Consistent with the National Academies' recommendation to assess uncertainty by developing ranges of estimates and specifying the likelihood of attaining them, EPA used expert elicitation to develop ranges of reductions in premature death expected from the proposed revisions. EPA officials said that ongoing research and development efforts will allow the agency to gradually achieve more progress in applying the recommendations. We note that robust uncertainty analysis is important because estimates of health benefits can be highly uncertain, as the draft regulatory impact analysis for particulate matter illustrates. EPA viewed the estimates in this analysis as so uncertain that it chose not to present them in the executive summary. For various reasons, EPA has not applied the remaining 12 recommendations to the analysis, such as the recommendation to evaluate the impact of using the simplifying assumption that each component of particulate matter is equally toxic. EPA officials viewed most of these recommendations as relevant to its health benefit analyses and, citing the need for additional research and development, emphasized the agency's commitment to continue to respond to the recommendations. For example, EPA did not believe that the state of scientific knowledge on the relative toxicity of particulate matter components was sufficiently developed to include in the January 2006 regulatory impact analysis, and the agency is currently sponsoring research on this issue. In addition, a senior EPA official said that insufficient resources impeded the agency's progress in applying the recommendations, citing, in particular, the limited availability of skilled staff, time, and other resources to conduct the required analyses and research and development. EPA officials also said that some of the recommendations the agency did not apply to the draft analysis, such as one calling for a summary table describing key analytical information to enhance transparency, will be applied to the analysis supporting the final rule. To the extent that EPA continues to make progress addressing the Academies' recommendations, decision makers and the public will be better able to evaluate the basis for EPA's air regulations.

benefit package, largely designed in 1965, provides virtually no coverage. In 1996, almost one third of beneficiaries had employer- sponsored health coverage, as retirees, that included drug benefits. More than 10 percent of beneficiaries received coverage through Medicaid or other public programs. To protect against drug costs, the remainder of Medicare beneficiaries can choose to enroll in a Medicare+Choice plan with drug coverage if one is available in their area or purchase a Medigap policy. 3 The availability, breadth, and price of such coverage is changing as the costs of expanded prescription drug use drives employers, insurers, and managed care plans to adopt new approaches to control the expenditures for this benefit. These approaches, in turn, are reshaping the drug market. Over the past 5 years, prescription drug expenditures have grown substantially, both in total and as a share of all health care outlays. Prescription drug spending grew an average of 12.4 percent per year from 1993 to 1998, compared with a 5 percent average annual growth rate for health care expenditures overall. (See table 1.) As a result, prescription drugs account for a larger share of total health care spending--rising from 5.6 percent to 7.9 percent in 1998. As an alternative to traditional Medicare fee-for-service, beneficiaries in Medicare+Choice plans (formerly Medicare risk health maintenance organizations) obtain all their services through a managed care organization and Medicare makes a monthly capitation payment to the plan on their behalf. Prescription Drugs: Increasing Medicare Beneficiary Access and Related Implications Prescription drug expenditures (in billions) Annual growth in prescription drug expenditures (percent) Annual growth in all health care expenditures (percent) Total drug expenditures have been driven up by both greater utilization of drugs and the substitution of higher-priced new drugs for lower-priced existing drugs. Private insurance coverage for prescription drugs has likely contributed to the rise in spending, because insured consumers are shielded from the direct costs of prescription drugs. In the decade between 1988 and 1998, the share of prescription drug expenditures paid by private health insurers rose from almost a third to more than half. (See fig. 1.) The development of new, more expensive drug therapies-- including new drugs that replace old drugs and new drugs that treat disease more effectively--also contributed to the drug spending growth by boosting the volume of drugs used as well as the average price for drugs used. The average number of new drugs entering the market each year rose from 24 at the beginning of the 1990s to 33 now. Similarly, biotechnology advances and a growing knowledge of the human immune system are significantly shaping the discovery, design, and production of drugs. Advertising pitched to consumers has also likely upped the use of prescription drugs. A recent study found that the 10 drugs most heavily advertised directly to consumers in 1998 accounted for about 22 percent of the total increase in drug spending between 1993 and 1998.Between March 1998 and March 1999, industry spending on advertising grew 16 percent to $1.5 billion. All of these factors suggest the need for effective cost control mechanisms to be in place under any option to increase access to prescription drugs. Medicare beneficiaries spent $2,000 or more.A recent report had projected that by 1999 an estimated 20 percent of Medicare beneficiaries would have total drug costs of $1,500 or more--a substantial sum for people lacking some form of insurance to subsidize their purchases or for those facing coverage limits. In 1996, almost a third of Medicare beneficiaries lacked drug coverage altogether. (See fig. 2.) The remaining two-thirds had at least some drug coverage--most commonly through employer-sponsored health plans. The proportion of beneficiaries who had drug coverage rose between 1995 and 1996, owing to increases in those with Medicare HMOs, individually purchased supplemental coverage, and employer-sponsored coverage. However, recent evidence indicates that this trend of expanding drug coverage is unlikely to continue. Medicare+Choice plans have found drug coverage to be an attractive benefit that beneficiaries seek out when choosing to enroll in managed care organizations. However, owing to rising drug expenditures and their effect on plan costs, the drug benefits the plans offer are becoming less generous. Many plans restructured drug benefits in 2000, increasing enrollees' out-of-pocket costs and limiting their total drug coverage. Beneficiaries may purchase Medigap policies that provide drug coverage, although this tends to be expensive, involves significant cost-sharing, and includes annual limits. Standard Medigap drug policies include a $250 deductible, a 50 percent coinsurance requirement, and a $1,250 or $3,000 annual limit. Furthermore, Medigap premiums have been increasing in recent years. In 1999, the annual premium for one type of Medigap policy with a $1,250 annual limit on drug coverage, ranged from approximately $1,000 to $6,000. All beneficiaries who have full Medicaid benefitsreceive drug coverage that is subject to few limits and low cost-sharing requirements. For beneficiaries whose incomes are slightly higher than Medicaid standards, 14 states currently offer pharmacy assistance programs that provided drug coverage to approximately 750,000 beneficiaries in 1997. The three largest state programs accounted for 77 percent of all state pharmacy assistance program beneficiaries. Most state pharmacy assistance programs, like Medicaid, have few coverage limitations. The burden of prescription drug costs falls most heavily on the Medicare beneficiaries who lack drug coverage or who have substantial health care needs. Drug coverage is less prevalent among beneficiaries with lower incomes. In 1995, 38 percent of beneficiaries with income below $20,000 were without drug coverage, compared to 30 percent of beneficiaries with higher incomes. Additionally, the 1995 data show that drug coverage is slightly higher among those with poorer self-reported health status. At the same time, however, beneficiaries without drug coverage and in poor health had drug expenditures that were $400 lower than the expenditures of beneficiaries with drug coverage and in poor health. This might indicate access problems for this segment of the population. employer-sponsored benefits, Medigap policies, and most recently, Medicare+Choice plans. Although reasonable cost sharing serves to make the consumer a more prudent purchaser, copayments, deductibles, and annual coverage limits can reduce the value of drug coverage to the beneficiary. Harder to measure is the effect on beneficiaries of drug benefit restrictions brought about through formularies designed to limit or influence the choice of drugs. During this period of rising prescription drug expenditures, third-party payers have pursued various approaches to control spending. These efforts have initiated a transformation of the pharmaceutical market. Whereas insured individuals formerly purchased drugs at retail prices at pharmacies and then sought reimbursement, now third-party payers influence which drug is purchased, how much is paid for it, and where it is purchased. A common technique to manage pharmacy care and control costs is to use a formulary. A formulary is a list of prescription drugs, grouped by therapeutic class, that a health plan or insurer prefers and may encourage doctors to prescribe. Decisions about which drugs to include in a formulary are based on the drugs' medical value and price. The inclusion of a drug in a formulary and its cost can affect how frequently it is prescribed and purchased and, therefore, can affect its market share. Formularies can be open, incentive-based, or closed. Open formularies are often referred to as "voluntary" because enrollees are not penalized if their physicians prescribe nonformulary drugs. Incentive-based formularies generally offer enrollees lower copayments for the preferred formulary or generic drugs. Incentive-based or managed formularies are becoming more popular because they combine flexibility and greater cost-control features than open formularies. A closed formulary limits insurance coverage to the formulary drugs and requires enrollees to pay the full cost of nonformulary drugs prescribed by their physicians. Another way in which the market has been transformed is through the use of pharmacy benefit managers (PBM) by health plans and insurers to administer and manage prescription drug benefits. PBMs offer a range of services, including prescription claims processing, mail-service pharmacy, formulary development and management, pharmacy network development, generic substitution incentives, and drug utilization review. PBMs also negotiate discounts and rebates on prescription drugs with manufacturers. Expanding access to more affordable prescription drugs could involve either subsidizing prescription drug coverage or allowing beneficiaries access to discounted pharmaceutical prices. The design of a drug coverage option, that is, the scope of the benefit, the covered population, and the mechanisms used to contain costs, as well as its implementation will determine the effect of the option on beneficiaries, Medicare or federal spending, and the pharmaceutical market. A new benefit would need to be crafted to balance competing concerns about the sustainability of Medicare, federal obligations, and the hardship faced by some beneficiaries. Similarly, the effect of granting some beneficiaries access to discounted prices will hinge on details such as the price of the drugs after the discount, how discounts are determined and secured, and which beneficiaries are eligible. The relative merits of any approach should be carefully assessed. We suggest that the following five criteria be considered in evaluating any option. (1) Affordability: an option should be evaluated in terms of its effect on public outlays for the long term. (2) Equity: an option should provide equitable access across groups of beneficiaries and be fair to affected providers. (3) Adequacy: an option should provide appropriate beneficiary incentives for prudent utilization, support standard treatment options for beneficiaries, and not impede effective and clinically meaningful innovations. (4) Feasibility: an option should incorporate such administrative essentials as implementation and cost and quality monitoring techniques. (5) Acceptance: an option should account for the need to educate the beneficiary and provider communities about its costs and the realities of trade-offs required by significant policy changes. drug costs, which is yet to be designed. Under the Breaux-Frist approach, competing health plans could design their own copayment structure, with requirements on the benefit's actuarial value but no provision to limit beneficiary catastrophic drug costs. Benefit cost-control provisions for the traditional Medicare program may present some of the thorniest drug benefit design decisions. Recent experience provides two general approaches. One would involve the Medicare program obtaining price discounts from manufacturers. Such an arrangement could be modeled after Medicaid's drug rebate program. While the discounts in aggregate would likely be substantial, this approach lacks the flexibility to achieve the greatest control over spending. It could not effectively influence or steer utilization because it does not include incentives that would encourage beneficiaries to make cost-conscious decisions. The second approach would draw from private sector experience in negotiating price discounts from manufacturers in exchange for shifting market share. Some plans and insurers employ PBMs to manage their drug benefits, including claims processing, negotiating with manufacturers, establishing lists of drug products that are preferred because of efficacy or price, and developing beneficiary incentive approaches to control spending and use. Applying these techniques to the entire Medicare program, however, would be difficult because of its size, the need for transparency in its actions, and the imperative for equity for its beneficiaries. As the largest government payer for prescription drugs, Medicaid drug expenditures account for about 17 percent of the domestic pharmaceutical market. Before the enactment of the Medicaid drug rebate program under the Omnibus Budget Reconciliation Act of 1990 (OBRA), state Medicaid programs paid close to retail prices for outpatient drugs. Other large purchasers, such as HMOs and hospitals, negotiated discounts with manufacturers and paid considerably less. The rebate program required drug manufacturers to rebate to state Medicaid programs a percentage off of the average price wholesalers pay manufacturers. The rebates were based on a percentage reduction that reflects the lowest or "best" prices the manufacturer charged other purchasers and the volume of purchases by Medicaid recipients. In return for the rebates, state Medicaid programs must cover all drugs manufactured by pharmaceutical companies that entered into rebate agreements with HCFA. After the rebate program's enactment, a number of market changes affected other purchasers of prescription drugs and the amount of the rebates that Medicaid programs received. Drug manufacturers substantially reduced the price discounts they offered to many large private purchasers, such as HMOs. Therefore, the market quickly adjusted by increasing drug prices to compensate for rebates obtained by the Medicaid program. Although the states have received billions of dollars in rebates from drug manufacturers since OBRA's enactment, state Medicaid directors have expressed concerns about the rebate program. The principal concern involves OBRA's requirement to provide access to all the drugs of every manufacturer that offers rebates, which limits the utilization controls Medicaid programs can use at a time when prescription drug expenditures are rapidly increasing. Although the programs can require recipients to obtain prior authorization for particular drugs and can impose monthly limits on the number of covered prescriptions, they cannot take advantage of other techniques, such as incentive-based formularies, to steer recipients to less expensive drugs. The few cost-control strategies available to state Medicaid programs can add to the administrative burden on state Medicaid programs. Other payers, such as private and federal employer health plans and Medicare+Choice plans, have taken a different approach to managing their prescription drug benefits. They typically use beneficiary copayments to control prescription drug use, and they use formularies to both control use and obtain better prices by concentrating purchases on selected drugs. In many cases, these plans and insurers retain a PBM's services to manage their pharmacy benefit and control spending. Beneficiary cost-sharing plays a central role in attempting to influence drug utilization. Copayments are frequently structured to influence both the choice of drugs and the purchasing arrangements. While formulary restrictions can channel purchases to preferred drugs, closed formularies, which provide reimbursement only for preferred drugs, have generated substantial dissatisfaction among consumers. As a result, many plans link their cost-sharing requirements and formulary lists. The fastest growing trend today is the use of a formulary that covers all drugs but that includes beneficiary cost-sharing that varies for different drugs--typically a smaller copayment for generic drugs, a larger one for preferred drugs, and an even larger one for all other drugs. Reduced copayments have also been used to encourage enrollees using maintenance drugs for chronic conditions to obtain them from particular suppliers, like a mail-order pharmacy. Plans and insurers have turned to PBMs for assistance in establishing formularies, negotiating prices with manufacturers and pharmacies, processing beneficiaries' claims, and reviewing drug utilization. Because PBMs manage drug benefits for multiple purchasers, they often may have more leverage than individual plans in negotiating prices through their greater purchasing power. Traditional fee-for-service Medicare has generally established reimbursement rates for services like those provided by physicians and hospitals and then processed and paid claims with few utilization controls. Adopting some of the techniques used by private plans and insurers might help better control costs. However, how to adapt those techniques to the characteristics and size of the Medicare program raises questions. Negotiated or competitively determined prices would be superior to administered prices only if Medicare could employ some of the utilization controls that come from having a formulary and differential beneficiary cost-sharing. In this manner, Medicare would be able to negotiate significantly discounted prices by promising to deliver a larger market share for a manufacturer's product. Manufacturers would have no incentive to offer a deep discount if all drugs in a therapeutic class were covered on the same terms. Without a promised share of the Medicare market, these manufacturers might reap greater returns from charging higher prices and by concentrating marketing efforts on physicians and consumers to influence prescribing patterns. Implementing a formulary and other utilization controls could prove difficult for Medicare. Developing a formulary involves determining which drugs are therapeutically equivalent so that several from each class can be included. Plans and PBMs currently make those determinations privately--something that would not be possible for Medicare, which must have transparent policies that are determined openly. Given the stakes involved in selecting drugs, one can imagine the intensive efforts to offer input to and scrutinize the selection process. operated in each area, beneficiaries could choose one to administer their drug benefit. This raises questions about how to inform beneficiaries of the differences in each PBM's policies and whether and how to risk-adjust payments to PBMs for differences in the health status of the beneficiaries using them. Another option before the Congress would allow Medicare beneficiaries to purchase prescription drugs at the lowest price paid by the federal government. Because of their large purchasing power, federal agencies, such as, the Departments of Veterans Affairs (VA) and Defense (DOD), have access to prescription drug prices that often are considerably lower than retail prices. Extending these discounts to Medicare beneficiaries, or some groups of beneficiaries, could have a measurable effect on lowering their out-of-pocket spending, although whether this would adequately increase access or raise prices paid by other purchasers that negotiate drug discounts is unknown. Typically, federal agencies obtain prescription drugs at prices listed in the federal supply schedule (FSS) for pharmaceuticals.FSS prices represent a significant discount off the prices drug manufacturers charge wholesalers.Under the Veterans Health Care Act of 1992, drug manufacturers must make their brand-named drugs available to federal agencies at the FSS price in order to participate in the Medicaid program. The act requires that the FSS price for VA, DOD, the Public Health Service, and the Coast Guard be at least 24 percent below the price that the manufacturers charge wholesalers. competitive basis for specific drugs considered therapeutically interchangeable. These contracts enable VA to obtain larger discounts from manufacturers by channeling greater volume to certain pharmaceutical products. Providing Medicare beneficiaries access to the lowest federal prices could result in important out-of-pocket savings to those without coverage who are paying close to retail prices. However, concerns exist that extending federal discounts to Medicare beneficiaries could lead to price increases to federal agencies and other purchasers since the discount is based on prices determined by manufacturers. Federal efforts to lower Medicaid drug prices demonstrate the potential for this to occur. While it is not possible to predict how federal drug prices would change if Medicare beneficiaries are given access to them, the larger the market that seeks to take advantage of these prices, the greater the economic incentive would be for drug manufacturers to raise federal prices to limit the impact of giving lower prices to more purchasers. The current Medicare program, without improvements, is ill suited to serve future generations of seniors and eligible disabled Americans. On the one hand, the program is fiscally unsustainable in its present form, as the disparity between program expenditures and program revenues is expected to widen dramatically in the coming years. On the other hand, Medicare's benefit package contains gaps in desired coverage, most notably the lack of outpatient prescription drug coverage, compared with private employer coverage. Any option to modernize the benefits runs the risk of exacerbating the fiscal imbalance of the programs. That is why we believe that expansions should be made in the context of overall program reforms that are designed to make the program more sustainable over the long term. Any discussions about expanding beneficiary access to prescription drugs should carefully consider targeting financial help to those most in need and minimizing the substitution of public funds for private funds. Employers that offer drug coverage through a retiree health plan may choose to adapt their health coverage if a Medicare drug benefit is available. A key characteristic of America's voluntary, employer-based system of health insurance is an employer's freedom to modify the conditions of coverage or to terminate benefits. device. It allows the government to track the extent to which earmarked payroll taxes cover Medicare's HI outlays. In serving the tracking purpose, the 1999 Trustees' annual report showed that Medicare's HI component has been, on a cash basis, in the red since 1992, and in fiscal year 1998, earmarked payroll taxes covered only 89 percent of HI spending. In the Trustees' report, issued in March 1999, projected continued cash deficits for the HI trust fund. (See fig. 3.) F u n d B a la n c e When the program has a cash deficit, as it did from 1992 through 1998, Medicare is a net claimant on the Treasury--a threshold that Social Security is not currently expected to reach until 2014. To finance these cash deficits, Medicare drew on its special issue Treasury securities acquired during the years when the program generates a cash surplus. In essence, for Medicare to "redeem" its securities, the government must raise taxes, cut spending for other programs, or reduce the projected surplus. Outlays for Medicare services covered under Supplementary Medical Insurance (SMI)-physician and outpatient hospital services, diagnostic tests, and certain other medical services and supplies-are already funded largely through general revenues. Although the Office of Management and Budget (OMB) has recently reported a $12 billion cash surplus for the HI program in fiscal year 1999 due to lower than expected program outlays, the long-term financial outlook for Medicare is expected to deteriorate. Medicare's rolls are expanding and are projected to increase rapidly with the retirement of the baby boomers. Today's elderly make up about 13 percent of the total population; by 2030, they will comprise 20 percent as the baby boom generation ages and the ratio of workers to retirees declines from 3.4 to 1 today to roughly 2 to 1. Without meaningful reform, the long-term financial outlook for Medicare is bleak. Together, Medicare's HI and SMI expenditures are expected to increase dramatically, rising from about 12 percent in 1999 to about a quarter of all federal revenues by mid-century. Over the same time frame, Medicare's expenditures are expected to double as a share of the economy, from 2.5 to 5.3 percent, as shown in figure 4. The progressive absorption of a greater share of the nation's resources for health care, like Social Security, is in part a reflection of the rising share of elderly population, but Medicare growth rates also reflect the escalation of health care costs at rates well exceeding general rates of inflation. Increases in the number and quality of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent. Third-party payers generally insulate consumers from the cost of health care decisions. In traditional Medicare, for example, the impact of the cost- sharing provisions designed to curb the use of services is muted because about 80 percent of beneficiaries have some form of supplemental health care coverage (such as Medigap insurance) that pays these costs. For these reasons, among others, Medicare represents a much greater and more complex fiscal challenge than even Social Security over the longer term. When viewed from the perspective of the entire budget and the economy, the growth in Medicare spending will become progressively unsustainable over the longer term. Our updated budget simulations show that to move into the future without making changes in the Social Security, Medicare, and Medicaid programs is to envision a very different role for the federal government. Assuming, for example, that the Congress and the President adhere to the often-stated goal of saving the Social Security surpluses, our long-term model shows a world by 2030 in which Social Security, Medicare, and Medicaid increasingly absorb available revenues within the federal budget. Under this scenario, these programs would absorb more than three-quarters of total federal revenue. (See fig. 5.) Budgetary flexibility would be drastically constrained and little room would be left for programs for national defense, the young, infrastructure, and law enforcement. Prescription Drugs: Increasing Medicare Beneficiary Access and Related Implications *The "eliminate non-Social Security surpluses" simulation can only be run through 2066 due to the elimination of the capital stock. Revenue as a share of GDP during the simulation period is lower than the 1999 level due to unspecified permanent policy actions that reduce revenue and increase spending to eliminate the non-Social Security surpluses. Medicare expenditure projections follow the Trustees' 1999 intermediate assumptions. The projections reflect the current benefit and financing structure. term. Assuming no other changes, these programs would constitute an unimaginable drain on the earnings of our future workers. actuarial balance to the HI trust fund. This analysis, moreover, does not incorporate the financing challenges associated with the SMI and Medicaid programs. Early action to address the structural imbalances in Medicare is critical. First, ample time is required to phase in the reforms needed to put this program on a more sustainable footing before the baby boomers retire. Second, timely action to bring costs down pays large fiscal dividends for the program and the budget. The high projected growth of Medicare in the coming years means that the earlier the reform begins, the greater the savings will be as a result of the effects of compounding. The actions necessary to bring about a more sustainable program will no doubt call for some hard choices. Some suggest that the size of the imbalances between Medicare's outlays and payroll tax revenues for the HI program may well justify the need for additional resources. One possible source could be general revenues. Although this may eventually prove necessary, such additional financing should be considered as part of a broader initiative to ensure the program's long-range financial integrity and sustainability. What concerns us most is that devoting general funds to the HI trust fund may be used to extend HI's solvency without addressing the hard choices needed to make the whole Medicare program more sustainable in economic or budgetary terms. Increasing the HI trust fund balance alone, without underlying program reform, does nothing to make the Medicare program more sustainable--that is, it does not reduce the program's projected share of GDP or the federal budget. From a macroeconomic perspective, the critical question is not how much a trust fund has in assets but whether the government as a whole has the economic capacity to finance all Medicare's promised benefits--both now and in the future. We must keep in mind the unprecedented challenge facing future generations in our aging society. Relieving them of some of the financial burden of today's commitments would help preserve some budgetary flexibility for future generations to make their own choices. portion of Medicare, which is projected to grow even faster than HI in coming decades, assuming no additional SMI benefits. The issue of the extent to which general funds are an appropriate financing mechanism for the Medicare program would remain important under financing arrangements that differed from those in place in the current HI and SMI structures. For example, under approaches that would combine the two trust funds, a continued need would exist for measures of program sustainability that would signal potential future fiscal imbalance. Such measures might include the percentage of program funding provided by general revenues, the percentage of total federal revenues or gross domestic product devoted to Medicare, or program spending per enrollee. As such measures were developed, questions would need to be asked about the appropriate level of general revenue funding. Regardless of the measure chosen, the real question would be what actions should be taken when and if the chosen cap is reached. Beyond reforming the Medicare program itself, maintaining an overall sustainable fiscal policy and strong economy is vital to enhancing our nation's future capacity to afford paying benefits in the face of an aging society. Decisions on how we use today's surpluses can have wide-ranging impacts on our ability to afford tomorrow's commitments. As we know, there have been a variety of proposals to use the surpluses for purposes other than debt reduction. Although these proposals have various pros and cons, we need to be mindful of the risk associated with using projected surpluses to finance permanent future claims on the budget, whether they are on the spending or the tax side. Commitments often prove to be permanent, while projected surpluses can be fleeting. For instance, current projections assume full compliance with tight discretionary spending caps. Moreover, relatively small changes in economic assumptions can lead to very large changes in the fiscal outlook, especially when carried out over a decade. In its January 2000 report,CBO compared the actual deficits or surpluses for 1986 through 1999 with the first projection it had produced 5 years before the start of each fiscal year. Excluding the estimated impact of legislation, CBO stated that its errors in projecting the federal surplus or deficit averaged about 2.4 percent of GDP in the fifth year beyond the current year. For example, such a shift in 2005 would mean a potential swing of about $285 billion in the projected surplus for that year. Although most would not argue for devoting 100 percent of the surplus to debt reduction over the next 10 years, saving a good portion of our surpluses would yield fiscal and economic dividends as the nation faces the challenges of financing an aging society. Our work on the long-term budget outlook illustrates the benefits of maintaining surpluses for debt reduction. Reducing the publicly held debt reduces interest costs, freeing up budgetary resources for other programmatic priorities. For the economy, running surpluses and reducing debt increase national saving and free up resources for private investment. These results, in turn, lead to stronger economic growth and higher incomes over the long term. Over the last several years, our simulations illustrate the long-term economic consequences flowing from different fiscal policy paths.Our models consistently show that saving all or a major share of projected budget surpluses ultimately leads to demonstrable gains in GDP per capita. Over a 50-year period, GDP per capita is estimated to more than double from present levels by saving all or most of projected surpluses, while incomes would eventually fall if we failed to sustain any of the surplus. Although rising productivity and living standards are always important, they are especially critical for the 21st century, for they will increase the economic capacity of the projected smaller workforce to finance future government programs along with the obligations and commitments for the baby boomers' retirement. Updating the Medicare benefit package may be a necessary part of any realistic reform program to address the legitimate expectations of an aging society for health care, both now and in the future. Expanding access to prescription drugs could ease the significant financial burden some Medicare beneficiaries face because of outpatient drug costs. Such changes, however, need to be considered as part of a broader initiative to address Medicare's current fiscal imbalance and promote the program's longer-term sustainability. Balancing these competing concerns may require the best from government-run programs and private sector efforts to modernize Medicare for the future. Further, the Congress should consider adequate fiscal incentives to control costs and a targeting strategy in connection with any proposal to provide new benefits such as prescription drugs. expectation and the future projected growth of the program, some additional revenue sources may in fact be a necessary component of Medicare reform. However, it is essential that we not take our eye off the ball. The most critical issue facing Medicare is the need to ensure the program's long range financial integrity and sustainability. The 1999 annual reports of the Medicare Trustees project that program costs will continue to grow faster than the rest of the economy. Care must be taken to ensure that any potential expansion of the program be balanced with other programmatic reforms so that we do not worsen Medicare's existing financial imbalances. Current budget surpluses represent both an opportunity and an obligation. We have an opportunity to use our unprecedented economic wealth and fiscal good fortune to address today's needs but an obligation to do so in a way that improves the prospects for future generations. This generation has a stewardship responsibility to future generations to reduce the debt burden they will inherit, to provide a strong foundation for future economic growth, and to ensure that future commitments are both adequate and affordable. Prudence requires making the tough choices today while the economy is healthy and the workforce is relatively large. National saving pays future dividends over the long term, but only if meaningful reform begins soon. Entitlement reform is best done with considerable lead-time to phase in changes and before the changes that are needed become dramatic and disruptive. The prudent use of the nation's current and projected budget surpluses combined with meaningful Medicare and Social Security program reforms can help achieve both of these goals. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other Subcommittee Members may have. For future contacts regarding this testimony, please call Paul L. Posner, Director, Budget Issues, at (202) 512-9573 or William J. Scanlon, Director, Health Financing and Public Health Issues at (202) 512-7114. Other individuals who made key contributions include Linda F. Baker, Laura A. Dummit, John C. Hansen, Tricia A. Spellman, and James R. McTigue. (201033/935352)

Pursuant to a congressional request, GAO discussed options for increasing Medicare beneficiaries' access to prescription drugs, focusing on the: (1) factors contributing to the growth in prescription drug spending and efforts to control that growth; and (2) design and implementation issues to be considered regarding proposals to improve seniors' access to affordable prescription drugs. GAO noted that: (1) the Medicare benefit package provides virtually no coverage; (2) in 1996, almost one third of beneficiaries had employer-sponsored health coverage, as retirees, that included drug benefits; (3) more than 10 percent of beneficiaries received coverage through Medicaid or other public programs; (4) to protect themselves against drug costs, the remainder of Medicare beneficiaries can choose to enroll in a Medicare Choice plan with drug coverage or purchase a Medigap policy; (5) however, the availability, breadth, and price of such coverage is changing as the costs of expanded prescription drug use drives employers, insurers, and managed care plans to adopt new approaches to control the expenditures for this benefit; (6) over the past 5 years, prescription drug expenditures have grown substantially, both in total and as a share of all health care outlays; (7) prescription drug spending grew an average of 12.4 percent per year from 1993 to 1998, compared with a 5 percent annual growth rate for health care expenditures overall; (8) total drug expenditures have been driven up by the following factors: (a) both greater utilization of drugs and the substitution of higher-priced new drugs for lower-priced existing drugs; (b) private insurance coverage for drugs; (c) biotechnology advances and a growing knowledge of the human immune system; and (d) advertising of drugs; (9) all of these factors suggest the need for effective cost control mechanisms; (10) a common technique to manage pharmacy care and control costs is to use a formulary, which can affect how frequently a drug is prescribed and purchased and, therefore, can affect its market share; (11) another way in which the market has been transformed is through the use of pharmacy benefit managers by health plans and insurers to administer and manage prescription drug benefits; (12) expanding access to more affordable prescription drugs could involve either subsidizing prescription drug coverage or allowing beneficiaries access to discounted pharmaceutical prices; (13) the design of a drug coverage option, as well as its implementation, will determine the effect of the option on beneficiaries, Medicare or federal spending, and the pharmaceutical market; (14) a new benefit would need to be crafted to balance competing concerns about the sustainability of Medicare, federal obligations, and the hardship faced by some beneficiaries; and (15) the effect of granting some beneficiaries access to discounted prices will hinge on details such as the price of the drugs after the discount, how discounts are determined and secured, and which beneficiaries are eligible.

The Social Security Act of 1935 authorized the Social Security Administration (SSA) to establish a record-keeping system to manage the Social Security program, which resulted in the creation of the SSN. Through a process known as "enumeration," unique numbers are created for every person as a work and retirement benefit record. Today, SSA issues SSNs to most U.S. citizens, as well as non-citizens lawfully admitted to the United States with permission to work. Because the SSN is unique for every individual, both the public and private sectors increasingly use it as a universal identifier. This increased use, as well as increased electronic record keeping by both sectors, has eased access to SSNs and potentially made this information more vulnerable to misuse, including identity theft. Specifically, SSNs are a key piece of information used to create false identities for financial misuse or to assume another individual's identity. Most often, identity thieves use SSNs belonging to real people. However, the Federal Trade Commission's (FTC) identity theft victim complaint data has shown that only 30 percent of identity theft victims know how thieves obtained their personal information. The FTC estimated that over a 1-year period, nearly 10 million people discovered they were victims of identity theft, translating into estimated losses of billions of dollars. There is no one law that regulates the overall use of SSNs by all levels and branches of government. However, the use and disclosure of SSNs by the federal government is generally restricted under the Privacy Act of 1974. Broadly speaking, this act seeks to balance the government's need to maintain information about individuals with the rights of individuals to be protected against unwarranted invasions of their privacy. Section 7 of the act requires that any federal, state, or local government agency, when requesting an SSN from an individual, tell individuals whether disclosing the SSN is mandatory or voluntary, cite the statutory or other authority under which the request is being made, and state what uses it will make of the individual's SSN. Additional federal laws also place restrictions on public and private sector entities' use and disclosure of consumers' personal information, including SSNs, in specific instances. As shown in table 1, some of these laws require certain industries, such as the financial services industry, to protect individuals' personal information to a greater degree than entities in other industries. In 1998, Congress also enacted a federal statute that criminalizes fraud in connection with the unlawful theft and misuse of personal identifiable information, including SSNs. The Identity Theft and Assumption Deterrence Act made it a criminal offense for a person to "knowingly transfer, possess, or use without lawful authority," another person's means of identification "with the intent to commit, or to aid or abet, or in connection with, any unlawful activity that constitutes a violation of Federal law, or that constitutes a felony under any applicable state or local law." Under the act, an individual's name or Social Security number is considered a "means of identification." In addition, in 2004, the Identity Theft Penalty Enhancement Act established the offense of aggravated identity theft in the federal criminal court, which is punishable by a mandatory two-year prison term. Many states have also enacted laws to restrict the use and display of SSNs. For example, in 2001, California enacted a law that generally prohibited companies and persons from engaging in certain activities with SSNs, such as posting or publicly displaying SSNs, or requiring people to transmit an SSN over the Internet unless the connection is secure or the number is encrypted. In our prior work, we identified 13 states--Arizona, Arkansas, Connecticut, Georgia, Illinois, Maryland, Michigan, Minnesota, Missouri, Oklahoma, Texas, Utah, and Virginia--that have passed laws similar to California's. While some states, such as Arizona, have enacted virtually identical restrictions on the use and display of SSNs, other states have modified the restrictions in various ways. For example, unlike the California law, which prohibits the use of the full SSN, the Michigan statute prohibits the use of more than four sequential digits of the SSN. Some states have also enacted other types of restrictions on the uses of SSNs. For example, Arkansas, Colorado, and Wisconsin prohibit the use of a student's SSN as an identification number. Other recent state legislation places restrictions on state and local government agencies, such as Indiana's law that generally prohibits state agencies from releasing SSNs unless otherwise required by law. A number of federal laws and regulations require agencies at all levels of government to frequently collect and use SSNs for various purposes. Beginning with a 1943 Executive Order issued by President Franklin D. Roosevelt, all federal agencies were required to use the SSN exclusively for identification systems of individuals, rather than set up a new identification system. In later years, the number of federal agencies and others relying on the SSN as a primary identifier escalated dramatically, in part, because a number of federal laws were passed that authorized or required its use for specific activities. For example, agencies use SSNs for internal administrative purposes, which include activities such as identifying, retrieving, and updating records; to collect debts owed to the government and conduct or support research and evaluations, as well as use employees' SSNs for activities such as payroll, wage reporting, and providing employee benefits; to ensure program integrity, such as matching records with state and local correctional facilities to identify individuals for whom the agency should terminate benefit payments; and for statistics, research, and evaluation. Table 2 provides an overview of federal statutes that address government collection and use of SSNs. In some cases, these statutes require that state and local government entities collect SSNs. Some government agencies also collect SSNs because of their responsibility for maintaining public records, which are those records generally made available to the public for inspection by the government. Because these records are open to the public, such government agencies, primarily at the state and local levels, provide access to the SSNs sometimes contained in those records. Based on a survey of federal, state, and local governments, we reported in 2004 that state agencies in 41 states and the District of Columbia displayed SSNs in public records; this was also true in 75 percent of U.S. counties. We also found that while the number and type of records in which SSNs were displayed varied greatly across states and counties, SSNs were most often found in court and property records. Public records displaying SSNs are stored in multiple formats, such as electronic, microfiche and microfilm, or paper copy. While our prior work found that public access to such records was often limited to inspection of the individual paper copy in public reading rooms or clerks' offices, or request by mail, some agencies also made public records available on the Internet. In recent years, some agencies have begun to take measures to change the ways in which they display or provide access to SSNs in public records. For example, some state agencies have reported removing SSNs from electronic versions of records, replacing SSNs with alternative identifiers in records, restricting record access to individuals identified in the records, or allowing such individuals to request the removal of their SSNs from these records. Certain private sector entities, such as information resellers, consumer reporting agencies (CRAs), and healthcare organizations collect SSNs from public and private sources, as well as their customers, and primarily use SSNs for identity verification purposes. In addition, banks, securities firms, telecommunication firms, and tax preparers engage in third party contracting and sometimes share SSNs with their contractors for limited purposes, generally when it is necessary and unavoidable. Information resellers are businesses that specialize in amassing personal information, including SSNs, and offering informational services. They provide their services to a variety of customers, such as specific businesses clients or through the Internet to the general public. Large or well known information resellers reported that they obtain SSNs from various public records, such as records of bankruptcies, tax liens, civil judgments, criminal histories, deaths, and real estate transactions. However, some of these resellers said they are more likely to rely on SSNs obtained directly from their clients, who may voluntarily provide such information, than those found in public records. In addition, in our prior review of information resellers that offer their services through the Internet, we found that their Web sites most frequently identified public or nonpublic sources, or both, as their sources of information. For example, a few Internet resellers offered to conduct background investigations on individuals by compiling information from court records and using a credit bureau to obtain consumer credit data. CRAs, also known as credit bureaus, are agencies that collect and sell information about the creditworthiness of individuals. Like information resellers, CRAs also obtain SSNs from public and private sources. For example, CRA officials reported that they obtain SSNs from public sources, such as bankruptcy records. We also found that these companies obtain SSNs from other information resellers, especially those that specialize in collecting information from public records. However, CRAs are more likely to obtain SSNs from businesses that subscribe to their services, such as banks, insurance companies, mortgage companies, debt collection agencies, child support enforcement agencies, credit grantors, and employment screening companies. Organizations that provide health care services, including health care insurance plans and providers, are less likely to obtain SSNs from public sources. These organizations typically obtain SSNs either from individuals themselves or from companies that offer health care plans. For example, individuals enrolling in a health care plan provide their SSNs as part of their plan applications. In addition, health care providers, such as hospitals, often collect SSNs as part of the process of obtaining information on insured people. We found that the primary use of SSNs by information resellers, CRAs, and health care organizations is to help verify the identity of individuals. Large information resellers reported that they generally use the SSN as an identity verification tool, though they also use it for matching internal databases, identifying individuals for their product reports, or conducting resident or employment screening investigations for their clients. CRAs use SSNs as the primary identifier of individuals in order to match information they receive from their business clients with information on individuals already stored in their databases. Finally, health care organizations also use the SSN, together with information such as name, address, and date of birth, for identity verification. In addition to their own direct use of customers' SSNs, private sector entities also share this information with their contractors. According to experts, approximately 90 percent of businesses contract out some activity because they find either it is more economical to do so or other companies are better able to perform these activities. Banks, investment firms, telecommunication companies, and tax preparation companies we interviewed for our prior work routinely obtain SSNs from their customers for authentication and identification purposes and contract with other companies for various services, such as data processing, administrative, and customer service functions. Company officials reported that customer information, such as SSNs, is shared with contractors for limited purposes, generally when it is necessary or unavoidable. Further, these companies included certain provisions in their standard contact forms aimed at safeguarding customer's personal information. For example, forms included electronic and physical data protections, audit rights, data breach notifications, subcontractor restrictions, and data handling and disposal requirements. Although federal and state laws have helped to restrict SSN use and display, and public and private sector entities have taken some steps to further protect this information, our prior work identified several remaining vulnerabilities. While government agencies have since taken actions to address some of the identified SSN protection vulnerabilities in the public sector, private sector vulnerabilities that we previously identified have not yet been addressed. Consequently, in both sectors, vulnerabilities remain to protecting SSNs from potential misuse by identity thieves and others. In our prior work, we found that several vulnerabilities remain to protecting SSNs in the public sector, and in response, some of these vulnerabilities have since been addressed by agencies. For example, in our review of government uses of SSNs, we found that some federal, state, and local agencies do not consistently fulfill the Privacy Act requirements that they inform individuals whether SSN disclosure is mandatory or voluntary, provide the statutory or other authority under which the SSN request is made, or indicate how the SSN will be used, when they request SSNs from individuals. To help address this inconsistency, we recommended that the Office of Management and Budget (OMB) direct federal agencies to review their practices for providing required information, and OMB has since implemented this recommendation. Actions have also been taken by some federal agencies in response to our previous finding that millions of SSNs are subject to exposure on individual identity cards issued under federal auspices. Specifically, in 2004, we reported that an estimated 42 million Medicare cards, 8 million Department of Defense (DOD) insurance cards, and 7 million Department of Veterans Affairs (VA) beneficiary cards displayed entire 9-digit SSNs. While the Centers for Medicare and Medicaid Services, with the largest number of cards displaying the entire 9-digit SSN, does not plan to remove the SSN from Medicare identification cards, VA and DOD have begun taking action to remove SSNs from cards. For example, VA is eliminating SSNs from 7 million VA identification cards and will replace cards with SSNs or issue new cards without SSNs between 2004 and 2009, until all such cards have been replaced. However, some of the vulnerabilities we identified in public sector SSN protection have not been addressed. For example, while the Privacy Act and other federal laws prescribe actions agencies must take to assure the security of SSNs and other personal information, we found that these requirements may not be uniformly observed by agencies at all levels of government. In addition, in our review of SSNs in government agency- maintained public records, we found that SSNs are widely exposed to view in a variety of these records. While some agencies reported taking actions such as removing SSNs from electronic versions of records, without a uniform and comprehensive policy, SSNs in these records remain vulnerable to potential misuse by identity thieves. Consequently, in both instances, we suggested that Congress consider convening a representative group of federal, state, and local officials to develop a unified approach to safeguarding SSNs used in all levels of government. Some steps have since been taken at the federal level to promote inter- agency discussion of SSN protection, such as creation of the President's Identity Theft Task Force in 2006 to increase the safeguards on personal data held by the federal government. In April 2007, the Task Force completed its work, which resulted in a strategic plan aimed at making the federal government's efforts more effective and efficient in the areas of identity theft awareness, prevention, detection, and prosecution. The plan's recommendations focus in part on increasing safeguards employed by federal agencies and the private sector with respect to the personal data they maintain, including decreasing the unnecessary use of SSNs in the public sector. To that end, last month, OMB issued a memorandum requiring federal agencies to examine their use of SSNs in systems and programs in order to identify and eliminate instances in which collection or use of the SSN is unnecessary. In addition, the memo requires federal agencies to participate in governmentwide efforts to explore alternatives to agency use of SSNs as personal identifiers for both federal employees and in federal programs. In our reviews of private sector entities' collection and use of SSNs, we found variation in how different industries are covered by federal laws protecting individuals' personal information. For example, although federal laws place restrictions on reselling some personal information, these laws only apply to certain types of private sector entities, such as financial institutions. Consequently, information resellers are not covered by these laws, and there are few restrictions placed on these entities' ability to obtain, use, and resell SSNs. However, recently proposed federal legislation, if implemented, may help to address this vulnerability. For example, the SSN Protection Act of 2007, as introduced by Representative Edward Markey, would give the Federal Trade Commission (FTC) rulemaking authority to restrict the sale and purchase of SSNs and determine appropriate exemptions. The proposed legislation would therefore improve SSN protection while also permitting limited exceptions to the purchase and sale of SSNs for certain purposes, such as law enforcement or national security. Vulnerabilities also exist in federal law and agency oversight for different industries that share SSNs with their contractors. For example, while federal law and oversight of the sharing of personal information in the financial services industry is very extensive, federal law and oversight of the sharing of personal information in the tax preparation and telecommunications industries is somewhat lacking. Specific actions to address these vulnerabilities in federal laws have not yet been taken, leaving SSNs maintained by information resellers and contractors in the tax preparation and telecommunications industries potentially exposed to misuse, including identity theft. We also found a gap in federal law addressing SSN truncation, a practice that would improve SSN protection if standardized. Specifically, in our Internet resellers report, several resellers provided us with truncated SSNs showing the first five digits, though other entities truncate SSNs by showing the last four digits. Therefore, because of the lack of SSN truncation standards, even truncated SSNs remain vulnerable to potential misuse by identity thieves and others. While we suggested that the Congress consider enacting standards for truncating SSNs or delegating authority to SSA or some other governmental entity to do so, SSN truncation standards have yet to be addressed at the federal level. The use of SSNs as a key identifier in both the public and private sectors will likely continue as there is currently no other widely accepted alternative. However, because of this widespread use of SSNs, and the vulnerabilities that remain to protecting this identifier in both sectors, SSNs continue to be accessible to misuse by identity thieves and others. Given the significance of the SSN in committing fraud or stealing an individual's identity, it would be helpful to take additional steps to protect this number. As the Congress moves forward in pursuing legislation to address SSN protection and identity theft, focusing the debate on vulnerabilities that have already been documented may help target efforts and policy directly toward immediate improvements in SSN protection. To this end, we look forward to supporting the Subcommittee and the Congress however we can to further ensure the integrity of SSNs. Related to this, we have issued a report on the federal government's provision of SSNs to state and local public record keepers, and we have also recently begun a review of the bulk sale of public records containing SSNs, including how federal law protects SSNs in these records when they are sold to entities both here and overseas. Mr. Chairman, this concludes my prepared testimony. I would be pleased to respond to any questions you or other members of the subcommittee may have. For further information regarding this testimony, please contact me at [email protected] or (202) 512-7215. In addition, contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this statement. Individuals making key contributions to this testimony include Jeremy Cox, Rachel Frisk, Ayeke Messam, and Dan Schwimer. Social Security Numbers: Internet Resellers Provide Few Full SSNs, but Congress Should Consider Enacting Standards for Truncating SSNs. GAO-06-495. Washington, D.C.: May 17, 2006. Social Security Numbers: More Could Be Done to Protect SSNs. GAO-06-586T. Washington, D.C.: March 30, 2006. Social Security Numbers: Stronger Protections Needed When Contractors Have Access to SSNs. GAO-06-238. Washington, D.C.: January 23, 2006. Social Security Numbers: Federal and State Laws Restrict Use of SSNs, yet Gaps Remain. GAO-05-1016T. Washington, D.C.: September 15, 2005. Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards. GAO-05-59. Washington, D.C.: November 9, 2004. Social Security Numbers: Use Is Widespread and Protections Vary in Private and Public Sectors. GAO-04-1099T. Washington, D.C.: September 28, 2004. Social Security Numbers: Use Is Widespread and Protections Vary. GAO-04-768T. Washington, D.C.: June 15, 2004. Social Security Numbers: Private Sector Entities Routinely Obtain and Use SSNs, and Laws Limit the Disclosure of This Information. GAO-04-11. Washington, D.C.: January 22, 2004. Social Security Numbers: Ensuring the Integrity of the SSN. GAO-03-941T. Washington, D.C.: July 10, 2003. Social Security Numbers: Government Benefits from SSN Use but Could Provide Better Safeguards. GAO-02-352. Washington, D.C.:May 31, 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.

Since its creation, the Social Security number (SSN) has evolved beyond its intended purpose to become the identifier of choice for public and private sector entities, and it is now used for myriad non-Social Security purposes. This is significant because a person's SSN, along with name and date of birth, are the key pieces of personal information used to perpetrate identity theft. Consequently, the potential for misuse of the SSN has raised questions about how private and public sector entities obtain, use, and protect SSNs. Accordingly, this testimony focuses on describing the (1) use of SSNs by government agencies, (2) use of SSNs by the private sector, and (3) vulnerabilities that remain to protecting SSNs. For this testimony, we primarily relied on information from our prior reports and testimonies that address public and private sector use and protection of SSNs. These products were issued between 2002 and 2006 and are listed in the Related GAO Products section at the end of this statement. We conducted our reviews in accordance with generally accepted government auditing standards. A number of federal laws and regulations require agencies at all levels of government to frequently collect and use SSNs for various purposes. For example, agencies frequently collect and use SSNs to administer their programs, link data for verifying applicants' eligibility for services and benefits, and conduct program evaluations. In the private sector, certain entities, such as information resellers, collect SSNs from public sources, private sources, and their customers and use this information for identity verification purposes. In addition, banks, securities firms, telecommunication firms, and tax preparers engage in third party contracting, and consequently sometimes share SSNs with their contractors for limited purposes. Vulnerabilities persist in federal laws addressing SSN collection and use by private sector entities. In particular, we found variation in how different industries are covered by federal laws protecting individuals' personal information. For example, although federal laws place restrictions on reselling some personal information, these laws apply only to certain types of private sector entities, such as financial institutions. Consequently, information resellers are not covered by these laws, and there are few restrictions placed on these entities' ability to obtain, use, and resell SSNs for their businesses. Vulnerabilities also exist in federal law and agency oversight for different industries that share SSNs with their contractors. For example, while federal law and oversight of the sharing of personal information in the financial services industry are very extensive, federal law and oversight of the sharing of personal information in the tax preparation and telecommunications industries are somewhat lacking. Moreover, in our Internet resellers report, several resellers provided us with truncated SSNs showing the first five digits, though other information resellers and consumer reporting agencies truncate SSNs to show the last four digits. Therefore, because of the lack of SSN truncation standards, even truncated SSNs remain vulnerable to potential misuse by identity thieves and others. While we suggested that the Congress consider enacting standards for truncating SSNs or delegating authority to the Social Security Administration or some other governmental entity to do so, SSN truncation standards have yet to be addressed at the federal level.

For many years, federal agencies have been encouraged to use information technology to improve their communications with the public and to increase participation in the rulemaking process. One of the recommendations of the National Performance Review in September 1993 was to "se information technology and other techniques to increase opportunities for early, frequent, and interactive public participation during the rulemaking process ..." The Paperwork Reduction Act of 1995 states that the Director of OMB should promote the use of IT "to improve the productivity, efficiency, and effectiveness of Federal programs..." Similarly, a December 17, 1999, presidential memorandum on "Electronic Government" noted that "as public awareness and Internet usage increase, the demand for online Government interaction and simplified, standardized ways to access Government information and services becomes increasingly important." Between June 2000 and February 2001, as information technology began to play an increasingly important role in agencies' regulatory management and the facilitation of public participation in federal rulemaking, we reported on a number of associated opportunities and challenges. We pointed out that the use of information technology could reduce regulatory burden, improve the transparency of regulatory processes, and, ultimately, facilitate the accomplishment of regulatory objectives. We reported on innovative uses of information technology that representatives of federal or state agencies and nongovernmental organizations believed could be more widely used by federal regulatory agencies, and we recommended actions that could facilitate innovation, avoid duplication of effort, and potentially result in a broader and more consistent approach across federal agencies. The President, through the President's Management Agenda, has advanced greater use of information technology across a range of government functions, including rulemaking. In July 2001, the President identified the expansion of e-government as one of the five priorities of his management agenda. To support this, OMB has developed an implementation strategy and identified 25 e-government initiatives, one of which is e-Rulemaking. In May 2002, the Director of OMB issued a memorandum to the heads of executive departments and agencies advising them of "our intention to consolidate redundant IT systems relating to the President's on-line rulemaking initiative." Citing OMB's authority under the Clinger-Cohen Act of 1996, the Director said OMB had identified "several potentially redundant systems across the federal government that relate to the rulemaking process," and indicated that consolidation of those systems could save millions of dollars. The administration said e-Rulemaking would "democratize an often closed process." In late 2002, the President signed into law the E-Government Act of 2002. The act requires agencies, to the extent practicable, to accept public comments on proposed rules "by electronic means" and to ensure that a publicly accessible federal Web site contains "electronic dockets" for their proposed rules. The act also established an Office of Electronic Government within OMB, headed by an Administrator appointed by the President and required to work with the Administrator of OMB's Office of Information and Regulatory Affairs in establishing the strategic direction of the e-government program and to oversee its implementation. Initially, OMB named the Department of Transportation (DOT) as the lead agency, or managing partner, for the e-Rulemaking effort, entrusting DOT with the day-to-day management of the project as well as collaboration with other e-Rulemaking agencies. In a previous report, we noted that "DOT had the most developed electronic docket system of the agencies that we contacted, covering every rulemaking action in the department and including all public comments received regardless of medium." DOT served as managing partner until an independent consultant's assessment concluded in August 2002 that the system operated by EPA was the optimal platform to serve as the consolidated electronic docket platform for the entire federal government. As a result of this assessment, OMB transferred managing partner responsibilities from DOT to EPA in late 2002. The e-Rulemaking initiative provides a single portal for businesses and citizens to access the federal rulemaking process and comment on proposed rules. It is composed of three modules. The first module was completed in January 2003 with the launch of the www.regulations.gov Web site. The second module, which is the focus of this report, will move beyond rule identification and a comment mechanism by establishing a governmentwide electronic docket management system into which all relevant regulatory supporting materials and public comments will be placed. The third and final module will create an electronic regulatory desktop to facilitate the rule development process. E-Rulemaking officials and the e-Rulemaking Initiative Executive Committee considered three alternative designs for the federal e- Rulemaking system and ultimately chose to develop and implement a single, centralized design. This decision was based upon studies that examined the costs, deployment risks, and security aspects of the three designs. Throughout the management of the e-Rulemaking initiative, e- Rulemaking officials have estimated that the centralized design would save money; the latest estimate is that it would save approximately $94 million over 3 years. Officials said they used their best professional judgment and information about the costs to develop and operate paper and electronic rulemaking systems. E-Rulemaking officials and the e-Rulemaking Initiative Executive Committee considered three designs for the system architecture of the governmentwide e-Rulemaking system. These were a centralized, tiered, or a distributed design. The key characteristics of the governmentwide e- Rulemaking system architecture would: enable agencies to manage content and workflow processes using variable access controls and role definitions; provide a robust and scaleable Web-based solution that supports the capture, conversion, and dissemination of high volumes of information; provide the public and stakeholders with the ability to perform electronic docket searching, viewing, and commenting across multiple agencies; and minimize the total cost of system ownership and management while delivering responsive service to agencies/subagencies, businesses, and citizens. Anyone with the ability to connect to the Internet with a standard industry browser would be able to access the e-Rulemaking system. Centralized design. The centralized design uses a minimal number of governmentwide e-Rulemaking system components in the same location to provide consistent access and services for citizens and agency staff across all dockets. Under this design, the features and functions of the governmentwide e-Rulemaking system are provided by component-based application architecture and all standard components are centrally located. These application components would reside on servers in a single location for delivery of services to the public and the agencies. Unlike the tiered and distributed designs, which are discussed in the next sections, the centralized design will not support existing agency docket systems nor will it distribute components of the governmentwide e-Rulemaking system in agency facilities. Tiered design. The tiered design utilizes a centralized governmentwide e- Rulemaking system to deliver all agency and citizen services, but is different from the centralized design because common hardware and software components installed in the governmentwide e-Rulemaking system are also installed at different agency sites to enhance system performance. For example, components like the database management or document management system may be placed on separate servers in the same or different locations to process information more efficiently to boost system performance, and the responsibility for the data is dispersed across multiple entities or agency sites and would be maintained locally at each site. Because the tiered design is based on the use of common hardware and software components, the governmentwide e-Rulemaking system is not linked to any existing agency specific docket system with its unique hardware and software. As a result, no customized software interfaces are needed. Distributed design. The distributed design integrates a centralized governmentwide e-Rulemaking system with existing agency-specific electronic docket systems while satisfying all governmentwide e-Rulemaking system requirements. This design links agencies with existing docket systems to the governmentwide e-Rulemaking system using customized software (middleware) to allow interconnectivity between agencies' systems and the governmentwide e-Rulemaking system. This design provides the public with a means of searching across agency dockets and establishes the governmentwide e-Rulemaking system as an access point to the public and agencies for searching, reviewing, and commenting on dockets that reside on the agencies' existing docket systems. In addition, agencies with docket systems will continue to perform their own workflow/business/docket life-cycle processing. In 2002, DOT, which was the managing partner for the e-Rulemaking initiative, contracted with a consulting firm to assess the capabilities of seven existing agency e-Rulemaking systems and prepare a business case describing alternative designs for the system and the recommended design. The firm was to provide advice to DOT about the best technical approach for the initiative, along with a full analysis of alternatives that leverage the use of existing technology to meet the vision, goals, and objectives of the initiative. Based on its assessment, the consulting firm's August 2002 report recommended that EPA's eDocket system would be the optimal platform for a governmentwide centralized e-Rulemaking system. The business case discussed two other alternative designs as well. DOT submitted this business case to OMB in September 2002. Based on the recommendation to use EPA's e-Rulemaking system as the platform for a centralized system, OMB transferred managing partner responsibilities for the e-Rulemaking initiative from DOT to EPA. After EPA became the managing partner in late 2002, EPA submitted three additional business cases to OMB--in December 2002, September 2003, and September 2004--and recommended the centralized design. During this time period, e-Rulemaking officials also hired a contractor to refine the three alternative designs, summarize the costs and risks for each alternative, and recommend one alternative for implementation. E- Rulemaking officials used the contractor's January 2004 report recommending the centralized alternative when preparing the last of the three business cases that was submitted to OMB. E-Rulemaking officials and the e-Rulemaking Initiative Executive Committee based the decision to select the centralized design over the tiered and distributed designs on three assessments that generally found that the centralized design was most cost effective, had the lowest risk for deployment and support instability, was the most secure, and was most likely to deliver the breadth and functionality sought by agencies and the public. E-Rulemaking officials hired a contractor to conduct two analyses based on cost and risk models, and the contractor obtained from a consulting firm a third assessment that was based on industry best practices and experiences in assessing similar architectures. The first assessment used a cost-analysis modeling tool used by the private sector and government agencies to analyze and estimate the costs associated with software application development. Using this model, the cost estimates to deliver and operate the three designs were $18.7 million for the centralized design, $21.1 million for the tiered design, and $87.2 million for the distributed design (assuming 10 agencies were integrated with the centralized governmentwide e-Rulemaking system). The model predicted it would take 1 year to deliver the centralized design and almost 3 years to deliver the distributed design. Also, according to the model, the complexity of the distributed design would present a high risk of instability to the overall operation and maintenance of the systems. The second assessment used a model that estimates the total cost of implementing and supporting a specific application within a commercial enterprise and assesses the expected risk of successful deployment and the benefit to the organization of adopting the new capability. Using this model, the cost to deliver and operate the three designs was $20.1 million for the centralized design, $22.8 million for the tiered design, and $94.9 million for the distributed design (assuming 10 agencies were integrated with the centralized governmentwide e-Rulemaking system). The model estimated that there was a 50 to 60 percent greater likelihood of unsuccessful deployment of the distributed design when compared to the other designs. The most significant risk factor accounting for this increased likelihood of failure is system complexity, resulting in major integration, infrastructure, and change management issues that tend to be difficult to resolve. The third assessment was done by a leading information technology firm with the intent of predicting the cost, risk, security, and supportability of the three designs based on industry best practices and the firm's experience in assessing similar architectures. The firm recommended the centralized design because it provided for a consistent implementation across the government and was the lowest cost and least risky design. The firm rated the tiered design as "feasible but not recommended" for various reasons including the following. First, the firm said it would be difficult to maintain consistent data quality in a tiered design because the responsibility for data would be spread across multiple entities. Second, consistent security and business continuity policies could not be implemented because each agency would most likely manage its data according to its security policies and business continuity models. Third, data retrieval could be complex because data would be maintained locally at each agency. The firm did not recommend the distributed design for several reasons, including the highly complex implementation and high delivery risk and higher cost for maintenance and support due to the large number of disparate systems involved in the design. E-Rulemaking officials estimated that the federal government would save approximately $94 million over 3 years by deploying the e-Rulemaking system--$56 million in savings from eliminating duplication of systems and $38 million in savings from annual maintenance fees. Officials said that they developed this estimate prior to completing the three assessments previously described and that at the time they developed this estimate, there was a lack of published information about how much it cost to develop or operate paper or electronic rulemaking systems. They primarily used their professional judgment, information about costs for developing and operating EPA's paper and electronic rulemaking systems, and information provided by OMB about the number of rulemaking entities to develop the estimate. The estimate assumes, among other things, that all rulemaking entities would either develop an electronic rulemaking system or, if they already had an electronic rulemaking system, they would continue to operate those systems. E-Rulemaking officials extensively collaborated with rulemaking agencies and used several methods to solicit the participation of those agencies during the e-Rulemaking effort, notably the use of interagency working groups. Most officials at these other rulemaking agencies said they had adequate opportunity to collaborate on the initiative and described the process as effective. They provided us with examples that supported their opinions. E-Rulemaking officials have successfully used a variety of collaboration tools to encourage participation and arrive at consensus among the participating agencies, particularly the use of interagency working groups. Two core working groups facilitate discussion and decision making for the project: (1) the e-Rulemaking Advisory Board, composed primarily of technical and policy staff from the participating agencies; and (2) the e- Rulemaking Initiative Executive Committee, composed of upper-level agency managers such as Chief Information Officers and individuals at the Assistant Secretary level, which was added after the project had begun to obtain upper management support from participating agencies--especially those that already have an electronic system in place. Additionally, e-Rulemaking officials have convened specialized working groups to tackle unique areas of concern, such as system design, project funding, or legal issues. These specialized working groups are open forums designed to foster consensus on decisions made on the e-Rulemaking initiative. Under e-Rulemaking officials' guidance, specialized working groups are charged with developing specific proposals for the project and transmitting these proposals to the Advisory Board for discussion. The Advisory Board may consider revisions to the proposal before reaching a decision that represents a consensus of the participants. This decision is then sent to the Executive Committee, which makes a final decision on the proposals and recommends a course of action to OMB. Agency officials we spoke with noted that representatives of all agencies are free to participate on the Executive Committee, the Advisory Board, or any working group. The three levels of panels are supplemented by a variety of other collaborative tools and methods, including: one-on-one meetings with agency officials, surveys, e-mail communication, teleconferencing, and an online library of documents related to the initiative. EPA also provided public notice of its work in the Federal Register and held public forums on the East and West coasts to obtain the views of businesses, citizens, and interest groups regarding the design of the e-Rulemaking system. The tenor of our discussions with officials of 14 of the 27 agencies serving on the Advisory Board was that they were satisfied with the level of collaboration. Participating agencies indicated that they had adequate opportunity to provide input and described the collaboration of e- Rulemaking officials as effective. Officials from a few agencies even said that in terms of the e-government initiatives, the e-Rulemaking initiative was one of the better collaborative efforts in which they have participated. Agencies often praised e-Rulemaking officials' concern for the unique needs of their agency. For example, one agency communicated its concern that it was not clear how the e-Rulemaking system would accommodate interim rules. While most rules are not effective until after the rulemaking process is concluded, some interim rules are effective immediately, for example, due to emergency conditions or other concerns related to health and safety. After receiving this comment, e-Rulemaking officials recognized the need to be clear about how interim rules would be processed and how comments on such rules would be addressed. The system was revised in accordance with the agency's suggestions. In another instance, one agency disagreed with the implementation schedule it was given for its transition to the e-Rulemaking system. The agency's officials anticipated that the transition date would overlap with a critical stage in their annual rulemaking cycle and expressed concern that any errors in processing and adopting rules during that time would be particularly harmful. E-Rulemaking officials readily agreed to change the schedule to account for this timing problem. Even when an agency's suggestion was not incorporated into the system design, they acknowledged that e-Rulemaking officials treated their concerns fairly, completely, and they understood why the suggestion was rejected. Agencies frequently deferred to the needs of the group after expressing their individual preferences during the collaborative process. The opinions expressed by these officials are consistent with our prior work. We noted in a recent report that e-Rulemaking initiative officials have successfully used collaboration strategies to achieve consensus with partner agencies on funding contributions to the e-Rulemaking initiative based on agency-specific characteristics. While managing the development of the centralized e-Rulemaking system, e-Rulemaking officials have, for the most part, followed key practices for successfully managing a project. However, there are a few practices that officials did not incorporate into the management of the e-Rulemaking initiative, such as including system performance measures in written agreements with agencies. The first agencies began migrating to the centralized e-Rulemaking system in May 2005 and the public is scheduled to have access to the system in September 2005. While all agencies will eventually migrate to the centralized system, the schedule for doing so may change, due in part to funding issues. E-Rulemaking officials have also created a process for approving changes to the system based on concerns or issues identified by agencies or the public. E-Rulemaking officials, for the most part, followed key practices for successfully managing a project while developing the centralized e- Rulemaking system; however, there are a few practices that they did not follow. Table 1 summarizes the key practices they followed and those that they did not follow when developing the centralized e-Rulemaking system. This table does not indicate how well they followed each practice, but rather, indicates if the steps they took to manage the e-Rulemaking initiative reflected the presence of the practice. E-Rulemaking officials followed all of the key practices except two. They did not document completely decisions related to the approach they used to identify alternative designs. Also, EPA, as managing partner, does not have written agreements that address system performance measures with agencies participating in the e-Rulemaking initiative. Although the written agreements do not include performance measures, e-Rulemaking officials do have performance goals that they are measuring. For example, one goal is to have the centralized e-Rulemaking system available to the public and agency rule writers and managers 99.99 percent of the time. Officials also said they are developing a postimplementation review plan. EPA, as managing partner, signed written agreements with 15 agencies during fiscal years 2003 or 2004 that indicated EPA would establish performance measures, but the agreements did not include any details about them. These agreements did include expected outcomes, roles and responsibilities, and resource commitments. These 15 agencies--which committed to providing financial assistance or in-kind resources to the initiative--included the 5 agencies, or parts of agencies, that are migrating to the centralized e-Rulemaking system during the first migration phase. During fiscal year 2005, EPA plans to sign similar agreements with 20 additional agencies that include these three items. The additional agencies are those to whom OMB has issued budget guidance for 2005 regarding providing funding to EPA for the e-Rulemaking initiative. As additional agencies become involved in funding the initiative, e-Rulemaking officials said they plan to sign similar agreements with them. In May 2005, the agencies included in phase I of the migration schedule-- EPA, the Department of Housing and Urban Development, the Animal and Plant Health Inspection Service within the Department of Agriculture, a portion of the Department of Homeland Security, and the National Archives and Records Administration--began migrating to the centralized e- Rulemaking system. Current plans are for 18 additional departments or agencies to begin using the system in fiscal year 2006, resources permitting. The remaining rulemaking departments or agencies are scheduled to begin using the system at different times during fiscal year 2007 and beyond. According to e-Rulemaking officials, the schedule may change depending on funding. They originally planned to migrate 10 agencies to the new system during phase I, but had to cut back due to funding shortfalls and late contributions, specifically in fiscal year 2004. When an agency is scheduled to migrate to the new system, it will go through a multistep process tailored to meet its needs. E-Rulemaking officials will sign an agreement that outlines the steps the agency will go through to migrate to the centralized system. Upon request, prior to initiating the implementation process, e-Rulemaking officials will meet with a department or agency to brief them on the initiative and demonstrate the system. The implementation steps, in chronological order, are: 1. 2. site survey (i.e., identify and analyze agency-specific technical and functional needs); 3. data preparation (i.e., develop agency-specific implementation); 4. agency configuration (i.e., develop technical and functional engineering requirements to support agency-unique implementation); 5. training (i.e., develop plans and conduct training); 6. usability testing (i.e., allow agency users to become familiar with the e- 7. data migration (i.e., migrate data to the system); 8. moving to production (i.e., agency goes "live" using the system); and 9. postproduction support. Five of the nine steps are high-level checkpoints at which the agency and e- Rulemaking officials agree that conditions are acceptable to move forward. These steps are the kick-off meeting, data preparation, training, usability testing, and moving to production. The centralized e-Rulemaking system will not remain static as additional agencies migrate to it, according to e-Rulemaking officials. They said that changes to the system will be made when valid concerns or issues are identified. Such concerns or issues could be raised by agencies that have already migrated to the system, agencies that will be migrating to the system, or public users of the system. E-Rulemaking officials are already planning changes to the system before phase II of the migration schedule begins. These changes are based on issues identified during beta testing by the agencies and usability testing by the public. According to e-Rulemaking officials, they have created a Change Control Board that will review and determine which requests for changes to the system will be granted. This board will also prioritize the changes that are to be made and obtain an estimate of the cost to implement them from the contractor assisting in the design and implementation of the system. A couple of agencies said they had concerns about whether the centralized system would include all the capabilities of their current electronic systems. For example, one agency said that their system tracks hearings as well as regulatory dockets. E-Rulemaking officials told these agencies that any such capabilities will be incorporated into future versions of the centralized e-Rulemaking system, provided adequate funding is provided. Moreover, they noted that because each agency signs an agreement with the e-Rulemaking Program Office before migrating to the centralized system, the agency can assure itself that the system has the capabilities it needs before signing the agreement and moving forward with migration. The process e-Rulemaking officials and the e-Rulemaking Initiative Executive Committee used to decide which of the three designs-- centralized, tiered, or distributed--to develop and implement as well as the basis for that decision, was reasonable and adequately supported. Using two cost and risk models and comparing the three designs to industry best practices was a sound approach to use in order to select which design should be implemented. In addition, because there was a lack of published information about the costs to develop or operate either a paper or electronic rulemaking system, e-Rulemaking officials used their professional judgment and own experiences to estimate how much the centralized e-Rulemaking system could save the federal government. E-Rulemaking officials established a governance structure to collaborate with other agencies to obtain input on developing and implementing the centralized e-Rulemaking system and its collaboration efforts with other agencies have been extensive and well-received. Most of the agencies we contacted were very satisfied with the collaboration efforts and thought that e-Rulemaking officials listened to their ideas and used them when developing and implementing the system. Officials from a few agencies we interviewed even said that in terms of the e-government initiatives, the e- Rulemaking initiative was one of the better collaborative efforts in which they have participated. While managing the development of the centralized e-Rulemaking system, e-Rulemaking officials followed most of the key practices for successfully managing a project. E-Rulemaking officials could, however, improve their management of the e-Rulemaking initiative by including system performance measures in written agreements with agencies. Having such agreements would provide criteria for determining if the e-Rulemaking initiative is operating in the most effective, efficient, and economic manner possible. E-Rulemaking officials established a governance structure that allowed it to successfully collaborate with other agencies about how to develop and implement the centralized e-Rulemaking system and used most of the key practices included in this report for managing an initiative. To learn from how it managed this initiative and to build on the success of it, we recommend that the Administrator of EPA, as managing partner of this initiative, take steps to ensure that the written agreements between EPA and the participating agencies include performance measures that address issues such as system performance, maintenance, and cost savings. These measures are necessary to provide criteria for evaluating the effectiveness of the e-Rulemaking initiative as well as for determining if the initiative is operating in the most efficient and economical manner. The Administrator of EPA was provided a draft of this report for his review and comment. The EPA Assistant Administrator and Chief Information Officer provided written comments on the draft in an August 17, 2005, letter, which is reprinted in appendix III. The Assistant Administrator agreed that the report accurately describes the e-Rulemaking Initiative. She added that e-Rulemaking officials appreciated GAO's recommendation to ensure the effectiveness of the initiative and they look forward to continuing to work with GAO for the continued success of the project. E- Rulemaking officials said they agree with GAO's recommendation and they plan to implement it. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from the date of this letter. At that time we will send copies of this report to the Chair and Ranking Minority Member of the House Committee on Government Reform, the Administrator of EPA, and the Director of OMB. We will 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 have any questions regarding this report, please contact me at (202) 512-5837 or at [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report were Thomas Beall, Boris Kachura, Steven Law, Joseph Santiago, Shellee Soliday, and Grant Turner. While the Office of Management and Budget (OMB) oversees the e- Rulemaking initiative, it named the Environmental Protection Agency (EPA) managing partner for the initiative. As managing partner, EPA heads the Program Management Office (PMO), which is staffed by officials from several rulemaking agencies participating in this initiative. The PMO staff manages the day-to-day activities of the e-Rulemaking initiative while the e- Rulemaking Initiative Executive Committee makes the final decisions about the initiative's strategy, resources, and timetable. Hereafter, we refer to PMO officials as e-Rulemaking officials. Our first objective was to describe the approach EPA used to identify alternative designs for the e-Rulemaking system and how the decision to proceed with a single, centralized system design was made. To address this objective, we reviewed the Capital Asset Plan and Business Cases submitted by the Environmental Protection Agency (EPA) and the Department of Transportation (DOT). We also reviewed a contractor's analysis of the capabilities of current e-Rulemaking systems, a contractor's summary of assessments of the three identified alternative designs including analyses of operational risks and security vulnerabilities, and documentation related to the basis for e-Rulemaking officials' and the e- Rulemaking Initiative Executive Committee's recommendation about which design alternative to implement. We also interviewed OMB, e- Rulemaking, and DOT officials involved with developing information about the design alternatives, the selection of the centralized system design, and the development of the estimated cost savings associated with the centralized design alternative. Our second objective was to describe how EPA collaborated with other rulemaking agencies to obtain input about the e-Rulemaking system and those agencies' views regarding the collaboration. To address this objective, we interviewed e-Rulemaking officials and reviewed documentation related to collaboration efforts such as those describing the purpose and composition of various committees and work groups and written agreements between agencies and EPA regarding funding of the system. To acquire agency views on the collaboration that has occurred, we randomly selected 12 of the 27 agencies that serve on the e-Rulemaking Initiative Advisory Board and interviewed officials from those agencies about their experiences with the collaboration efforts. Included in this set of selected agencies were (1) agencies that serve on the e-Rulemaking Executive Committee, (2) agencies that currently have an e-Rulemaking system, and (3) agencies that are heavily involved in rulemaking. We analyzed the agency officials' responses to our questions on collaboration and identified those views that were most frequently expressed by officials from multiple agencies as a means of gauging the overall quality of the collaboration. In addition to the agencies included in the sample, we discussed collaboration with two additional agencies that serve on the Advisory Board. The first was DOT. Since we contacted DOT officials in relation to the first objective, we also discussed collaboration issues with them. We contacted the second agency, the National Archives and Records Administration (NARA), because many officials included in the original sample suggested that we talk to that agency since an official from NARA was heavily involved in meeting with all agencies to discuss the development of the e-Rulemaking system. We also discussed the methods used to obtain information from the public about the development of the e- Rulemaking system with PMO officials and reviewed related documents. Our third objective was to (1) determine whether EPA used key practices for successfully managing a project when managing the e-Rulemaking initiative and (2) describe EPA's future plans for developing and implementing the centralized e-Rulemaking system. To determine whether e-Rulemaking officials followed key practices, we identified key practices for successfully managing a project by reviewing previous GAO work related to the e-government initiatives. The key practices included in prior GAO reports were based in part on studies done by federal, state, and local agencies, international agencies, and the private sector and on guidance provided by the federal government, state, local and international governments, private research groups, national associations, and educational institutions. GAO information technology staff agreed with the list of key practices we identified. After developing the list of key practices, we compared the list to the information we had gathered about e-Rulemaking officials' management of the e-Rulemaking initiative. When making the comparison, we did not assess how well each key practice was followed, but rather we determined if the steps they took to manage the e- Rulemaking initiative reflected the presence of the practice. We did not attempt to assess the quality or extent of each practice's implementation. In order to describe future plans for the initiative, we reviewed documents that addressed future plans such as the business cases and implementation schedules and interviewed e-Rulemaking officials. We did not assess the quality of these plans. Although we report cost and related data from contractor assessments of the three governmentwide e-Rulemaking system design alternatives, we did not examine the reliability of that data since our first objective was to describe how e-Rulemaking officials selected one of the three alternatives rather than to determine if the appropriate alternative was selected. We performed our work from December 2003 through June 2005 in accordance with generally accepted government auditing standards. Federal Rulemaking: Agencies' Use of Information Technology to Facilitate Public Participation. GAO/GGD-00-135R. Washington, D.C.: June 30, 2000. Electronic Government: Government Paperwork Elimination Act Presents Challenges for Agencies. GAO/AIMD-00-282. Washington, D.C.: September 15, 2000. Electronic Government: Better Information Needed on Agencies' Implementation of the Government Paperwork Elimination Act. GAO-01- 1100. Washington, D.C.: September 28, 2001. Regulatory Management: Communication About Technology-Based Innovations Can Be Improved. GAO-01-232. Washington, D.C.: February 12, 2001. Information Technology: OMB Leadership Critical to Making Needed Enterprise Architecture and E-government Progress. GAO-02-389T. Washington, D.C.: March 21, 2002. Electronic Government: Selection and Implementation of the Office of Management and Budget's 24 Initiatives. GAO-03-229. Washington, D.C.: November 22, 2002. Electronic Government: Success of the Office of Management and Budget's 25 Initiatives Depends on Effective Management and Oversight. GAO-03-495T. March 13, 2003. Electronic Rulemaking: Efforts to Facilitate Public Participation Can Be Improved. GAO-03-901. Washington, D.C.: September 17, 2003. Electronic Government: Potential Exists for Enhancing Collaboration on Four Initiatives. GAO-04-6. Washington, D.C.: October 10, 2003. Electronic Government: Initiatives Sponsored by the Office of Management and Budget Have Made Mixed Progress. GAO-04-561T. Washington, D.C.: March 24, 2004. Electronic Government: Federal Agencies Have Made Progress Implementing the E-Government Act of 2002. GAO-05-12. Washington, D.C.: December 10, 2004. Electronic Government: Funding of the Office of Management and Budget's Initiatives. GAO-05-420. Washington, D.C.: April 25, 2005.

The E-Government Act of 2002 requires regulatory agencies, to the extent practicable, to ensure there is a Web site the public can use to comment on the numerous proposed regulations that affect them. To accomplish this, the Office of Management and Budget named the Environmental Protection Agency (EPA) as the managing partner for developing a governmentwide e-Rulemaking system that the public can use for these purposes. Issues GAO was asked to address include: (1) EPA's basis for selecting a centralized system, (2) how EPA collaborated with other agencies and agency views of that collaboration, and (3) whether EPA used key management practices when developing the system. E-Rulemaking officials and the e-Rulemaking Initiative Executive Committee considered three alternative designs and chose to implement a centralized e-Rulemaking system based on cost savings, risks, and security. Officials relied on an analysis of the three alternatives using two cost and risk assessment models and a comparison of the alternatives to industry best practices. Prior to completing this analysis, officials estimated the centralized approach would save about $94 million over 3 years. They said when they developed this estimate, there was a lack of published information about costs related to paper or electronic rulemaking systems. They used their professional judgment and information about costs for developing and operating EPA's paper and electronic systems, among other things, to develop the estimate. E-Rulemaking officials extensively collaborated with rulemaking agencies and most officials at the agencies we contacted thought the collaboration was effective. E-Rulemaking officials created a governance structure that included an executive committee, advisory board, and individual work groups that discussed how to develop the e-Rulemaking system. We contacted 14 of the 27 agencies serving on the advisory board and most felt their suggestions affected the system development process. Agency officials offered several examples to support their views, such as how their recommendations for changes to the system's design were incorporated. While managing the development of the centralized system, e-Rulemaking officials followed all but a few of the key practices for successfully managing an initiative. For example, officials did not have written agreements with participating agencies that included system performance measures. The first agencies began migrating to the centralized system in May 2005 with the public scheduled to have access in September 2005. Eventually, all rulemaking agencies will migrate to the centralized system; however, the schedule is tentative due in part to funding issues. As agencies migrate, e-Rulemaking officials are planning changes to the system including adding capabilities that exist in electronic systems operated by some agencies.

The major goals of medical tort laws are to (1) deter poor quality health care, (2) compensate the victims of negligent acts, and (3) penalize negligent providers. The system operates under the assumption that negligent behavior can be controlled and corrected by the hospitals and physicians themselves. It relies primarily on deterrence due to the threat of liability and disciplinary action. While this report focuses on the cost of medical liability borne by hospitals and physicians, the deterrence threat of tort law may lower costs incurred by consumers by reducing the number and severity of negligent medical acts. (See appendix I for a discussion of the legal basis for medical liability actions.) At least two factors have prompted calls for medical liability reform. First, some research suggests that the medical tort system is not achieving its goals. For example, one study reported that only a fraction of malpractice injuries result in claims, compensation is often unrelated to the existence of medical negligence, the legal system is slow at resolving claims, and legal fees and administrative costs consume almost half of the compensation. The second factor is the perception among some hospital officials and physicians that the current tort system places an unreasonable burden on their industry. Officials from the American Hospital Association and the American Medical Association contend that liability-related costs are too high and unduly influence the way hospitals deliver services and physicians practice medicine. The Congress has before it a number of legislative proposals that are intended to directly and indirectly reduce tort liability in the health care industry. To identify the various types of medical liability costs, we interviewed and collected data from a variety of sources, including the American Hospital Association, the American Medical Association, the American Bar Association, the St. Paul Fire and Marine Insurance Company, and individual hospitals and hospital systems. In addition, we reviewed recent professional and academic journals, such as the Journal of the American Medical Association and Health Affairs. From our research, we identified three studies that estimate certain hospital and physician medical liability costs. These studies were prepared by the General Accounting Office (GAO), the Congressional Budget Office (CBO), and the Office of Technology Assessment (OTA). We reviewed these studies to determine whether their estimates included all types of medical liability costs. In addition, we examined other studies that (1) estimated components of medical liability costs not included in these three studies or (2) used different methodologies to arrive at their estimates. We cannot project costs or generalize our findings because we did not use statistical methods to select the sources of the liability cost data we collected and did not collect data associated with all four categories of liability costs we identified. Also, because our work often involved data that some sources regarded as proprietary or sensitive, we agreed not to identify some sources in examples cited in our report. We did not verify the accuracy of the data. We performed our review from January 1995 through April 1995 in accordance with generally accepted government auditing standards. We discussed a draft of our report with CBO and OTA officials and have incorporated their comments where appropriate. Malpractice insurance is the first category of medical liability costs we identified and the cost specifically measured by each of the three studies. Most physicians and hospitals purchase medical malpractice insurance to protect themselves from medical malpractice claims. In most cases, the insurer will pay any claims up to a specific limit of coverage during a fixed period in return for a fee. The insurer investigates the claim and defends the physician or hospital. While hospital and physician insurance contracts can vary greatly, we have included the following types of costs in the medical malpractice insurance cost category: premiums for purchased insurance, hospital contributions for self-insurance, and payments made from hospitals' general revenues and reserves and physicians' personal assets to cover uninsured malpractice losses. (See appendix II for a detailed discussion of the types of hospital and physician insurance policies and related costs.) The CBO and OTA studies estimated costs primarily associated with purchased insurance. The CBO study reported the cost of purchased insurance in 1990, which totaled $5 billion and represented 0.74 percent of national health care expenditures. The OTA study measured purchased insurance and self-insurance costs in 1991 and reported that purchased insurance totaled $4.86 billion in 1991, or 0.66 percent of national health care expenditures. The study estimated self-insurance costs at 20 percent to 30 percent of premiums, which would mean that purchased insurance and self-insurance amounted to between $5.8 billion and $6.3 billion in 1991, less than 1 percent of national health care expenditures. Other studies that measured purchased insurance and self-insurance for the same periods studied by CBO and OTA estimated costs to be higher. Tillinghast, an actuarial and consulting firm, used its internal database of state-by-state malpractice insurance costs rather than insurance industry data because those data do not include self-insurance. Tillinghast estimated malpractice insurance costs in 1990 at over $8.2 billion.Another consulting firm, Lewin-VHI, Inc., used an estimate that malpractice insurance other than that purchased represents 86 percent of purchased insurance. This firm estimated malpractice insurance costs at $9.2 billion in 1991. Table 1 summarizes the estimates of malpractice insurance costs in 1990 and 1991. Our mid-1980s study measured all elements in our malpractice insurance cost category. To obtain information on hospital malpractice insurance costs, we analyzed data from a randomly selected sample of 1,248 hospitals. We obtained physician malpractice expense data from (1) American Medical Association reports quantifying expenses incurred by every known self-employed physician in the United States and (2) information collected from leading physician malpractice insurance companies. We reported that malpractice insurance costs for self-employed physicians averaged 9 percent of their total professional expenses in 1984, while malpractice insurance costs for hospitals accounted for 1 percent of their average inpatient per-day expense in 1985. Insurance company officials stated that the insurance market has changed since 1985 as more hospitals have established self-insurance programs and increased their self-insurance limits, thereby reducing their reliance on purchased insurance. However, the impact of this trend on costs has not been measured. Physician malpractice insurance costs vary by state and can vary within a state. Figure 1 presents The St. Paul Fire and Marine Insurance Company's 1994 rates for mid-range liability risk physician mature claims-made policies with limits primarily at $1 million/$3 million. In certain states, lower limits are mandatory or more common due to patient compensation funds. Variations by state and within states generally reflect the insurance company's claims and loss experience. Table 2 presents the rates the company provided for selected metropolitan areas that have rating territories separate from the remainder of their respective states. Across all rating territories, the annual premium for $1 million/$3 million coverage under claims-made policies ranged from a low of $5,388 in Arkansas to a high of $48,718 in Chicago. Within each rating territory, physicians' malpractice insurance costs also vary by specialty. For example, one insurer's average 1993 mature claims-made rates for policies providing $1 million/$3 million coverage limits to physicians in Texas ranged from $7,410 (except $9,877 in Houston) for family practitioners performing no surgery, a low-risk practice, to $54,834 (except $73,089 in Houston) for physicians specializing in obstetrics and gynecology, a high-risk specialty. While malpractice insurance rates are generally insensitive to a physician's malpractice history, a physician's malpractice claims history can lead to denial or termination of coverage. Hospital malpractice insurance costs vary according to claim trends in the state where the hospital is located, the number of occupied beds and outpatient visits, the limits of liability selected, the types of procedures performed, and the number of years the hospital has been insured under claims-made coverage. Malpractice insurance rates for hospitals are also frequently based on the malpractice loss experience (in terms of the number of claims filed and the amount per paid claim) of the individual hospital. Figure 2 presents The St. Paul Fire and Marine Insurance Company's per-bed average acute care rates for mature claims-made coverage at $1 million/$3 million limits of liability except in states where lower limits are mandatory or in states with patient compensation funds. Table 3 presents The St. Paul Fire and Marine Insurance Company's per-bed average acute care rates for hospitals in selected metropolitan areas that have rating territories separate from the remainder of their respective states. The annual per-bed rates ranged from a low of $612 in South Dakota to a high of $7,734 in Detroit. Defensive medicine includes the following hospital and physician actions aimed at reducing the risk of medical malpractice claims: additional or more complex diagnostic tests and procedures and additional patient visits and time spent with patients. The costs of defensive medicine cannot be easily estimated because of difficulties in defining it and distinguishing it from clinically justified medical care. For example, if the definition includes only conscious defensive medicine, it could exclude defensive medical practices acquired during medical training. Thus, the definition would need to address the question of the physician's motive for performing tests: Should cost estimates for defensive medicine encompass only procedures performed for "purely" defensive purposes or should they also include procedures performed for "primarily" defensive purposes? Cost estimates would vary greatly depending upon the definition used. Also, it is difficult to segregate the costs of those defensive acts that produce little or no medical benefit from those that are medically justified, such as additional tests that rule out certain diagnoses. Defensive medical practices can be classified as positive and negative. Positive defensive medicine involves tests and treatment that would not be provided if the threat of being sued were not present. For example, physicians may order more tests or procedures, take more time to explain risks or treatment options, and spend more time maintaining patient records than they would if there were no threat of malpractice suits. Negative defensive medicine involves not performing services because of the risk of malpractice actions. For example, physicians may restrict the scope of their practices to low-risk patients or procedures. While positive defensive medicine drives up the cost of health care, negative defensive medicine reduces its availability. The following discussion is limited to positive defensive medicine. Certain physician specialists may practice more defensive medicine than others. Defensive medicine is generally considered to be more extensive in surgery, radiology, cardiology, emergency medicine, and obstetrics and gynecology. As we previously reported, in 1990 Maine imposed practice guidelines by law that state officials expect will decrease these specialists' motivation to practice defensive medicine. These practice guidelines are intended to reduce the number of diagnostic tests and procedures that are performed for defensive purposes, including preoperative tests, such as some electrocardiograms and chest x-rays, cervical spine x-rays for some emergency room patients, some breast biopsies, and some colonoscopies. High rates of caesarean section are also cited as evidence of defensive medicine. According to the results of our earlier review, the hospitals we visited analyzed their physicians' practice patterns in an effort to reduce costs. In some cases, the hospitals found that some physicians provided a significant amount of unnecessary or excessively sophisticated services but could not determine whether the provision of these services represents defensive medicine. For example, one hospital we visited reviewed its physicians' use of low osmolality contrast agents in its cardiac catheterization lab. Among health care professionals, the widespread use of low osmolality contrast agents is often viewed as a function of defensive medicine. Physicians use the low osmolality agents because high osmolality contrast agents have been associated with mild to moderate adverse reactions, such as nausea and vomiting, as well as more serious adverse reactions. The average cost of the low osmolality agent used in that hospital was $146.10, compared to $6.96 for the high osmolality agent, and represented 95 percent of the contrast media used in its cardiac catheterization laboratory. Because numerous research articles have suggested that the incidence of adverse effects were easily manageable and did not result in increased medical costs, the hospital limited the use of low osmolality agents to the approximately 30 percent of patients considered to be at high risk. Because the hospital performs 5,000 procedures in its cardiac catheterization laboratory annually, it projects yearly savings of over $400,000. While hospital officials provided no conclusive evidence linking the unnecessary costs to defensive medicine, they stated that the physicians' desire to avoid adverse effects had prompted their use of the low osmolality contrast agent. Neither our 1986 report nor the OTA study estimated the cost of defensive medicine. We reported that the cost of defensive medicine is impossible to quantify with any degree of confidence because of the difficulty in isolating defensive practices from medical care provided for clinical reasons. The OTA study, like our study, cited the difficulty in measuring the cost of defensive medicine and did not provide an estimate. The CBO study concluded that defensive medicine is probably not a major factor in the cost of medical care and did not provide an estimate. In a separate study, OTA reported that it found evidence that defensive medicine exists, estimating that as much as 8 percent of diagnostic procedures result primarily from physicians' conscious concern about professional liability. The strongest evidence found by OTA was produced in a study of caesarean deliveries in New York State. That study reported that obstetricians who practice in hospitals with high malpractice claim frequency and premiums do more caesarean deliveries than obstetricians practicing in areas with low malpractice claim frequency and premiums. However, OTA also reported that it does not know whether the report's findings for obstetricians and caesarean deliveries can be generalized to other states, specialties, clinical situations, or procedures. OTA concluded that it is virtually impossible to accurately measure the overall level and national cost of defensive medicine because of the methodological problems associated with isolating defensive medical practices. Through our research, we identified two studies that attempted to quantify the total cost of defensive medicine. An American Medical Association study estimated that in 1984, defensive medical costs were between $9 billion and $10.6 billion for primarily defensive medicine purposes.The $10.6 billion estimate is based on the results of a physician survey, which may not accurately reflect the cost of defensive medicine. The $9 billion estimate assumes a statistical correlation between an increase in physician fees and higher malpractice costs. This method might overstate the costs of defensive medicine because increases in fees might result from many factors besides physicians' defensive medical practices. A second study, prepared by Lewin-VHI, Inc., estimated hospital and physician defensive medicine costs at between $4.2 billion and $12.7 billion in 1991. This estimate is based primarily on the earlier AMA estimates and is subject to the same methodological limitations. This third category of medical liability costs we identified includes certain risk management activities, time and travel associated with litigation, and creating and maintaining records subject to discovery or required for defense. Our study and the CBO and OTA studies did not attempt to provide a measure of liability-related administrative costs. Nor did we identify, during the course of our research and discussions, other studies that estimated hospital and physician liability-related administrative costs. Hospital risk management activities are designed to (1) reduce the hospital's and its physicians' risk of malpractice suits by maintaining or improving the quality of care, (2) reduce the probability of a claim being filed by negotiating compensation with an injured patient prior to the patient filing a claim, and (3) preserve the hospital's assets once a claim has been filed. Risk management was first applied to health care facilities during the 1970s when jury awards and settlements increased sharply. During this period, many insurance companies either substantially increased hospitals' premiums or stopped writing malpractice insurance for them. Many hospitals intensified their risk management activities in the 1980s when an increasing number became at risk for malpractice losses as they began to self insure for smaller damage awards and settlements. While hospitals perform some risk management activities specifically to reduce liability-related costs, they do not segregate the costs of these activities from the cost of practices designed to promote quality assurance or to satisfy accreditation standards. For example, occurrence screening systems--which are designed to identify deviations from normal procedures or expected treatment outcomes--involve costs associated with both promoting quality and reducing liability risk. By contrast, claims management is an example of a purely liability-related risk management cost. Claims management activities include claims investigation, claims filing, damage evaluation and reserve determination, planning remedial medical care, settlement strategy formulation, settlement structuring, and negotiating and "posturing" for defense or settlement. Hospital officials and physicians also identified time spent at trials and other litigation-related events as liability-related administrative activities. As with liability-related risk management activities, hospitals and physicians did not routinely account for these activities separately. Examples of these activities include time and travel expenses associated with answering interrogatories and depositions. For instance, if a nurse is a defendant, the hospital will pay the nurse's expenses and salary while he or she prepares for and attends trial. The hospital would also incur additional costs contracting with a temporary nurse agency or using its supplemental nurse pool to perform the duties of the defendant nurse. Similarly, a defendant physician would have to contract with another physician to care for patients during litigation. Hospital officials also reported incurring additional liability-related administrative expenses associated with creating and maintaining records that may be required for defense. Such records would include detailed staffing schedules and precisely worded training, policy, and procedures manuals. Hospitals archive these records for decades since they may be needed for litigation long after an alleged negligent act. In some cases, hospitals spend considerable time locating physicians and other staff when malpractice actions involve events that occurred in the distant past, such as a law suit filed years after the birth of a child. Hospitals and physicians incur the following types of medical device and pharmaceutical liability costs in the prices that they pay for their products: manufacturers' liability insurance and costs associated with product design and marketing that would not be incurred in the absence of the threat of suit. Neither our study nor the CBO or OTA studies estimated manufacturers' medical device and pharmaceutical liability costs incurred in the purchase price hospitals and physicians pay for their products. During our research and discussions with industry officials, we did not identify other studies that estimated the liability costs passed on to hospitals and physicians in the prices of medical devices and pharmaceuticals. Medical device and pharmaceutical industry officials and others we spoke with expressed concern about liability costs associated with medical products. They believe that litigation involving medical products is extensive and increasing. Because state product liability laws differ and most manufacturers sell products in many states, manufacturers are at risk of simultaneous suits in numerous jurisdictions with different legal standards. They also stated that drugs intended for chronic conditions or devices remaining in the body indefinitely may be used by patients for periods longer than the products were tested in clinical trials. As a result, problems may not be discovered until decades after use, when many patients may be using the product. Because only claims-made insurance is generally available for medical products, manufacturers with such coverage are not insured for suits in future years. When suits appear, the insurer can refuse to renew the policy, leaving the manufacturer without insurance. Medical device and pharmaceutical industry officials told us that this legal environment drives up the cost of medical products. Manufacturers pass on their liability costs to hospitals and physicians in their products' prices. Their liability costs include insurance and liability-related production and marketing costs. Manufacturer insurance costs, like those of hospitals, can include periodic self-insurance payments, payments made for purchased insurance, and payments made from general revenues to cover uninsured losses. Liability-related production and marketing costs include expenses associated with actions taken primarily to protect the manufacturer from liability, such as multiple layers of packaging and repeated safety warnings. Certain medical devices and pharmaceuticals involve a greater degree of liability risk than others. For example, stethoscopes pose little threat of liability risk. However, implanted devices such as heart valves, intrauterine devices, and breast implants have been involved in the most prominent medical device suits. Likewise, some pharmaceuticals like generic drugs and nonprescription drugs generally involve little risk of liability action. Most pharmaceutical litigation has involved brand name prescription drugs, such as Bendectin. While some medical device and pharmaceutical cases and settlements have been widely publicized, such as those involving silicon breast implants and the Dalcon shield, little information is now available on the prevalence of litigation throughout the industry or the magnitude of the costs passed on to hospitals and physicians. Industry and insurance company officials stated that out of court settlements are common, and manufacturers are reluctant to disclose settlement terms for fear of encouraging new suits or inflating future claims. Manufacturers are also reluctant to disclose their pricing strategies because of competition. Hospitals and physicians incur a variety of medical liability costs. Studies attempting to measure such costs have focused on the cost of purchased malpractice insurance, which is readily quantifiable due to state reporting requirements. Other hospital and physician liability costs, however, are impractical, if not methodologically difficult to measure with any precision. Such costs include defensive medicine, liability-related administrative expenses, and medical device and pharmaceutical manufacturers' liability expenses that they pass on to hospitals and physicians in the prices of their products. However, a broader understanding of such costs and their implications is useful to the ongoing medical liability reform debate. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from its date. At that time, we will send copies to the Ranking Minority Member of the House Committee on Ways and Means and to other interested Members of the Congress. Copies of this report will also be available to interested parties upon request. Please contact me at (202) 512-9542 if you or your staff have any questions concerning this report. Major contributors are listed in appendix III. Generally, medical malpractice suits are based on tort law. Plaintiffs select tort theory instead of alternatives, such as breach of contract, because they may recover larger damages and because the statute of limitations generally runs from the date the harm was discovered rather than the date the alleged malpractice occurred. When a third party such as a surviving spouse or parent brings suit, it generally must select tort theory because the plaintiff is neither a party to the original contract nor a third party beneficiary. Figure I.1 summarizes the types of malpractice action filed against physicians insured by The St. Paul Fire and Marine Insurance Company during the 5-year period from 1989 through 1993. According to The St. Paul Fire and Marine Insurance Company, failure to diagnose was the most common malpractice claim--28 percent of all claims--filed against physicians it insured during the 5-year period spanning 1989 through 1993. Failure to diagnose cancer was the most common claim in this category. Other frequent failure to diagnose claims involved fractures and dislocations, infections, myocardial infarctions, and pregnancy problems. Claims stemming from surgical procedures constituted the next largest category, 27 percent of all claims. The most frequent malpractice claim related to surgery was "postoperative complication." Inadvertent surgical acts and inappropriate or unnecessary surgeries also were frequent allegations in this category. Claims alleging improper treatment represented the third largest category, making up 26 percent of all claims during the period. Most of these claims were birth-related. Other claims made up the final category, including adverse reaction to anesthesia, injection site injuries, and lack of informed consent. In addition to asserting physician negligence, plaintiffs may file malpractice claims against hospitals where treatment was provided through the vicarious liability doctrine or by establishing hospital corporate negligence in areas such as the selection and review of medical staff. In some jurisdictions, hospitals can be jointly and severally liable, which enables plaintiffs to recover most or all damages from a hospital even when the hospital was only partially responsible for the negligent act. Plaintiffs can also file claims against medical device and pharmaceutical manufacturers under various legal theories, such as negligence, strict liability, and breach of warranty. Manufacturers are liable for negligence if they did not exercise due care and this lack of care caused injury. Manufacturers are liable under strict liability if their products are defective, making the products unreasonably dangerous and causing the injury. The three types of defects for which manufacturers can be found to be strictly liable are (1) a flaw in the product introduced in the manufacturing process (manufacturing defect), (2) a defect in the design of the product (design defect), and (3) a failure to adequately warn consumers of risks or give instructions regarding product use (warning defect). Under breach of warranty, manufacturers are liable if the product fails to work as expressly or implicitly warranted or promised. Hospital and physician insurance coverage and costs can vary greatly. This appendix briefly discusses types of insurance and factors that can affect their costs. Several factors influence the cost of purchased malpractice insurance. The number of claims and the average cost per claim are the primary factors. However, within the prevailing legal environment, hospitals and physicians can reduce the cost of their premiums by purchasing insurance policies with characteristics that allow them to retain risk or to defer costs to future years. One malpractice policy characteristic that influences the cost of insurance is the amount of coverage provided. Typically, medical malpractice insurance policies have a dollar limit on the amount that the insurance company will pay on each claim against the hospital or physician (per occurrence limit) and a dollar limit for all claims against the insured (aggregate limit) for the policy period. For example, limits coverage of $1 million/$3 million means that the insurer will pay up to $1 million on a single claim and up to $3 million for all claims during the policy period. The higher the limits, the more costly the policy. However, since small claims occur more frequently then large ones, the cost per dollar of coverage decreases as the coverage limits increase. A deductible provision can also influence the cost of purchased insurance. Under a policy with a deductible provision, an insurer is liable only for losses in excess of a stated amount up to the policy limits. For example, if a hospital incurred a $300,000 malpractice loss while insured under a $1 million per occurrence policy with a $100,000 deductible, the hospital would pay $100,000 of the loss and the insurer would pay $200,000. Generally, the higher the deductible, the lower the premium. The type of policy purchased can also influence the cost of medical malpractice insurance. Generally, malpractice insurance is written on either an occurrence or a claims-made basis. An occurrence policy covers malpractice events that occurred during the policy period, regardless of the date of discovery or when the claim may be filed. A claims-made policy covers malpractice events that occurred after the effective date of the coverage and for which claims are made during the policy period. Because the risk exposure to the insurer is lower, premiums for claims-made policies are generally lower during the first year (approximately 25 percent of occurrence policies) but increase to approximate the occurrence basis after about 5 years when they mature. To cover claims filed after a claims-made policy has expired--when, for example, a hospital changes insurers or after a physician retires, the hospital or physician must purchase insurance known as "tail coverage," which insurance company officials stated can cost between 100 percent and 200 percent of the last claims-made policy cost. To minimize the cost of purchased malpractice insurance, most medium-size and large hospitals self-insure for smaller settlements and damage awards. In many cases, these hospitals establish self-insurance trusts that they administer themselves or contract with third parties to administer. Self-insuring hospitals make periodic contributions to these trusts to pay for losses as defined under formal trust agreements. Generally, the contribution amounts are generally actuarily determined based upon the estimated present value of future indemnity payments and expenses. Indemnity payments include amounts that the trusts will pay claimants as a result of settlements and damage awards. Expenses include defense attorneys, medical experts, private investigators, court reporters for depositions, and court costs. Most self-insuring hospitals purchase "excess" insurance to cover that portion of large losses that exceeds their self-insurance limits. Whereas self-insurance coverage typically pays settlements or damage awards up to a few million dollars, excess coverage pays up to tens of millions of dollars above the self-insurance coverage limits. Some hospitals obtain an additional layer of coverage above their excess layer, often referred to as "blue sky" coverage, which pays that portion of settlements or damage awards exceeding the excess coverage limit up to $100 million. Generally, the higher the limits, the more costly the insurance. However, the cost per dollar coverage decreases as the limits increase. Like purchased insurance, hospital self-insurance costs are determined by the expected number and severity of claims. However, other factors can influence self-insurance costs. Costs can vary over time because estimated future losses may differ from actual losses. If the hospital incurs fewer losses than expected, the resulting surplus will enable the hospital to reduce trust contributions. If the hospital incurs more losses than expected, the resulting deficit will force the hospital to increase trust contributions. Costs can also vary over time if estimated trust investment income differs from actual investment income. If trust investments return a higher or lower yield than expected, hospitals may be able to lower, or may be required to raise, trust contributions accordingly. In addition to self-insurance and purchased insurance, hospitals and physicians can also incur malpractice liability costs associated with uninsured losses. The most common uninsured loss involves deductibles paid by hospitals and physicians that have purchased primary coverage. Hospitals and physicians are also at risk for losses that exceed the limits of coverage. Hospitals and physicians can also incur losses associated with causes of action not covered by policies. Russell E. Hand, Auditor-in-Charge Elaine Coleman, Evaluator Claudine Makofsky, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the types of medical liability costs that affect hospitals and physicians, and whether existing studies include these costs in their estimates of hospital and physician liability expenses. GAO found that: (1) in general, hospitals' and physicians' medical liability costs account for about 1 percent of national health care expenditures; (2) estimates of malpractice premiums do not take into account direct and indirect liability costs other than some self-insurance costs; (3) these nonpremium liability costs include self-insurance costs and uninsured losses, defensive medical costs, liability-related administrative costs, and medical device and pharmaceutical liability costs; (4) it is difficult to quantify hospitals' and physicians' nonpremium liability costs because data on these costs are not usually collected, defensive medical practices are not clearly defined and are hard to distinguish from reasonable care, and administrative costs intended to minimize medical liability are included in efforts to improve service or adhere to accreditation standards; (5) medical device and pharmaceutical manufacuturers include in the cost of their products liability insurance and litigation costs and product design and marketing costs incurred to reduce the threat of law suits; and (6) it is difficult to obtain information on manufacturers' liability costs because of sealed court records and proprietary and competitive concerns.

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 maintaining the public's trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet have revolutionized the way our government, our nation, and much of the world communicates and conducts business. Although this expansion has created many benefits for agencies such as IRS in achieving their missions and providing information to the public, it also exposes federal networks and systems to various threats. Without proper safeguards, computer systems are vulnerable to individuals and groups with malicious intent who can intrude and use their access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. The risks to these systems are well-founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, and steady advances in the sophistication and effectiveness of attack technology. For example, the Office of Management and Budget cited a total of 12,198 incidents reported to the U.S. Computer Emergency Readiness Team (US-CERT) by federal agencies during fiscal year 2007, which is more than twice the number of incidents reported the prior year. The Federal Bureau of Investigation has identified multiple sources of threats, including foreign nation states engaged in intelligence gathering and information warfare, domestic criminals, hackers, virus writers, and disgruntled employees or contractors working within an organization. In addition, the U.S. Secret Service and the CERT Coordination Center studied insider threats and stated in a May 2005 report that "insiders pose a substantial threat by virtue of their knowledge of, and access to, employer systems and/or databases." Our previous reports, and those by federal inspectors general, describe persistent information security weaknesses that place federal agencies, including IRS, at risk of disruption, fraud, or inappropriate disclosure of sensitive information. Accordingly, we have designated information security as a governmentwide high-risk area since 1997, a designation that remains in force today. Recognizing the importance of securing federal agencies' information systems, Congress enacted the Federal Information Security Management Act (FISMA) in December 2002 to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program for the information and systems that support the operations and assets of the agency, using a risk-based approach to information security management. Such a program includes assessing risk; developing and implementing cost-effective security plans, policies, and procedures; providing specialized training; testing and evaluating the effectiveness of controls; planning, implementing, evaluating, and documenting remedial actions to address information security deficiencies; and ensuring continuity of operations. IRS has demanding responsibilities in collecting taxes, processing tax returns, and enforcing the nation's tax laws, and relies extensively on computerized systems to support its financial and mission-related operations. IRS collected about $2.7 trillion in tax payments in fiscal years 2008 and 2007; processed hundreds of millions of tax and information returns; and paid about $426 billion and $292 billion, respectively, in refunds to taxpayers. Further, the size and complexity of IRS adds unique operational challenges. The agency employs tens of thousands of people in its Washington, D.C., headquarters, 10 service center campuses, 3 computing centers, and numerous other field offices throughout the United States. IRS also collects and maintains a significant amount of personal and financial information 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. The Commissioner of Internal Revenue has overall responsibility for ensuring the confidentiality, integrity, and availability of the information and information systems that support the agency and its operations. FISMA requires the Chief Information Officers (CIO) at federal agencies to be responsible for developing and maintaining an information security program. Within IRS, this responsibility is delegated to the Associate CIO for Cybersecurity. The Office of Cybersecurity is within the CIO's Modernization and Information Technology Services (MITS) organization. The mission of MITS is to deliver information technology services and solutions that drive effective tax administration to ensure public confidence. MITS's goals are to improve service, deliver modernization, increase value, and assure the security and resilience of IRS information systems and data. The Office of Cybersecurity is responsible for ensuring IRS's compliance with federal laws, policies, and guidelines governing measures to assure the confidentiality, integrity, and availability of IRS electronic systems, services, and data. The Office of Cybersecurity is to manage IRS's information security program in accordance with FISMA, including to perform assessments of risks; track compliance; identify, mitigate and monitor cybersecurity threats; determine strategy and priorities; and monitor security program implementation. In order for IRS organizations to carry out their respective responsibilities in information security, information security policies, guidelines, standards and procedures have been developed and published in the Internal Revenue Manual. Although IRS has continued to make progress toward correcting previously reported information security weaknesses at three data centers and an additional facility, many deficiencies remain. It has corrected or mitigated 49 of the 115 information security weaknesses that we reported as unresolved at the time of our last review. IRS corrected weaknesses related to access controls, including physical security, among others. For example, it has implemented controls for unauthenticated network access and user IDs on the mainframe; further limited access to its mainframe environment by limiting access to system management utility functions and mainframe console commands; taken several measures to protect information traversing its network, such as installing a secure communication service for encryption; taken steps to improve its auditing and monitoring capability by retaining audit logs of security-relevant events for its administrative accounting system and ensuring that audit logs were being created for such events on its procurement system; removed authority for unrestricted physical access to the computer room and tape library from individuals who did not need it to perform their job; improved controls over physical access proximity cards; enhanced periodic reviews of mainframe configurations; improved the disposal of removable media; improved patching of critical vulnerabilities, as well as the timeliness of applying patches at certain facilities; and updated contingency plans to document critical business processes. In addition, IRS has made progress in improving its information security program. For example, the agency completed an organizational realignment, including creation of the Associate CIO for Cybersecurity position, and has several initiatives under way that are designed to improve information security. IRS has developed and documented a detailed road map to guide its efforts in targeting critical weaknesses. Additionally, it is in the process of implementing a comprehensive plan to address numerous information security weaknesses, such as those associated with network and system access, audit trails, system software configuration, security roles and responsibilities, and contingency planning. These efforts are a positive step toward improving the agency's overall information security posture. Although IRS has moved to correct previously identified security weaknesses, 66 out of 115 weaknesses--or about 57 percent--remained open or unmitigated at the time of our site visits (see fig. 1). Unmitigated deficiencies include those related to access controls, as well as other controls such as configuration management and personnel security. For example, IRS continues to, among other things, allow sensitive information, including user IDs and passwords for mission-critical applications, to be readily available to any user on IRS's internal network; use passwords that are not complex enough to avoid being guessed or grant excessive electronic access to individuals; inconsistently apply patches; and not remove separated employees' access in a timely manner for one of its systems. Such weaknesses increase the risk of compromise of critical IRS systems and information. According to IRS officials, they are continuing to address the uncorrected weaknesses, and subsequent to our site visits, they had completed corrective actions for some of the weaknesses. Although IRS has continued to make progress toward correcting previously reported information security weaknesses at its three data centers, as well as an additional facility, many deficiencies remain. These deficiencies include those related to access controls, as well as other controls such as configuration management and personnel security. A key reason for these weaknesses is that IRS has not yet fully implemented its agencywide information security program to ensure that controls are appropriately designed and operating effectively. Furthermore, these weaknesses continue to jeopardize the confidentiality, integrity, and availability of IRS's systems and contributed to IRS's material weakness in information security during the fiscal year 2008 financial statement audit. A basic management objective for any organization is to protect the resources that support its critical operations from unauthorized access. Organizations accomplish this objective by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Inadequate access controls potentially diminish the reliability of computerized information and increase the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of service. Access controls include those related to user identification and authentication, authorization, cryptography, audit and monitoring, and physical security. IRS did not fully implement controls in the areas listed above, as the following sections in this report demonstrate. A computer system must be able to identify and authenticate different users so that activities on the system can be linked to specific individuals. When an organization assigns unique user accounts to specific users, the system is able to distinguish one user from another--a process called identification. The system also must establish the validity of a user's claimed identity by requesting some kind of information, such as a password, that is known only by the user--a process known as authentication. The combination of identification and authentication-- such as user account/password combinations--provides the basis for establishing individual accountability and for controlling access to the system. According to the Internal Revenue Manual, passwords should be protected from unauthorized disclosure and modification when stored and transmitted. The Internal Revenue Manual also requires IRS to enforce strong passwords for authentication (defined as a minimum of eight characters, containing at least one numeric or special character, and a mixture of at least one uppercase and one lowercase letter). Although IRS had implemented controls for identification and authentication, weaknesses continued to exist at two of the sites we visited. Specifically, usernames and passwords were still viewable on an IRS contractor-maintained Web site at one of its data centers. In addition, the agency continued to store passwords in scripts and did not enforce the use of strong passwords for systems at another data center. As a result, increased risk exists that an individual could view or guess these passwords and use them to gain unauthorized access to IRS systems. Authorization is the process of granting or denying access rights and permissions to a protected resource, such as a network, a system, an application, a function, or a file. A key component of granting or denying access rights is the concept of "least privilege." Least privilege is a basic principle for securing computer resources and information. This principle means that users are granted only those access rights and permissions that they need to perform their official duties. To restrict legitimate users' access to only those protected resources that they need to do their work, organizations establish access rights and permissions. "User rights" are allowable actions that can be assigned to individual users or groups of users. File and directory permissions are rules that regulate which users can access a particular file or directory and the extent of that access. To avoid unintentionally authorizing users' access to sensitive files and directories, an organization must give careful consideration to its assignment of rights and permissions. The Internal Revenue Manual requires that system access be assigned based on least privilege--allowing access at the minimum level necessary to support the user's job duties. The Internal Revenue Manual also specifies that only individuals having a "need to know" in the performance of their duties should have access to sensitive information including that deemed as personally identifiable information. IRS permitted users more privileges on its systems than needed to perform their official duties. For example, IRS integrated network device controls with its Windows management controls that could provide users with excessive access to its network infrastructure. According to IRS officials, the agency made a cost-based decision to implement this configuration. In addition, IRS did not restrict access to sensitive personally identifiable information. To illustrate, the agency allowed authenticated users on its network access to shared drives containing taxpayer information, as well as performance appraisal information for IRS employees including their social security numbers. This information could allow someone to commit fraud or identity theft. In another example, the agency did not restrict access to tax data for a major corporation and allowed all employees with network access the potential to view this information. These excessive privileges could allow users unwarranted access to IRS's network or enable them to access information not needed for their jobs and could place IRS systems or information at risk. Cryptography underlies many of the mechanisms used to enforce the confidentiality and integrity of critical and sensitive information. A basic element of cryptography is encryption. Encryption can be used to provide basic data confidentiality and integrity by transforming plain text into cipher text using a special value known as a key and a mathematical process known as an algorithm. IRS policy requires the use of encryption for transferring sensitive but unclassified information between IRS facilities. The National Security Agency also recommends disabling protocols that do not encrypt information transmitted across the network, such as user ID and password combinations. Although IRS had implemented controls to encrypt information traversing its network, it did not always ensure certain sensitive data was encrypted. For example, one data center has not yet disabled unencrypted protocol services for all its UNIX servers. Similarly, at another center, users' login information is still being sent across the IRS internal network in clear text, potentially exposing account usernames and passwords. More importantly, IRS continues to transmit data, such as account and financial information, from its financial accounting system using an unencrypted protocol. By transmitting data unencrypted, IRS is at increased risk that an unauthorized individual could view sensitive information. To establish individual accountability, monitor compliance with security policies, and investigate security violations, it is crucial to know what, when, and by whom specific actions have been taken on a system. Organizations accomplish this by implementing system or security software that provides an audit trail, or logs of system activity, that they can use to determine the source of a transaction or attempted transaction and to monitor users' activities. The way in which organizations configure system or security software determines the nature and extent of information that can be provided by the audit trail. To be effective, organizations should configure their software to collect and maintain audit trails that are sufficient to track security-relevant events. IRS did not always effectively monitor its systems. For example, IRS had not configured security software controls to log changes to datasets that would support effective monitoring of the mainframe at one of its data centers. In addition, other weaknesses include inadequate logging of security-relevant events for UNIX and Windows servers at one data center and for UNIX servers at another. By not effectively logging changes to its systems, IRS will not have assurance that it will be able to detect unauthorized system changes that could adversely affect operations, or appropriately detect security-relevant events. Physical access controls are used to mitigate the risks to systems, buildings, and supporting infrastructure related to their physical environment and to control the entry and exit of personnel in buildings, as well as data centers containing agency resources. Examples of physical security controls include perimeter fencing, surveillance cameras, security guards, and locks. Without these protections, IRS computing facilities and resources could be exposed to espionage, sabotage, damage, and theft. The Internal Revenue Manual requires that all authorized visitors and their packages and briefcases be examined when entering an IRS facility. In addition, data center security checkpoint procedures require that officers specifically screen for cameras and other items that are prohibited from IRS facilities. The Internal Revenue Manual also states that the authorized access list into restricted areas will be prepared monthly and dated and signed by the branch chief, but not before the branch chief validates the need of individuals to access the restricted area. Although IRS had implemented numerous physical security controls, certain controls were not working as intended, and the agency had not fully implemented others. For example, security guards at one data center did not ensure that visitors and their possessions were properly screened when entering the facility. Our staff inadvertently included digital cameras in packed luggage. Despite screening the luggage with the magnetometer, the guards did not confront them about the prohibited items. In another example, IRS prepared access lists identifying personnel authorized to enter sensitive areas at two centers and at an additional facility; however, the branch chiefs at the three sites had not signed or dated the lists as required. This step is essential in verifying that employees continue to warrant access into restricted areas. As a result, increased risk exists that prohibited items and individuals may inappropriately be permitted access to IRS facilities and restricted areas. In addition to access controls, other important controls should be in place to ensure the confidentiality, integrity, and availability of an organization's information. These controls include policies, procedures, and techniques for securely configuring information systems and implementing personnel security. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of IRS's information and information systems. The purpose of configuration management is to establish and maintain the integrity of an organization's work products. The Internal Revenue Manual states that IRS shall establish and maintain baseline configurations and inventories of organizational information systems and monitor and control any changes to the baseline configurations. Proactively managing vulnerabilities of systems will reduce or eliminate the potential for exploitation and involves considerably less time and effort than responding after an exploit has occurred. Patch management, a component of configuration management, is an important factor in mitigating software vulnerability risks. Patch installation can help diminish vulnerabilities associated with flaws in software code. Attackers often exploit these flaws to read, modify, or delete sensitive information; disrupt operations; or launch attacks against other organizations' systems. The Internal Revenue Manual requires that all vendor-supplied security patches be installed on all IRS systems. IRS did not fully implement its policies for managing changes to its systems. Specifically, IRS did not maintain or enforce a baseline configuration for one data center's mainframe system, which supports the revenue accounting system of record and other applications. In addition, IRS used an unsupported software package that was not current and thus vulnerable to attack. Specifically, certain IRS servers were running an outdated version of software that was no longer supported by the vendor and, therefore, could not be patched against a known vulnerability. As a result, IRS has limited assurance that system changes are being properly monitored and that its systems are protected against new vulnerabilities. The greatest harm or disruption to a system comes from the actions, both intentional and unintentional, of individuals. These intentional and unintentional actions can be reduced through the implementation of personnel security controls. According to the National Institute of Standards and Technology (NIST), personnel security controls help organizations ensure that individuals occupying positions of responsibility (including third-party service providers) are trustworthy and meet established security criteria for those positions. Organizations should also ensure that information and information systems are protected during and after personnel actions, such as terminations and transfers. More specifically, the Internal Revenue Manual requires that all accounts be deactivated within 1 week of an individual's departure on friendly terms and immediately upon an individual's departure on unfriendly terms. IRS did not always ensure that personnel security controls were fully implemented. For example, at three locations, IRS did not remove application access within 1 week of separation for 6 of 17 (35 percent) separated employees we reviewed. IRS also did not deactivate proximity cards immediately upon employee separation at one of its facilities. As a result, IRS is at an increased risk that individuals could gain unauthorized access to its resources. A key reason for the information security weaknesses in IRS's financial and tax processing systems is that it has not yet fully implemented its agencywide information security program to ensure that controls are effectively established and maintained. FISMA requires each agency to develop, document, and implement an information security program that, among other things, includes periodic assessments of the risk and magnitude of harm that could result from the 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 information security risks to an acceptable level, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; plans for providing adequate information security for networks, facilities, and systems; security awareness training to inform personnel of information security risks and of their responsibilities in complying with agency policies and procedures, as well as training personnel with significant security responsibilities for information security; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, to be performed with a frequency depending on risk, but no less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency's required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in its information security policies, procedures, or practices; and plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. IRS has made important progress in developing and documenting elements of its information security program. However, not all components of its program have been fully implemented. According to NIST, risk is determined by identifying potential threats to the organization and vulnerabilities in its systems, determining the likelihood that a particular threat may exploit vulnerabilities, and assessing the resulting impact on the organization's mission, including the effect on sensitive and critical systems and data. Identifying and assessing information security risks are essential to determining what controls are required. Moreover, by increasing awareness of risks, these assessments can generate support for the policies and controls that are adopted in order to help ensure that these policies and controls operate as intended. Consistent with NIST guidance, IRS requires its risk assessment process to detail the residual risk assessed, as well as potential threats, and to recommend corrective actions for reducing or eliminating the vulnerabilities identified. IRS also requires system risk assessments be reviewed annually. Although IRS had implemented a risk assessment process, it did not always annually review its risk assessments. The risk assessments that we reviewed were current, documented residual risks assessed, as well as potential threats, and recommended corrective actions for mitigating or eliminating the vulnerabilities that were identified. However, two risk assessments for systems supporting tax processing and inventory control had not been reviewed annually, per IRS's policy. As a result, potential risks to these systems and the adequacy of their management, operational, and technical controls to reduce risks may be unknown. Another key element of an effective information security program is to develop, document, and implement risk-based policies, procedures, and technical standards that govern security over an agency's computing environment. If properly implemented, policies and procedures should help reduce the risk associated with unauthorized access or disruption of services. Technical security standards can provide consistent implementation guidance for each computing environment. Developing, documenting, and implementing security policies are the important primary mechanisms 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 the security policies and controls should provide. IRS has developed and documented information security policies, standards, and guidelines that generally provide appropriate guidance to personnel responsible for securing information and information systems. This has included guidance for assessing risk, security planning, security training, testing and evaluating security controls, contingency planning, and guidance for operating system platforms. However, as illustrated by the weaknesses identified in this report, IRS has not yet fully implemented its policies, standards, and guidelines. An objective of system security planning is to improve the protection of information technology resources. A system security plan provides an overview of the system's security requirements and describes the controls that are in place or planned to meet those requirements. OMB Circular A- 130 requires that agencies develop system security plans for major applications and general support systems, and that these plans address policies and procedures for providing management, operational, and technical controls. Furthermore, IRS policy requires that security plans be developed, documented, implemented, and periodically updated for the controls in place or planned for an information system. IRS had developed, documented, and updated the plans for eight systems we reviewed. Furthermore, those plans documented the management, operational, and technical controls in place and included information required per the OMB Circular A-130 for applications and general support systems. However, as illustrated by weaknesses identified in this report, IRS had not yet fully implemented all the controls documented in its security plans. People are one of the weakest links in attempts to secure systems and networks. Therefore, an important component of an information security program is providing sufficient training so that users understand system security risks and their own role in implementing related policies and controls to mitigate those risks. IRS policy requires that personnel performing information technology security duties meet minimum continuing professional education hours in accordance with their roles. Personnel performing security roles are required by IRS to have 12, 8, or 4 hours of specialized training per year, depending on their specific role. IRS personnel performing information technology security duties met their minimum continuing professional education requirements. For the employees and contractors with specific security-related roles that we reviewed, 36 employees and contractors at one data center, and 24 employees and contractors at another, met the required minimum security awareness and specialized training hours. Another key element of an information security program is to test and evaluate policies, procedures, and controls to determine whether they are effective and operating as intended. 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 are not achieved unless the results improve the security program. FISMA requires that the frequency of tests and evaluations be based on risks and occur no less than annually. IRS policy also requires periodic testing and evaluation of the effectiveness of information security policies and procedures. Although IRS had a process in place for testing and evaluating its systems, the process was not comprehensive. IRS had tested and evaluated information security controls for each of the eight systems we reviewed. However, its testing process did not identify certain weaknesses that we identified during our review. For example, IRS was not testing for complex passwords on its UNIX servers at one data center. Additionally, from an enterprisewide perspective, the agency had not identified inappropriate access to numerous shares containing sensitive information. Until IRS improves its testing of controls over its systems, it has reduced assurance that its policies and procedures are being followed and that controls for its systems are being effectively implemented and maintained. A remedial action plan is a key component described in FISMA. Such a plan assists agencies in identifying, assessing, prioritizing, and monitoring progress in correcting security weaknesses that are found in information systems. In its annual FISMA guidance to agencies, OMB requires agency remedial action plans, also known as plans of action and milestones, to include the resources necessary to correct identified weaknesses. According to IRS policy, the agency should document weaknesses found during security assessments, as well as document only planned, implemented, and evaluated remedial actions to correct any deficiencies. The policy further requires that IRS track the status of resolution of all weaknesses and verify that each weakness is corrected. Although remedial action plans were in place, corrective actions were not always appropriately validated. IRS has developed and implemented a remedial action process to address deficiencies in its information security policies, procedures, and practices. However, this remedial action process was not working as intended, since the verification process used to determine whether remedial actions were implemented was not always effective. For example, IRS had informed us that it had completed actions to close 65 recommendations related to previously identified weaknesses, however, we determined that 16 of the corrective actions did not mitigate or correct the underlying control deficiencies. Without a sound remediation process, IRS will not have assurance that it has taken the necessary actions to correct weaknesses in its policies, procedures, and practices. We have previously identified a similar weakness and recommended that IRS implement a revised remedial action verification process that ensures actions are fully implemented, but the condition continued to exist at the time of our review. Continuity of operations planning, which includes contingency planning and disaster recovery planning, is a critical component of information protection. To ensure that mission-critical operations continue, it is necessary to be able to detect, mitigate, and recover from service disruptions while preserving access to vital information. It is important that these plans be clearly documented, communicated to potentially affected staff, and updated to reflect current operations. In addition, testing contingency plans is essential to determine whether the plans will function as intended in an emergency situation. FISMA requires that agencywide information security programs include plans and procedures to ensure continuity of operations. IRS contingency planning policy requires, among other things, that contingency plans be reviewed and tested at least annually. Although contingency plans were in place, IRS recognizes the need for improvements. The agency has completed contingency plans for the eight systems we reviewed. Additionally, it has reviewed/updated and tested these contingency plans annually. The plans also identified critical business processes, correcting a weakness we reported last year. Although the specific plans we reviewed did not have any shortcomings, IRS's comprehensive plan for addressing information security weaknesses recognizes the need for further efforts to improve the agency's contingency planning, through initiatives involving disaster recovery planning, some of which will not be completed until 2011. Until it completes these efforts, IRS is at increased risk of not being able to effectively recover and continue operations when an emergency occurs. IRS has made progress in correcting or mitigating previously reported weaknesses, implementing controls over key financial systems, and developing and documenting a framework for its agencywide information security program. Information security weaknesses--both old and new-- continue to impair the agency's ability to ensure the confidentiality, integrity, and availability of financial and taxpayer information. These deficiencies represent a material weakness in IRS's internal controls over its financial and tax processing systems. A key reason for these weaknesses is that the agency has not yet fully implemented certain key elements of its agencywide information security program. The financial and taxpayer information on IRS systems will remain particularly vulnerable to insider threats until the agency (1) begins to address and correct prior weaknesses across the service and (2) fully implements a comprehensive agencywide information security program that ensures risk assessments are appropriately reviewed for all systems, tests and evaluations of controls for systems are comprehensive, and the remedial action process effectively validates corrective actions. Until IRS takes these steps, financial and taxpayer information are at increased risk of unauthorized disclosure, modification, or destruction, and the agency's management decisions may be based on unreliable or inaccurate financial information. In addition to implementing our previous recommendations, we recommend that you take the following two actions to implement an agencywide information security program: ensure risk assessments for IRS systems are reviewed at least annually, implement steps to improve the scope of testing and evaluating controls, such as those for weak passwords. We are also making eight detailed recommendations in a separate report with limited distribution. These recommendations consist of actions to be taken to correct specific information security weaknesses related to authorization, physical security, and configuration management identified during this audit. In providing written comments (reprinted in app. II) on a draft of this report, the Commissioner of Internal Revenue stated that the security and privacy of taxpayer information is of the utmost importance to the agency, and noted that IRS is committed to securing its computer environment as it continually evaluates processes, promotes user awareness and applies innovative ideas to increase compliance. He also stated that the agency is working to improve its security posture, and will develop a detailed corrective action plan addressing each of our recommendations. 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 Homeland Security and Governmental Affairs and to the House Committee on Oversight and Government Reform not later than 60 days from the date of the report 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 report. Because agency personnel serve as the primary source of information on the status of recommendations, GAO requests that the agency also provide us with a copy of your agency's statement of action to serve as preliminary information on the status of open recommendations. We are sending copies of this report to interested congressional committees, the Secretary of the Treasury, and the Treasury Inspector General for Tax Administration. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact Nancy Kingsbury at (202) 512-2700 or Gregory C. Wilshusen at (202) 512-6244. We can also be reached by e-mail at [email protected] and [email protected]. Key contributors to this report are listed in appendix III. The objectives of our review were to determine (1) the status of the Internal Revenue Service's (IRS) actions to correct or mitigate previously reported information security weaknesses and (2) whether controls over key financial and tax processing systems were effective in protecting the confidentiality, integrity, and availability of financial and sensitive taxpayer information. This work is part of our audit of IRS's financial statements for the purpose of supporting our opinion on internal controls over the preparation of those statements. To determine the status of IRS's actions to correct or mitigate previously reported information security weaknesses, we reviewed prior GAO reports to identify previously reported weaknesses and examined IRS's corrective action plans to determine which weaknesses IRS reported corrective actions as being completed. For those instances where IRS reported it had completed corrective actions, we assessed the effectiveness of those actions by: testing the complexity and expiration of passwords on servers to determine if strong password management was enforced; analyzing users' system authorizations to determine whether they had more permissions than necessary to perform their assigned functions; observing data transmissions across the network to determine whether sensitive data was being encrypted; observing whether system security software was logging successful testing and observing physical access controls to determine if computer facilities and resources were being protected from espionage, sabotage, damage, and theft; inspecting key servers and workstations to determine whether critical patches had been installed or were up-to-date; and examining access responsibilities to determine whether incompatible functions were segregated among different individuals. We evaluated IRS's implementation of these corrective actions for three data centers and an additional facility. To determine whether controls over key financial and tax processing systems were effective, we considered the results of our evaluation of IRS's actions to mitigate previously reported weaknesses at three data centers and the additional facility. We concentrated our evaluation primarily on threats emanating from sources internal to IRS's computer networks and focused on three critical applications and their general support systems that directly or indirectly support the processing of material transactions that are reflected in the agency's financial statements. Our evaluation was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information. Using the requirements identified by the Federal Information Security Management Act, which establishes key elements for an effective agencywide information security program, we evaluated IRS's implementation of its security program by analyzing IRS's risk assessment process and risk assessments for eight key IRS financial and tax processing systems to determine whether risks and threats were documented; analyzing IRS's policies, procedures, practices, and standards to determine whether sufficient guidance was provided to personnel responsible for securing information and information systems; analyzing security plans for eight systems to determine if management, operational, and technical controls were documented and if security plans were updated; examining training records for personnel with significant responsibilities to determine if they received training commensurate with those responsibilities; analyzing test plans and test results for eight IRS systems to determine whether management, operational, and technical controls were tested at least annually and based on risk; observing IRS's process to correct weaknesses and determining whether remedial action plans were complete; and examining contingency plans for eight IRS systems to determine whether those plans had been tested or updated. We also reviewed or analyzed previous reports from the Treasury Inspector General for Tax Administration and GAO; and discussed with key security representatives and management officials whether information security controls were in place, adequately designed, and operating effectively. In addition to the individuals named above, David Hayes (Assistant Director), Jeffrey Knott (Assistant Director), Harold Lewis (Assistant Director), Larry Crosland, Mark Canter, Sharhonda Deloach, Neil Doherty, Caryn English, Edward Glagola, Nancy Glover, Rebecca LaPaze, Kevin Metcalfe, Zsaroq Powe, Eugene Stevens, and Christy Tyson made key contributions to this report.

The Internal Revenue Service (IRS) relies extensively on computerized systems to carry out its demanding responsibilities to collect taxes (about $2.7 trillion in fiscal years 2008 and 2007), process tax returns, and enforce the nation's tax laws. Effective information security controls are essential to protect financial and taxpayer information from inadvertent or deliberate misuse, improper disclosure, or destruction. As part of its audits of IRS's fiscal years 2008 and 2007 financial statements, GAO assessed (1) the status of IRS's actions to correct previously reported weaknesses and (2) whether controls were effective in ensuring the confidentiality, integrity, and availability of financial and sensitive taxpayer information. To do this, GAO examined IRS information security policies and procedures and other documents; tested controls over key financial applications; and interviewed key agency officials. IRS has continued to make progress in correcting previously reported information security weaknesses. It has corrected or mitigated 49 of the 115 weaknesses that GAO reported as unresolved during its last audit. For example, the agency (1) implemented controls for unauthenticated network access and user IDs on the mainframe, (2) encrypted sensitive data going across its network, (3) improved the patching of critical vulnerabilities, and (4) updated contingency plans to document critical business processes. However, most of the previously identified weaknesses remain unresolved. For example, IRS continues to, among other things, allow sensitive information, including IDs and passwords for mission-critical applications, to be readily available to any user on its internal network, and grant excessive access to individuals who do not need it. According to IRS officials, they are continuing to address the uncorrected weaknesses and, subsequent to GAO site visits, had completed additional corrective actions. Despite IRS's progress, information security control weaknesses continue to jeopardize the confidentiality, integrity, and availability of financial and sensitive taxpayer information. IRS did not consistently implement controls that were intended to prevent, limit, and detect unauthorized access to its systems and information. For example, IRS did not always (1) enforce strong password management for properly identifying and authenticating users; (2) authorize user access, including access to personally identifiable information, to permit only the access needed to perform job functions; (3) encrypt certain sensitive data; (4) effectively monitor changes on its mainframe; and (5) physically protect its computer resources. A key reason for these weaknesses is that IRS has not yet fully implemented its agencywide information security program to ensure that controls are appropriately designed and operating effectively. Specifically, IRS did not annually review risk assessments for certain systems, comprehensively test for certain controls, or always validate the effectiveness of remedial actions. Until these weaknesses are corrected, the agency remains particularly vulnerable to insider threats and IRS is at increased risk of unauthorized access to and disclosure, modification, or destruction of financial and taxpayer information, as well as inadvertent or deliberate disruption of system operations and services.

The Army and Marine Corps maintain organic depot maintenance capabilities that are designed to retain, at a minimum, a ready, controlled source of technical competence and resources to meet military requirements. In fiscal year 2008, DOD budgeted about $5.6 billion for the five Army and two Marine Corps maintenance depots and maintained a workforce of about 26,000 personnel at these facilities. Depot-level maintenance and repair involves materiel maintenance or repair requiring the overhaul, upgrading or rebuilding of parts assemblies and subassemblies, and testing and reclamation of equipment as necessary, regardless of the source of funds for the maintenance or repair or the location at which the maintenance or repair is performed. Army and Marine Corps depots work on a wide range of weapon systems and military equipment, such as combat vehicles, aircraft, and communications and electronics equipment. Each of the services' depot-level activities has been designated as a Center for Industrial and Technical Excellence in the recognized core competency of the designee, pursuant to Section 2474 of Title 10, U.S Code. Table 1 describes the principal work performed at each Army and Marine Corps depot. During the late 1980s and the late 1990s, Army and Marine Corps maintenance depots--like other DOD depots--were significantly downsized as a result of reductions in the armed forces and DOD's decision to outsource many logistics activities, including depot maintenance, to the private sector. These downsizing efforts contributed to decreased workloads at the depots and diminished their capability, reliability, and cost effectiveness for supporting requirements for legacy systems; it also reduced their opportunities to acquire work for new and modified weapon systems. The downsizing also affected the depots' ability to obtain investments in facilities, equipment, and human capital to support their long-term viability and to ensure that they remained a key resource for repair of new and modified systems. As a result, DOD's depots had become facilities that primarily repaired aging weapon systems and equipment. In 2003, Army and Marine Corps depots experienced an increase in workload, stemming from overseas contingency operations in Iraq and Afghanistan. Contributing to this increase were efforts to reset systems such as the High Mobility Multipurpose Wheeled Vehicle, the M1 Abrams Tank, and the Bradley Fighting Vehicle, as well as work related to armor fabrication and the armoring of systems such as the Medium Tactical Vehicle Replacement. Despite the increase in workload, the Army and Marine Corps lacked direction from DOD on a department wide strategic depot plan that clarified the future role of the military depots. We reported in April 2003 that the services and DOD had not implemented comprehensive strategic plans for defense maintenance to revitalize or protect the future viability of their depot facilities, equipment, and workers. In that report, we recommended that the services develop depot strategic plans that are linked to the services' missions and objectives, and that DOD develop a strategic plan that provides guidance and a schedule for identifying long-term capabilities to be provided in government-owned and -operated plants. The House Armed Services Committee has previously encouraged DOD to develop a comprehensive strategy to ensure that the depots are viably positioned, and that they have the workforce, equipment, and facilities they need to maintain efficient operations to meet the nation's current and future requirements. In March 2007, the Under Secretary of Defense for Acquisition, Technology, and Logistics approved the DOD Depot Maintenance Strategy and Implementation Plans, which articulated OSD's strategy and plans for ensuring that the department's organic depot maintenance infrastructure is postured and resourced to meet the national security and management challenges of the 21st century. The plan also specified that each military service was responsible for conducting strategic planning for depot maintenance that focused on achieving DOD's strategy. OSD required the services to submit the results of their strategic plans no later than 6 months after the publication of DOD's plan. In March 2007, the Deputy Under Secretary of Defense for Logistics and Materiel Readiness modified this requirement to have each service submit either its published depot maintenance strategic plan, or a report describing the process being used to develop its strategic plan, and a target date for completing the plan by September 1, 2007. The Army and Marine Corps finalized and submitted their strategic plans to OSD in 2008. In addition, the Army developed an implementation plan to accompany its strategic plan. The Marine Corps did not produce an implementation plan. While the depot maintenance strategic plans developed by the Army and the Marine Corps identify key issues affecting the depots, they do not fully address all of the elements required to achieve a results-oriented management framework, and they are not fully responsive to OSD's direction to the services for developing their plans. Furthermore, these plans do not address uncertainties in workload that affect the depots' ability to plan for meeting future maintenance requirements. Finally, they do not show whether and how the depots will have a role in planning for the sustainment of new and modified weapon systems. As a result of these deficiencies in their strategic plans, the Army and Marine Corps may lack assurance that their depots are postured and resourced to meet future maintenance requirements. The Army's and the Marine Corps' depot maintenance strategic plans do not fully address all of the elements that are needed for a comprehensive results-oriented management framework. In addition, the plans are not fully responsive to OSD's direction to the services for developing these plans. Our prior work has shown that organizations need sound strategic management planning in order to identify and achieve long-range goals and objectives. We have identified critical elements that should be incorporated in strategic plans to establish a comprehensive, results- oriented management framework. A results-oriented management framework provides an approach whereby program effectiveness is measured in terms of outcomes or impact, rather than outputs, such as activities and processes. The framework includes critical elements such as a comprehensive mission statement, long-term goals and objectives, approaches for accomplishing goals and objectives, stakeholder involvement, external factors that may affect how goals and objectives will be accomplished, performance goals that are objective, quantifiable, and measurable, resources needed to meet performance goals, performance indicators or metrics that measure outcomes and gauge progress, and an evaluation plan that monitors the goals and objectives. OSD also directed the services to include many of the elements in their depot maintenance strategic plans. Specifically, the OSD criteria stated that each military service's plan should include a comprehensive mission statement, general goals and objectives (including outcome-related goals and objectives), a description of how the goals and objectives are to be achieved, metrics that will be applied to gauge progress, key factors external to the respective service and beyond its control that could significantly affect the achievement of their general goals and objectives, and descriptions of the program evaluations used in establishing, monitoring, or revising goals and objectives, with a schedule for future program evaluations. Furthermore, OSD directed the services to address a number of specific issues in their strategic plans, including logistics transformation, core logistics capability assurance, workforce revitalization, and capital investment. OSD wanted the services, at a minimum, to address these four issues because it believed they were critical to ensuring the depots would be postured and resourced to meet future requirements. Based on our evaluation of the Army's and Marine Corps' depot maintenance strategic plans, we found that the plans partially address the elements for a results-oriented management framework. While the services' strategic plans address key issues affecting the depots and contain mission statements, along with long-term goals and objectives, they do not fully address all the elements needed for sound strategic planning. Elements not fully addressed in the strategic plans are Approaches for accomplishing goals and objectives; Stakeholder involvement in developing the plan; External factors that may affect how goals and objectives will be Performance goals that are objective, quantifiable, and measurable; Resources required to meet performance goals; Performance indicators or metrics that measure outcomes and gauge progress of the goals and objectives; and An evaluation plan that monitors the goals and objectives. Table 2 summarizes, based on our evaluation, the extent to which the Army and Marine Corps depot maintenance strategic plans address the strategic planning elements needed for a comprehensive results-oriented management framework. The Army's and Marine Corps' depot maintenance strategic plans partially address logistics transformation, core logistics capability assurance, workforce revitalization, and capital investment--the four issues that OSD directed each service, at a minimum, to include in their plans. Table 3 summarizes, based on our evaluation, the extent to which the Army and Marine Corps depot maintenance strategic plans discuss these four issues. Army and Marine Corps officials involved with the development of the service strategic plans acknowledged that their plans do not fully address the OSD criteria, but they stated that the plans nevertheless address issues they believe are critical to maintaining effective, long-term depot maintenance capabilities. An official in the Office of the Deputy Chief of Staff of the Army, G4, who was involved with the Army's depot maintenance strategic plan acknowledged that the Army's plan does not fully address OSD's criteria. According to this official, the Army's plan focuses on issues of greatest priority to the service's depots. The official added that the OSD criteria lacked clear and specific instructions to the services. According to an official in the Marine Corps' Logistics Plans, Policy, and Strategic Mobility Division who was involved with that service's depot maintenance strategic plan, the Marine Corps' plan was intended to be only an overarching outline and was not intended to provide the detailed "nuts and bolts" that would be needed for implementation. The Army and Marine Corps have not updated their strategic plan since initially submitting them to OSD in 2008, and since that time neither service has received notice from OSD that its plan did not meet OSD's criteria or should be revised and updated. An OSD official in the Office of the Deputy Secretary of Defense for Logistics and Materiel Readiness told us that although the services' strategic plans are not completely responsive to OSD's direction, they represent a good first start on developing a strategic plan. Although OSD plans to require the services to update their plans, this official told us that OSD would wait until after completion of the Quadrennial Defense Review. That review is to be completed in early 2010. According to the OSD official, it would be counterproductive to ask the services to update their strategic plans in 2009 and then update them again following the Quadrennial Defense Review. The Army's and Marine Corps' depot maintenance strategic plans do not provide strategies for mitigating and reducing uncertainties in future workloads that affect the depots' ability to plan for meeting future maintenance requirements. These uncertainties stem primarily from a lack of information from the depots' major commands on workload that will replace current work on legacy systems, which is expected to decline, as well as workload associated with new systems that are in the acquisition pipeline (which is discussed further in the next section of this report). Workload uncertainties hinder effective planning for meeting future depot maintenance requirements because workload is a key driver in planning for the necessary capabilities such as workforce skills, equipment, and infrastructure. Depot officials said that these resources require significant lead times to develop and put in place to effectively respond to the customers' needs. In the absence of timely and reliable data on future workloads, the depots' efforts to identify and develop needed capabilities and to conduct workforce planning may be adversely affected. The depots' major commands generate workload projections from workload forecasting systems and are based on past history and discussions with customers about workload planned for the depots. The Army uses the Army Workload and Performance System as a tool for projecting future workloads, coordinating personnel requirements, managing resources, and tracking performance. The Marine Corps use the Principle End Item Stratification Module within the Material Capability Decision Support System to determine its depot level maintenance requirements. Army and Marine Corps guidance identifies workload as a key planning factor for supporting the expected life of a materiel system. For example, Army Regulation 750-1, Army Materiel Maintenance Policy, states that a depot maintenance capability will be established and sustained on the basis of workload generated by those weapon systems and materiel that is essential to the completion of the Army's primary roles and mission. The Marine Corps' Depot Level Maintenance Program guide establishes general guidelines for planning workloads for the depots. Although the services have guidance, systems, and processes for workload planning, depot officials told us that the workload forecasts they receive from their major commands are unreliable beyond the current fiscal year. Officials cited various factors that contribute to workload uncertainties, such as the volatility in workload requirements; changing wartime environment; budget instability, including the timing of and heavy reliance on supplemental funding; and unanticipated changes in customer orders. Depot officials also cited other factors such as delayed work returning from theater and workload cancellations. Depot officials told us that they were not in a position to address these factors on their own, and that reducing or mitigating future workload uncertainties would require substantial involvement of the service headquarter organizations and major commands that are responsible for managing the depots. Officials at the TACOM Life Cycle Management Command, one of the commands that support two Army depots, said that they too had difficulty forecasting workload flowing to the depots because of factors that were outside their control, such as technology development and surge requirements. Marine Corps Logistics Command officials said that they are currently implementing an enterprise-level maintenance program that focuses on how to better identify future year requirements. Army and Marine Corps depot officials expressed particular concern that they lacked information on workloads that might replace some of their current work on legacy systems that is expected to decline due to various factors, including a drawdown of U.S. forces resulting from a decline in combat operations in Iraq and from the 2005 BRAC decisions. For example, Anniston Army depot's work on the M1 Abrams tank fleet is projected to decrease from about 6,000 tanks to 2,500 tanks by fiscal year 2013, as a result of the Army's projected decline in demand. In addition, the 2005 BRAC decision is expected to reduce future workload at the Marine Corps' Barstow depot by about 30 percent by fiscal year 2011, when BRAC is fully implemented. Moreover, Army and Marine Corps officials noted that the surge in workload resulting from operations in Iraq could be masking a decline in traditional organic depot work that occurred during this operation. Furthermore, these officials expressed concern that they lack information on workload associated with new and modified systems in the acquisition pipeline that will require future maintenance support at the depots. Depot officials also said that they are not involved in the sustainment portion of the life cycle management planning process for new and modified systems. Army Aviation and Missile Command officials said that the life cycle sustainment planning process is a responsibility of the program manager. While the command is operationally aligned with the program manager and plays a significant role in deciding how weapon systems will be supported, they do not include the depots in this planning process. Both the Army's and the Marine Corps' depot maintenance strategic plans recognize that forecasting workload is important to the depots. However, while the Army's strategic plan notes the need to identify sufficient work for its depots, it does not explain how or when the Army will take steps to develop more reliable forecasts or take other steps that could reduce or mitigate depot workload uncertainties. The Marine Corps' strategic plan also mentions workload estimating, stating that the Marine Corps plans to forecast depot maintenance workload with sufficient lead time to allow it to analyze the required depot capabilities. However, the strategic plan does not specify how the depots will be involved in this process, how this process will be accomplished, or who is going to be held accountable to ensure that this process is performed. Neither the Army's nor the Marine Corps' strategic plans address whether and how the depots will be integrated into the sustainment portion of the life cycle management planning process for new and modified weapon systems. During this process, weapon system program managers plan for how and where a new or modified system will be supported and maintained in the future--decisions that have a profound impact on planning future depot workload and related infrastructure, capital investments, and workforce requirements. According to depot officials, they are not involved in the program managers' planning because no clear process exists that would enable them to have input. The department's overarching acquisition guidance, DOD Directive 5000.01, states that the program manager shall be the single point of accountability for accomplishing program objectives for total life-cycle systems management, including sustainment. While program managers are required to assign work to the depots to maintain core capabilities, they have no formal requirement to include the depots in the sustainment planning process to determine how a weapon system will be supported. In prior reports, we have noted that program managers often make decisions to contract out the repair of new and modified systems without considering the impact of these decisions on the requirement to maintain core capability for essential systems in military depots. Our recent report on core depot maintenance indicates that shortcomings in DOD's acquisition guidance and its implementation have resulted in DOD program managers not identifying and establishing required core capability at military depots in a timely manner--capability that will be needed to support future maintenance requirements for new and modified systems. The depots' lack of involvement in life cycle management planning limits their ability to influence how weapon systems being acquired by their service will be sustained, and also plan for and develop capabilities they will need to support these systems in the future. For example, even though Red River Army depot is designated as the primary repair facility for Bradley Fighting Vehicles, depot planners stated that they were not involved in the Army's life cycle management planning process to decide which facility would have full capability to perform the test and repair work on the newer model of the Bradley A3. As a result, this depot received minimal work associated with this weapon system, while the majority of this work--including the testing on the turret and the major overhaul of the system--went to a private contractor. According to depot officials, including the depots in the sustainment portion of the life cycle management planning process cannot be achieved without full participation and coordination between the sustainment and acquisition communities, and without consistent communication between the services' major commands and the depots during the process of determining how new and modified systems will be sustained. The Army Materiel Command's Industrial Base Strategic Plan notes the importance of developing a process that provides closer interface between the acquisition and sustainment communities to ensure that future weapon system requirements are matched with organic sustainment capabilities early in the acquisition process. Also, the Marine Corps Logistics Command's Alignment and Integration Strategic Plan emphasizes the importance of this command to assist program managers with the planning and execution of total life cycle management responsibilities for their weapon systems. Without a clear process to integrate the depots in the sustainment portion of the life cycle management planning process, the depots cannot determine what capabilities are needed to plan for future workloads and what other resources are needed to support new and modified weapon systems. The Army and Marine Corps face some challenges to ensure that their maintenance depots will remain operationally effective, efficient, and capable of meeting future maintenance requirements. The increased reliance on contractor support for weapon systems, including contractor support provided through performance-based logistics, and the continuing uncertainties about workload, increase the risk that the depots may not be postured and resourced to meet future requirements. These issues, if not addressed, could adversely affect materiel readiness and future depot operations and potentially lead to equipment shortages and delays in meeting the combatant commander's requirements. While strategic planning is a valuable management tool to help mitigate the challenges facing the depots, the Army and Marine Corps plans as currently written are not comprehensive enough for this purpose. The plans do not fully address all the elements needed for a results-oriented management strategy or the specific issues that OSD directed each service, at a minimum, to include in their plans. Furthermore, until the services address problems caused by workload uncertainties, the depots will continue to have difficulties planning for future maintenance requirements. Regarding workload uncertainties for systems that have yet to enter the defense inventory, without a clear process for integrating the depots into the sustainment portion of the life cycle management planning process, the depots may continue to lose key opportunities to develop needed capabilities that would enable them to provide depot level maintenance support for new and modified systems. To provide greater assurance that the military depots will be postured and resourced to meet future maintenance requirements, we recommend that the Secretary of Defense direct the Secretary of the Army and the Commandant of the Marine Corps to take the following three actions to update the depot maintenance strategic plans: Fully address all elements needed for a comprehensive results-oriented management framework, including those elements partially addressed in the current plans---such as the approaches for accomplishing goals and objectives, stakeholder involvement, external factors that may affect how goals and objectives will be accomplished, performance goals that are objective, quantifiable, and measurable, resources needed to meet performance goals, performance indicators used to measure outcomes and gauge progress, and an evaluation plan that monitors goals and objectives. Fully address the four specific issues of logistics transformation, core capability assurance, workforce revitalization, and capitalization, consistent with OSD criteria provided to the services. Develop goals and objectives, as well as related strategic planning elements, aimed at mitigating and reducing future workload uncertainties. As part of this last effort, the Army and Marine Corps should develop a clear process for integrating the depots' input into the sustainment portion of the life cycle management planning process for systems in the acquisition pipeline. In written comments on a draft of this report, DOD concurred with all three of our recommendations to provide greater assurance that the military depots will be postured and resourced to meet future maintenance requirements. DOD's written comments are reprinted in appendix IV. The department concurred with our first two recommendations to direct the Army and the Marine Corps to update their depot maintenance strategic plans to fully address all elements needed for a comprehensive results-oriented management framework, and fully address the four specific issues of logistics transformation, core capability assurance, workforce revitalization, and capitalization, consistent with OSD criteria provided to the services. DOD stated that they will reiterate and incorporate these recommendations into the next update of the strategic plan. While this is a step in the right direction, DOD did not indicate what steps, if any, it plans to take to ensure that the Army and Marine Corps will also incorporate these recommendations into their depot maintenance strategic plans. Therefore, DOD may need to take further action by following up with the Army and Marine Corps to ensure that they fully incorporate these recommendations into their depot maintenance strategic plans. DOD also concurred with our third recommendation to direct the Army and Marine Corps to develop goals and objectives for mitigating and reducing future workload uncertainties and integrate the depot's input into the sustainment portion of the life cycle management planning process. DOD stated that the Army has initiated several actions to mitigate and reduce uncertainties in projecting future depot workload and to ensure viability of the depot workforce. DOD said that the Army has established integrated product teams to address core workload shortfalls and developed an action plan and the resources and time line required to transfer sufficient workload from the original equipment manufacturers to the applicable Army depot to meet core requirements. In addition, DOD said that the Army has begun to develop policy that would require review of Core Logistic Assessments / Core Depot Assessments and Source of Repair Analyses during the milestone decision review process, and to develop a comprehensive training package for export to program executive officers and program managers, Life Cycle Management Commands, and depots. While these are positive steps that would help to improve future workload planning, these steps focus on addressing core requirements and do not fully address the need to mitigate and reduce workload uncertainties or to include the depots' input into the sustainment portion of the life cycle management planning process for systems in the acquisition pipeline. We continue to believe the depots will have difficulties planning for future maintenance requirements until the services develop solutions for mitigating and reducing uncertainties across the full range of the depots' workloads. We also continue to believe that without a clear process for integrating the depots into the sustainment portion of the life cycle management planning process, the depots will continue to lose key opportunities to develop capabilities that would enable them to provide depot-level support for systems in the acquisition pipeline. The department reiterated its plan to incorporate our recommendations into the next update of the strategic plan. As we stated above with regard to our first two recommendations, DOD may need to take further action by following up with the Army and Marine Corps to ensure that they fully incorporate this recommendation into their depot maintenance strategic plans. We are sending copies of this report to the appropriate congressional committees and the Secretary of Defense, the Secretaries of the Army, the Navy, the Air Force, and the Commandant of the Marine Corps. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have questions about this report, please contact me at (202) 512-8365 or [email protected]. Key contributors to this report are listed in appendix VI. To evaluate the extent to which the Army's and Marine Corps' strategic plans provide a comprehensive strategy for meeting future depot maintenance requirements, we assessed the Army's April 2008 Depot Maintenance Enterprise Strategic Plan, and the Marine Corps February 2008 Depot Maintenance Strategic Plan to determine if they are consistent with the criteria for developing a comprehensive results-oriented management framework as indicated in GAO's prior work on strategic management plans. While the Office of the Secretary of Defense (OSD) required all the services to prepare and submit such plans to them, we decided to focus our work on the Army's and Marine Corps' plans because of their significant roles in supporting overseas contingency operations in Iraq and Afghanistan. We also determined if the Army's and Marine Corps' strategic plans for depot maintenance fully addressed the criteria for developing a strategic plan specified in the Department of Defense (DOD) March 2007 Depot Maintenance Strategy and Implementation Plans. Furthermore, we determined if the Office of the Under Secretary of Defense for Logistics and Materiel Readiness assessed the services' depot management strategic plans and provided follow on actions to ensure the plans meet their criteria. In addition, we reviewed and addressed issues regarding uncertainties in projecting future workloads, which is necessary for effective depot planning. We also interviewed depot management officials to determine the depots' participation in the sustainment portion of the life cycle management planning process to effectively plan and prepare for future maintenance work and related capabilities. To gain further perspective on the services' efforts to plan for the future of the depot maintenance facilities, we interviewed and obtained documentation from officials at Headquarters, Department of the Army, Washington, D.C.; U.S. Army Materiel Command, Fort Belvoir, Virginia; Headquarters Marine Corps, Arlington, Virginia; Marine Corps Systems Command, Quantico, Virginia; and Marine Corps Logistics Command, Albany, Georgia. We also visited, interviewed, and obtained documentation from officials at the Army's five maintenance depots that perform organic level maintenance at Anniston Army Depot, Anniston, Alabama; Corpus Christi Army Depot, Corpus Christi, Texas; Letterkenny Army Depot, Chambersburg, Pennsylvania; Red River Army Depot, Texarkana, Texas; and Tobyhanna Army Depot, Tobyhanna, Pennsylvania. In addition, we visited, interviewed depot officials and obtained documentation from the Marine Corps' two maintenance depots that perform organic level maintenance at Maintenance Center Albany, Georgia and Maintenance Center Barstow, California. Furthermore, we obtained data and information on actions aimed at improving depot productivity at the Army and Marine Corps depots and data on the depots' workforce trends from fiscal year 1999 through fiscal year 2008. We determined that the data used were sufficiently reliable for our purposes. We conducted this performance audit from August 2007 through September 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Both the Army and Marine Corps depots have reported actions they have taken to improve their productivity. The depots have reported that they have improved their maintenance operations' productivity and efficiency through the use of several process improvements including Lean, Six Sigma, Value Stream Mapping, and Theory of Constraints. They report that such improvements have allowed them to identify and reduce or eliminate unnecessary work-related functions and other impediments that created restrictions or "bottlenecks" in their production processes and have resulted in increases in the number of weapon systems or other components processed, reductions in repair cycle times, and reductions in the cost of production. The Army and Marine Corps have issued a policy and a guidebook, respectively, aimed at improving the depots' repair processes, including information on assessing the depots' progress in making, sharing, and sustaining improvements and in measuring overall productivity. We questioned depot officials about the data associated with these improvements and relied on their professional judgment concerning the adequacy and reliability of the data. Table 4 shows information reported by the Army depots on the results of initiatives to improve the repair process for selected weapon systems-- one from each of the five Army depots. The Army depots generally assess the results of their productivity improvements based on increases in the number of units produced, reductions in repair cycle times, and reductions in production costs. The third column shows the period during fiscal years 2004 through 2007 in which the initiative was implemented. The fourth column shows the average reduction in repair cycle time expressed in days, and the fifth column shows this reduction expressed as a percentage by which repair time was reduced. The final column shows the estimated cost reduction or savings that the Army depots reported for the period. Army depot officials told us that there is limited sharing of lessons learned or cross application among the depots and that increased sharing and cross application could contribute to additional reductions in repair days and cost savings or cost avoidances. Table 5 shows information reported by the Marine Corps depots on the results of initiatives to improve the repair process for selected weapons systems repaired at its two depots for fiscal years 2004 through 2007. The Marine Corps depots generally assess the results of their productivity improvements based on reductions in repair cycle times. The second column shows the average number of days taken for the repair cycle in fiscal year 2004, the baseline year before the depots initiated their process improvement initiatives. The third column shows the average number days the depots reported for repair cycle time in fiscal year 2007, after implementing process improvement initiatives. The fourth and fifth columns show the reported reduction in repair time expressed as number of days and the percentage by which repair time was reduced. The Marine Corps depots generally do not either capture or report cost savings or cost avoidances resulting from such improvements. A Marine Corps official responsible for managing the results of the depots' improvement told us that some of the reductions in repair days were achieved by using overtime and multiple shifts. The official also told us that there is limited sharing of lessons learned or cross application among the depots and that increased sharing and cross application could contribute to additional reductions in repair days and in cost savings or cost avoidances. Workforce levels for the Army and Marine Corps depots have been increasing along with the workloads since fiscal year 2003. The depots have accommodated the surge in workload by hiring primarily temporary and contract employees. Depot officials told us they hired temporary and contract workers in lieu of permanent government workers due to uncertainties about the duration of the overseas contingency operations in Iraq and Afghanistan. The depots plan to reduce temporary and contract labor as workload related contingency operations decreases. Although uncertainties about future workload inhibit their workforce planning, we found that the depots' workforce strategic planning addresses anticipated personnel and skill gaps. For example, while the workloads have increased, the depots have been able to maintain a skilled workforce. In addition, with a large percentage of depot workers becoming eligible to retire over the next 5 years, some of the depots are working with local community colleges to provide specialized programs focused on skills needed by the depots. The Army and Marine Corps depots' workforce was relatively stable from fiscal year 1999 though fiscal year 2002. The depots report that the increase in workload associated with the Global War on Terrorism (GWOT) began during fiscal year 2003. Before GWOT, the total depot workforce was more than 89 percent permanent government employees, but at the end of fiscal year 2008 permanent government employees made up only 62 percent of the total depot workforce. After remaining relatively constant from fiscal year 1999 through fiscal year 2002, total workforce increased from fiscal year 2003 through fiscal year 2008, along with the increases in workload associated with GWOT. From fiscal year 2003 through fiscal year 2008, the Army depots' workforce increased by 106 percent and the Marine Corps' by 99 percent. Figures 1 and 2 illustrate these changes in the Army's and the Marine Corps' depots' workforces from fiscal year 1999 through fiscal year 2008. The trends reflected in figures 1 and 2 show marked changes in the composition of the Army's and Marine Corps' depots' workforces since fiscal year 2003. The largest increases have been in the number of temporary workers and contract labor hired in lieu of permanent staff. As GWOT continued and the workload continued to increase, the depots continued to hire more temporary and contract workers to accommodate the increased workload. The depots plan to reduce the number of temporary and contract workers as they employ GWOT-related workload decreases. As figures 1 and 2 illustrate, in fiscal year 2008, 37 percent of the Army depots' workforce and 48 percent of the Marine Corps depots' workforce were comprised of temporary and contract workers. Specifically, temporary workers represented about 15 percent of the Army depots' workforce and 25 percent of the Marine Corps depots' workforce. Contract workers represented about 22 percent of the Army depots' workforce and about 23 percent of the Marine Corps depots' workforce. We have previously reported that the depots may face challenges that could inhibit effective strategic workforce planning. These challenges include the high average age of workers, difficulty in maintaining depot viability if large numbers of eligible skilled workers retire, and lack of an available source of trained and skilled personnel. The Army and Marine Corps depots' have reduced the average age of their permanent workers. For fiscal year 2008, the age of permanent workers in the Army's depots averaged 45, and the age of permanent workers in the Marine Corps' depot averaged 46. Since fiscal year 1999, the average age of the Army's permanent depot workers has decreased by 9 percent, while that of the Marine Corps' has decreased by 12 percent. Depot officials attributed this reduction to the retirement of older permanent workers; the availability of younger, qualified applicants; and in-house training programs. The depots have developed workforce strategic plans that address current and anticipated personnel and skill gaps. These plans include maintaining a mix of personnel with the skills and capabilities needed to satisfy current workload requirements. According to Army and Marine Corps depot officials, permanent, skilled workers are readily available. Further, the depots forecast a high rate of retirement eligibility in the next 5 years, and they are taking steps to address the potential loss of skilled personnel. According to Army data, 34 percent of the Army's permanent depot workforce will be eligible for retirement in fiscal year 2013. According to Marine Corps data, 43 percent of the Marine Corps' permanent depot workforce will also be eligible for retirement in fiscal year 2013. Both services' depots track and monitor personnel who may be eligible to retire soon, considering their skills in order to address potential skill gaps in the future workforce. Both Army and Marine Corps depots address this potential loss of personnel and skills in their workforce strategic plans, and they have instituted various types of recruitment and training programs designed to attract and train workers. In addition to the contact named above, Julia Denman and Tom Gosling, Assistant Directors; Larry Bridges; John Clary; Joanne Landesman; Latrealle Lee; Katherine Lenane; and Christopher Watson made key contributions to this report.

The Army and Marine Corps maintenance depots provide critical support to ongoing military operations in Iraq and Afghanistan and are heavily involved in efforts to reset the force. The Department of Defense (DOD) has an interest in ensuring that the depots remain operationally effective, efficient, and capable of meeting future maintenance requirements. In 2008, in response to direction by the Office of the Secretary of Defense (OSD), the Army and the Marine Corps each submitted a depot maintenance strategic plan. Our objective was to evaluate the extent to which these plans provide comprehensive strategies for meeting future depot maintenance requirements. GAO determined whether the plans were consistent with the criteria for developing a results-oriented management framework and fully addressed OSD's criteria. The depot maintenance strategic plans developed by the Army and Marine Corps identify key issues affecting the depots, but do not provide assurance that the depots will be postured and resourced to meet future maintenance requirements because they do not fully address all of the elements required for a comprehensive, results-oriented management framework. Nor are they fully responsive to OSD's direction for developing the plans. While the services' strategic plans contain mission statements, along with long-term goals and objectives, they do not fully address all the elements needed for sound strategic planning, such as external factors that may affect how goals and objectives will be accomplished, performance indicators or metrics that measure outcomes and gauge progress, and resources required to meet the goals and objectives. Also, the plans partially address four issues that OSD directed the services, at a minimum, to include in their plans, such as logistics transformation, core logistics capability assurance, workforce revitalization, and capital investment. Army and Marine Corps officials involved with the development of the service strategic plans acknowledged that their plans do not fully address the OSD criteria, but they stated that the plans nevertheless address issues they believe are critical to maintaining effective, long-term depot maintenance capabilities. The Army's and Marine Corps' plans also are not comprehensive because they do not provide strategies for mitigating and reducing uncertainties in future workloads that affect the depots' ability to plan for meeting future maintenance requirements. Such uncertainties stem primarily from a lack of information on (1) workload that will replace current work on existing systems, which is expected to decline, and (2) workload associated with new systems that are in the acquisition pipeline. According to depot officials, to effectively plan for future maintenance requirements, the depots need timely and reliable information from their major commands on both the amounts and types of workloads they should expect to receive in future years. Depot officials told us that the information they receive from their major commands on their future workloads are uncertain beyond the current fiscal year. Officials cited various factors that contribute to these uncertainties, such as volatility in workload requirements, changing wartime environment, budget instability, and unanticipated changes in customer orders. In addition, depot officials said that they are not involved in the sustainment portion of the life cycle management planning process for new and modified systems. No clear process exists that would enable them to have input into weapon system program managers' decisions on how and where new and modified systems will be supported and maintained in the future. Unless they are integrated in this planning process, these officials said, the depots will continue to have uncertainties about what capabilities they will need to plan for future workloads and what other resources they will need to support new and modified weapon systems.

Federal regulations and EEOC policy require federal agencies to report certain EEO complaint-related data annually to EEOC. Agencies report these data on EEOC form 462, Annual Federal Equal Employment Opportunity Statistical Report of Discrimination Complaints. EEOC compiles the data from the agencies for publication in the annual Federal Sector Report on EEO Complaints Processing and Appeals. According to EEOC Management Directive 110, agencies should make every effort to ensure accurate recordkeeping and reporting of these data. In our recent report, we said that reliable data are important to program managers, decisionmakers, and EEOC in identifying the nature and extent of workplace conflicts. We analyzed the data contained in EEOC's annual federal sector reports to prepare our reports dealing with employment discrimination complaint trends. Because the Postal Service accounts for a large share of complaints filed by federal employees with their agencies, we analyzed forms 462 submitted by the Service for fiscal year 1991 through fiscal year 1998, as well as other complaint data provided at our request. Because our studies generally focused on trends in the number and age of unresolved complaints in inventory, the number of complaints filed, the bases and issues cited in complaints, and complaint processing times, we did not examine the full scope of data reported on form 462. Although we did not examine the Service's controls for ensuring accurate recordkeeping and reporting or validate the data the Service reported, we examined the data for obvious inconsistencies or irregularities. We requested comments on a draft of this report from the Postmaster General. The Postal Service's oral comments are discussed near the end of this letter. We performed our work in July and August 1999 in accordance with generally accepted government auditing standards. The most significant error that we identified in Postal Service data involved the number of race-based complaints filed by white postal workers. EEOC requires agencies to report the bases (e.g., race, sex, disability) for complaints that employees file. For fiscal year 1996, the Postal Service had reported that 9,044 (about 68 percent) of the 13,252 complaints filed contained allegations by white postal workers of race discrimination. For fiscal year 1997, the Service had reported that 10,040 (70 percent) of the 14,326 complaints filed contained such allegations. These figures represented significant increases over the figures reported for previous fiscal years. For example, in fiscal year 1995, the Service reported to EEOC that 1,534 of the complaints filed contained allegations by white postal workers of race discrimination. In fiscal year 1994, the figure reported was 2,688. We questioned Postal Service officials about the sudden increase in the number of complaints containing allegations by white postal workers of race discrimination. The officials said that they also had been concerned about these data, and had discussed the data with EEOC officials. After we raised this issue, the officials intensified their efforts to identify the true magnitude and source of the increase and subsequently found that a computer programming error had resulted in a significant overcounting of these complaints. They said that the corrected figures were 1,505 for fiscal year 1996 (or 11.4 percent of the 13,252 complaints filed) and 1,654 for fiscal year 1997 (or 11.5 percent of the 14,326 complaints filed). They also provided these figures to EEOC. In explaining how the error occurred, the officials said that each automated case record in the complaint information system contains a data field for race, which is to be filled in with a code for the applicable racial category when an employee alleges racial discrimination. If an employee alleges discrimination on a basis or bases other than race, this data field is to remain blank. According to the officials, the faulty computer program counted each blank racial data field as indicating an allegation by a white employee of racial discrimination. These results were then tallied with complaints in which the data field was properly coded as an allegation by a white employee of racial discrimination. The officials advised us that the programming error had been corrected. Although we did not examine the computer program, our review of the data reported on the Postal Service's form 462 for fiscal year 1998 appeared to confirm that the correction had been made. Other errors that we found in data that the Service reported on form 462 related to the age of cases in the inventory of unresolved complaints. EEOC requires agencies to report statistics on the length of time that cases have been in the agencies' inventories of unresolved complaints, from the date of complaint filing. These data are broken out by each stage of the complaint process--acceptance/dismissal, investigation, hearing, and final decision. We questioned figures for fiscal year 1997 about the age of (1) cases pending acceptance/dismissal, because the reported total number of days such cases had been in inventory seemed unusually high, and (2) cases pending a hearing before an EEOC administrative judge, because the reported average age of such cases seemed unusually low. After we brought the questionable figures to the attention of the Postal Service EEO Compliance and Appeals Manager, he provided corrected figures and said that the errors, like the problem with the reporting of complaint bases described previously, were due to a computer programming error. He said that the faulty computer program had been corrected. In addition, the Service provided the corrected figures to EEOC. We also found that the Postal Service has not been reporting all issues-- the specific conditions or events that are the subjects of complaints--as EEOC requires. Because some complaints involve more than one basis or more than one issue, EEOC's instructions for completing part IV of form 462 require agencies to include all bases and issues raised in complaints. While the Postal Service's complaint information system allows more than one complaint basis (like racial and sexual discrimination) to be recorded, the system's data field allows only one "primary" issue (like an adverse personnel action) to be recorded for each complaint, regardless of the number of issues that a complainant raises. Although this practice results in underreporting complainants' issues to EEOC, the EEO Compliance and Appeals Manager said that the Postal Service adopted this approach to give the data more focus by identifying the primary issues driving postal workers' complaints. This matter has not been resolved. In order to report more than one issue for each complaint, the Service would have to modify the automated complaint information system to allow for the recording of more than one issue for a complaint. However, we have reported that part IV of form 462 for reporting statistics on bases and issues is methodologically flawed and results in an overcounting of bases and issues. We have made a recommendation to EEOC that it correct this problem, and the agency said that it would address our concerns. Therefore, we believe that it would be prudent for the Postal Service to wait for EEOC to resolve this issue before modifying its data recording and reporting practices. In addition to the discrepancies already noted, we found that the Postal Service's statistical reports to EEOC for fiscal years 1996 and 1997 did not include data for complaints involving certain categories of primary issues. The form 462, which EEOC requires agencies to complete, contains a list of issues. For its own management needs, the Service supplemented EEOC's list with three additional categories of specific issues: (1) denial of worker's compensation, (2) leave, and (3) other pay. However, we found that in completing part IV of EEOC form 462 for fiscal years 1996 and 1997, the Service omitted the data about complaints in which these additional issues were cited. After we brought our observations to the attention of Service officials, they provided the omitted data to EEOC. The officials explained that, for fiscal year 1998, in lieu of including data about complaints involving the three additional issues on part IV of form 462, they provided these data separately to EEOC. The EEO Compliance and Appeals Manager explained that he did not want to "force fit" the data about the three issues into one of the categories listed on the form 462, such as "other," because the issues thereby would lose their identity and significance. He added that part IV of form 462 needs to be revised because the categories of issues listed are too broad and do not recognize emerging issues. Further, we found certain underreportings of the bases and issues cited in complaints for fiscal year 1995. After we brought the underreporting to the attention of the Postal Service officials, they provided corrected data to EEOC and us. Service officials attributed this underreporting to difficulties associated with implementing a new complaint information system in fiscal year 1995. Both Postal Service management and EEOC need complete, accurate, and reliable information to deal with EEO-related workplace conflicts. Discrepancies that we found in our limited review of the Postal Service's EEO complaint data raised questions about the completeness, accuracy, and reliability of the reported data, particularly data generated through the automated complaint information system. All but one of the reporting problems we found and their underlying causes appear to have been corrected. However, because we examined only a limited portion of the reported data for obvious discrepancies and because the errors we identified were related to data generated by an automated complaint information system put in place in 1995, we have concerns about the completeness, accuracy, and reliability of the data that we did not examine. To help ensure that the EEO complaint data submitted to EEOC are complete, accurate, and reliable, we recommend that you review the Postal Service's controls over the recording and reporting of these data, including evaluating the computer programs that generate data to prepare the EEOC form 462, Annual Federal Equal Employment Opportunity Statistical Report of Discrimination Complaints. We recognize that recording and reporting issues raised in complaints are matters that cannot be completely addressed until EEOC resolves the methodological flaws in part IV of form 462. In oral comments on a draft of this report made on August 20, 1999, the Postal Service Manager, EEO Compliance and Appeals, generally concurred with our observations and offered comments of a clarifying nature. In response to our recommendation that the Service's controls over the recording and reporting of EEO complaint data to EEOC be reviewed, this official said that the Postal Service plans to adopt more comprehensive management controls to ensure that the data submitted are complete, accurate, and reliable. The official further said that these controls would involve (1) an analysis of trend data to identify anomalies and (2) an examination of data categories in which discrepancies have previously been found. He also said that complaint information system controls would be examined to determine whether they ensure that data recorded and reported are complete, accurate, and reliable. He said, however, that because the complaint information system has been certified for year 2000 compatibility and because the Service has decided not to modify any computer systems until March 2000, any modifications to improve the complaint system will not be made until then. We believe that the actions the Postal Service proposes, if carried out, will address the substance of our recommendation. We are sending copies of this report to Senators Daniel K. Akaka, Thad Cochran, Joseph I. Lieberman, and Fred Thompson and Representatives Robert E. Andrews, John A. Boehner, Dan Burton, William L. Clay, Elijah E. Cummings, Chaka Fattah, William F. Goodling, Steny H. Hoyer, Jim Kolbe, John M. McHugh, David Obey, Harold Rogers, Joe Scarborough, Jose E. Serrano, Henry A. Waxman, and C. W. Bill Young in their capacities as Chair or Ranking Minority Member of Senate and House Committees and Subcommittees. In addition, we will send a copy to Representative Albert R. Wynn. We will also send copies to the Honorable Ida L. Castro, Chairwoman, EEOC; the Honorable Janice R. Lachance, Director, Office of Personnel Management; the Honorable Jacob Lew, Director, Office of Management and Budget; and other interested parties. We will make copies of this report available to others on request. Because this report contains a recommendation to you, you are required by 31 U.S.C. 720 to submit a written statement on actions taken on this recommendation to the Senate Committee on Governmental Affairs and the House Committee on Government Reform not later than 60 days after the date of this report 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 report. If you or your staff have any questions concerning this report, please contact me or Stephen Altman on (202) 512-8676. Other major contributors to this report were Anthony P. Lofaro, Gary V. Lawson, and Sharon T. Hogan. Michael Brostek Associate Director, Federal Management and Workforce Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch- tone phone. 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GAO reviewed certain discrepancies in the complaint data that the Postal Service reported to the Equal Employment Opportunity Commission (EEOC) and the need for the Service to take additional steps to ensure that such data are complete, accurate, and reliable. GAO noted that: (1) in GAO's limited analyses of the data the Service reported to EEOC, GAO found errors in statistics on the underlying bases for EEO complaints and on the length of time complaints had been in inventory; (2) GAO also found that required data on the issues raised in complaint information system; (3) these discrepancies were generally linked to statistical reports generated by the Service's automated complaint information system; (4) after GAO brought these discrepancies to the attention of Postal Service staff, they promptly corrected them and appeared to correct the underlying causes for the errors, with one exception; (5) that situation need not be resolved until EEOC revises its reporting form; and (6) because GAO examined only a portion of the reported data for obvious discrepancies and because the errors GAO identified were related to data generated by an automated complaint information system put in place in 1995, GAO has concerns about the completeness, accuracy, and reliability of the data that GAO did not examined.

The No Child Left Behind Act of 2001, which reauthorized the Elementary and Secondary Education Act (ESEA), is designed to improve the education of all students and the quality of teachers. NCLBA requires that all teachers of "core academic subjects"--defined to mean English, reading or language arts, mathematics, science, foreign languages, civics and government, economics, arts, history, and geography--be "highly qualified." To be highly qualified, teachers (1) must have at least a bachelor's degree, (2) be certified to teach by their state, and (3) demonstrate subject matter competency in each core academic subject that they teach. A teacher's options for demonstrating subject matter competency vary according to whether the teacher is new and the grade level being taught. New elementary school teachers must demonstrate subject matter competency by passing a rigorous state exam in the basic elementary school curriculum; new middle or high school teachers may establish that they are highly qualified by either taking a rigorous state exam or successfully completing a degree (or equivalent credentialing) in each core academic subject taught. In addition, NCLBA allows current teachers to demonstrate subject matter competency based on a "high objective uniform state standard of evaluation." For example, under these uniform state standards, a combination of experience, expertise, and professional training could be used to meet the NCLBA subject matter competency requirements. Education has issued guidance to states on how to apply NCLBA requirements to all teachers, including special education teachers. According to Education's January 2004 guidance, special education teachers who provide instruction in core academic subjects, such as teachers in self-contained classrooms, are required to comply with the NCLBA subject matter competency requirements. In contrast, those special educators who do not provide instruction in core academic subjects, such as those who provide consultative services to highly qualified general educators, do not have to comply with the NCLBA teacher requirements. In addition, Education's March 2004 guidance provided additional flexibility on the implementation deadline and competency requirements for some special education teachers. Specifically, the guidance stated that educators in eligible rural areas who are highly qualified in at least one core academic subject they teach would have 3 additional years to demonstrate subject matter competency in other academic areas. The guidance also states that teachers who provide instruction in multiple core academic subjects will be able to demonstrate their subject matter competency through one process under their states' uniform standards, such as taking a single test that covers multiple core academic subjects. IDEA is the primary federal law that addresses the unique needs of children with disabilities, including, among others, children with specific learning disabilities, speech and language impairments, mental retardation, and serious emotional disturbance. The law mandates that a free appropriate public education be made available for all eligible children with disabilities, ensures due process rights, requires an individualized education program (IEP) for each student, requires the inclusion of students with disabilities in state and district wide assessment programs, and requires the placement of students in the least restrictive environment. Under IDEA, states are required to establish special education teacher requirements that are based on the highest requirements in the state for personnel serving children and youth with disabilities. Congress is considering including new special education teacher qualifications in the reauthorized IDEA. Under H.R. 1350, a new definition of "highly qualified," as it refers to teachers, would be added with the same meaning as in NCLBA. In contrast, S. 1248 would add an extensive definition of "highly qualified" with respect to the qualification of educational personnel, while taking into account differences between special education and general education teachers. For example, under S. 1248, special education teachers who consult with secondary school core academic subject teachers for children with disabilities would need to be fully certified in special education and demonstrate the knowledge and skills necessary to teach students with disabilities, to be highly qualified. In addition, S. 1248 proposes to extend the deadline for meeting the highly qualified teacher requirements by 1 year--to school year 2006- 2007. Two offices within the Department of Education are responsible for addressing special education teacher qualifications: the Office of Elementary and Secondary Education and the Office of Special Education Programs. The enactment of NCLBA significantly changed the expectations for all teachers, including those instructing students with disabilities. For example, states are now required to report on the qualifications of their teachers and the progress of their students. OESE has assumed responsibility for developing policies for improving the achievement of all students and the qualifications of teachers. In addition, the office provides technical and financial assistance to states and localities, in part so they can help teachers meet the new qualification requirements. For example, in fiscal year 2003, OESE provided funding to state and local education agencies through its Improving Teacher Quality state grant program. OSEP is responsible for providing leadership and financial resources to help states and localities implement IDEA for students with disabilities and their teachers. These responsibilities include awarding discretionary grants and contracts for projects designed to improve service provision to children with disabilities. In 2003, OSEP provided funding to 30 states through the State Improvement Grants program. OSEP also supports research on special education through centers such as the Center on Personnel Studies in Special Education. In the 2002-2003 school year, all states required that special education teachers have a bachelor's degree and be certified to teach--two of the three NCLBA teacher qualification requirements--and half required special education teachers to demonstrate competency in core academic subjects, which is the third requirement. In the 26 states that did not require teachers to demonstrate subject matter competency, state-certified special education teachers who were assigned to instruct core academic subjects might not be positioned to meet the NCLBA requirements. In 31 states that offered alternative routes to teacher certification, certification requirements for alternative route and traditional teacher preparation program graduates followed a similar pattern, with half meeting two of three NCLBA teacher requirements. Every state required special education teachers to hold at least a bachelor's degree and to be certified by their states before teaching, according to our survey results and reviews of Education documents and state Web sites. States varied in whether they offered one or more types of teaching certificates for special educators. Specifically, 30 states established a single certification for special education teachers that covered kindergarten through 12th grade, according to survey respondents. The remaining 22 states offered two or more certifications. For example, some states offered different certifications for teachers of elementary, middle school, and high school students. In addition, some states certified special education teachers to serve students with specific disability categories such as hearing impaired and emotionally disturbed, and/or with broader disability categories, such as mild, moderate, and severe special needs. Finally, several states certified their special education teachers for specific instructional roles such as general special education teacher, resource room teacher, or collaborative teacher. During the 2002-2003 school year, 24 states, the District of Columbia, and Puerto Rico required special education teachers to demonstrate some level of competency in the core academic subjects that they wished to teach at the time of their initial certification by having a degree or passing tests in the academic subjects that they wished to teach. Teachers in these states are better positioned to meet NCLBA's teacher requirements. However, the level of competency required varied by state and in some cases may not meet NCLBA competency level requirements. The rest of the states did not have any such requirements. (See fig. 1.) In states that did not have these requirements, the certified special education teachers who were assigned to instruct core academic subjects might not be positioned to meet the NCLBA requirements. To meet NCLBA teacher requirements, these teachers would need to demonstrate subject matter competency by the end of the 2005-2006 school year. The extent to which special education teachers were required to meet NCLBA subject matter competency requirements depended upon their instructional roles, which could sometimes be difficult for prospective teachers to determine. Special education teachers often attained their certification prior to being hired by local school districts for specific grade levels, subjects, or instructional roles. Therefore, these individuals might not be positioned to meet NCLBA teacher requirements for their future instructional roles. Furthermore, any special education teacher who was assigned to teach a different subject from one year to the next might meet subject matter competency requirements one year but not the next. According to Education officials, these challenges are not specific to special education teachers and will require school districts to be more mindful of teacher qualifications, including subject matter mastery, when assigning teachers to various teaching roles. According to survey respondents, 31 states provided alternative routes to certification for prospective special education teachers. States have developed such routes to meet specific teacher shortages as well as to allow professionals in related fields to become teachers. The alternative routes to certification programs that we reviewed were generally administered by the state education agencies, often through institutions of higher education. However, this was not always the case: In Maryland, for example, one county contracted with Sylvan Learning Center and the New Teacher Project to provide its alternative route to certification program. Most of the states that provided alternative routes to certification required that the graduates from such alternative route to certification programs fulfill the same certification requirements as graduates from traditional special education teacher preparation programs, such as having a bachelor's degree and passing teacher licensing examinations. The primary difference between alternative route programs and traditional teacher preparation programs was the extent to which teaching candidates received practical teaching experience prior to attaining full state certification. In general, prospective teachers in alternative route to certification programs were required to receive more practical teaching experience before being certified than were teachers in traditional programs. For example, candidates in an alternative route to certification program in Illinois were required to complete a 1-year mentored teaching internship, while most traditional certification programs for special education teachers required teaching candidates to complete a 9- to 18-week supervised student teaching assignment. This additional teaching experience has been required because individuals in some alternative programs have not received courses in pedagogy and instructional techniques. (See app. I for state special education alternative route to certification program contact information.) State officials indicated that implementing the core academic subject competency requirements of NCLBA would be difficult and cited factors that have facilitated or impeded application of this requirement to special education teachers. State officials identified several key facilitators, including having funds available to dedicate to special educators' professional development and having preexisting or ongoing efforts to develop subject matter competency standards for special educators. State officials and national education organizations' representatives also cited several factors that impeded meeting the subject competency requirements, including uncertainty about how to apply the law to special education teachers in some circumstances, and the need for additional assistance from Education in identifying implementation strategies. Survey respondents, as well as state officials and national education organizations' representatives we interviewed, reported that the availability of professional development funding and the flexibility to use funds were essential in helping teachers meet the NCLBA subject matter competency requirement. For example, officials in 19 states reported helping special education teachers by allocating some of the states' professional development money to financial aid for those seeking to enhance their knowledge in a core academic subject, such as by pursuing a degree. In addition, states can use their professional development funds to create alternative routes to certification. This could result in developing a cadre of special educators who would already have expertise in a core academic subject area. Survey respondents described several state assistance initiatives that were designed to help special education teachers meet the subject matter competency requirements. For example, 17 survey respondents reported holding workshops for special education teachers on specific academic subjects, and a few states held review sessions to prepare teachers for states' academic content exams. In addition, respondents from 7 states reported providing sample test questions to help teachers prepare for subject matter competency tests. Nineteen survey respondents reported that their states had established partnerships with institutions of higher education to develop and implement strategies to assist special education teachers. For example, Arkansas collaborated with state colleges and universities to develop dual-certification programs for special educators. Officials we interviewed from 2 of 6 states said that they expected their uniform state standards of evaluation would make it easier for their experienced teachers to meet NCLBA subject matter requirements. Specifically, they asserted that these competency standards would allow states and territories to design alternative methods for evaluating teachers' knowledge of the subject matter they teach, other than having a degree or passing subject matter tests in a core academic subject. According to officials in 2 of the 6 states we interviewed, their alternative methods of evaluating teachers' subject matter competency would take into account both a teacher's years of experience and factors such as participation in professional development courses. A few state officials and national education organizations' representatives we spoke to commented that the flexibility to design alternative methods for evaluating teachers' subject matter knowledge provided more options for making subject matter competency assessments of experienced special education teachers. State officials we interviewed and surveyed reported being concerned about how difficult meeting the subject matter competency requirements might be for special educators providing instruction, given that their roles may require them to teach at multiple grade levels or multiple subjects. State officials told us that because of special educator shortages, special education teachers' instructional roles might vary. For example, some special educators might not have to meet subject matter competency requirements when they were hired, but subsequently might have to meet subject matter competency requirements for one or more core academic subjects, depending upon their instructional roles. Education has issued guidance that says that teachers instructing core academic subjects must demonstrate subject matter competency. This guidance applies to all teachers, including special education teachers. However, Education officials told us that the assessment level of the student being taught was a consideration in determining the application of the NCLBA subject matter competency requirement. The inclusion of the assessment levels in determining how to apply the NCLBA requirements may explain some of state officials' uncertainty regarding the application of the requirement to special education teachers. About half of the state officials and national education organizations' representatives we interviewed reported that states needed more assistance on how to implement NCLBA teacher requirements for their special education teachers. For example, some state officials from Oklahoma and South Dakota reported being uncertain how to apply the requirements to the unique situations in which special education teachers provide instruction. Officials in these states reported that they were unclear whether a teacher providing instruction in core academic subjects to high school age students who are performing at the elementary level would need to meet elementary or high school level subject competency requirements (See table 1 for examples of the application of NCLBA requirements to special educators' instructional roles). Officials from half the states we surveyed indicated that they did not believe the law provided enough flexibility for teachers to meet the subject competency requirements. A few state officials we interviewed, particularly those with a large percentage of rural districts, such as those in South Dakota and Arkansas, mentioned this perceived lack of flexibility as a key concern. In particular, these officials indicated that because their special education teachers often teach multiple subjects, they would have to attain multiple degrees or pass several subject matter tests to meet the subject matter competency requirement. Recent Education guidance issued after this survey was concluded gives states more time to help all teachers, including special education teachers who teach core academic subjects, in small, rural school districts, meet the requirements. Under this new guidance, teachers in eligible rural school districts, who are highly qualified in at least one subject, will have 3 years to become highly qualified in the additional subjects they teach. State officials reported concerns about their states' ability to meet the federal timelines for implementing the NCLBA teacher requirements for special education teachers. Officials from 32 states reported that the time frames were not feasible for implementing the requirements. This included 15 states that had established subject matter competency requirements for their special education certification. However, depending on the specific state certification requirements, teachers in these states may still be required to do additional work to meet the subject matter competency requirements of NCLBA. In addition, some state officials reported that their states were not positioned to meet federal deadlines because some institutions of higher education had not aligned their programs with NCLBA requirements. For example, officials in 31 states reported that that current special education teacher preparation programs hindered implementation of NCLBA requirements, primarily because these programs did not emphasize majors or concentrations in core academic subjects. Given these conditions, state officials, in 3 of the 6 states we visited, reported the need for additional assistance in identifying strategies to meet the timelines for meeting requirements. Education also noted that the challenge facing states is developing new mechanisms to make sure that all teachers of core academic subjects are able to demonstrate appropriate subject matter mastery. Some state officials and national education organizations' leaders also cited concerns that special education teachers currently teaching might leave the field rather than take exams or return to school to take the courses needed to demonstrate subject matter competency. Thirty-two survey respondents expressed concern that the potential flight of special education teachers would hinder efforts to implement the requirements. Finally, state education officials reported uncertainty over how to reconcile requirements of the two laws that appear to be inconsistent and thus could impede implementation of NCLBA. These officials reported that they were unsure as to which act--IDEA or NCLBA--should take precedence in establishing personnel requirements for special education teachers. For example, under IDEA, a student's IEP could require that he be taught mathematics at a functional level 3 years below his chronological age, and under IDEA a certified special education teacher would be qualified to provide this instruction. However, under NCLBA, a teacher might not be qualified to instruct this student without first demonstrating subject matter competency in mathematics. According to Education officials, the requirements would depend in part on the assessment level of the students being taught. At the same time, Education officials noted that NCLBA teacher requirements apply to all teachers, including special education teachers. As a result of this uncertainty, some of the state special education officials we interviewed and surveyed said that they had decided to wait for further guidance or assistance before beginning to implement any NCLBA requirements for special education teachers. Education officials reported that they were aware that some states had expressed uncertainty about how to implement NCLBA's teacher requirements. Moreover, Education officials noted that states that wait for further guidance could hinder their special education teachers' ability to meet the subject matter competency requirements by the end of the 2005-2006 school year. Education has provided a range of assistance, such as site visits, Web- based guidance, and financial assistance, to help states implement the highly qualified teacher requirements. However, department coordination related to the implementation of NCLBA's teacher requirements for special education teachers has been limited. OESE has taken the lead in providing this guidance, with support from offices such as the Office of General Counsel and the Office of the Secretary. OSEP played a limited role in these efforts. Further, departmental coordination among Education's offices was limited with respect to OSEP's involvement in other key teacher quality initiatives. Because of this, Education may not have been in a position to be fully apprised of how special education concerns could affect implementation of the NCLBA teacher requirements. However, Education officials told us that they included OSEP by contacting OSEP staff to clarify IDEA substantive issues. Further, Education officials told us they have recently added OSEP to the department's teacher quality policy team. However, Education currently does not have plans to develop written policies and procedures for coordination among its offices. According to Education officials, OESE took the lead in providing assistance to states concerning the NCLBA teacher requirements, with some support provided by offices including OSEP, the Office of the Secretary, the Office of the Undersecretary, the Assistant Secretary of Elementary and Secondary Education, and the Office of General Counsel. One of OESE's key efforts to provide technical assistance to states was the Teacher Assistance Corps initiative, which sent teams of experts to states to provide clarification and guidance on implementing NCLBA teacher requirements. According to Education, these teams have been responsible for sharing promising strategies, providing advice on compliance issues, and assisting state officials in setting and meeting teacher quality goals. The teams have also gathered feedback from states on their concerns about implementing the teacher requirements. Team members have included lead officials from OESE and general counsel, individuals with expertise on issues of concern to particular states, higher education representatives, and education officials from that state. Education officials told us that OSEP staff did not participate in these visits, but two state officials with expertise in special education participated in some visits. OESE also offered states other types of assistance. OESE created a teacher quality newsletter, and the Office of the Under Secretary created and then updated the No Child Left Behind Toolkit for Teachers booklet, to help teachers understand the law in general, the highly qualified teacher requirements, and to explain which teachers need to meet the NCLBA requirements. However, while the tool kit provided detailed information pertaining to general education teachers, it provided limited information for special education teachers. According to OESE officials, the office had also been developing a Web site on promising practices for implementing the NCLBA teacher quality requirements and had plans to feature special education on the site. However, at the time of our interviews, OESE did not have a timeline for when this Web site would be available. Finally, OESE also provided financial assistance to states through Improving Teacher Quality state grants; states could use this financial assistance to help special education teachers meet NCLBA teacher requirements. The enactment of NCLBA significantly changed the expectations for all students and their teachers in the nation's schools and increased the need for OESE and OSEP to coordinate their efforts. NCLBA covers to a greater extent than did previous educational legislation the groups that have historically been the primary responsibility of OSEP--students with disabilities and their teachers. Moreover, NCLBA established qualifications for all teachers, including special education teachers, who provide instruction in core academic subjects such as English, language arts, mathematics, and science. As state education officials began implementing NCLBA subject matter competency requirements, they sought guidance from OSEP, their primary source of information on special education issues. However, OSEP officials told us that they had generally referred these officials to OESE or to the NCLBA Web site. OSEP officials told us that they were waiting until IDEA is reauthorized to develop their own guidance on special education teacher quality requirements. However, during this time NCLBA requirements applied to special educators teaching core academic subjects, and several state officials told us they needed clarification of the guidance on these requirements. Coordination between OSEP and OESE has generally been limited. For example, OSEP commented on the teacher quality policies and initiatives that OESE developed, but generally was not involved in the initial development of these policies. Education officials told us that OSEP was included in the implementation of the teacher requirements, noting that they contacted this office to clarify IDEA substantive issues and that OSEP officials reviewed NCLBA guidance. OSEP did not participate in OESE's Teacher Assistance Corps visits to states and generally was not involved in the analysis of the information that was collected from these visits. OESE officials told us that they did not believe that states would benefit from OSEP's participation in these visits, because the focus of the visits was on meeting the NCLBA requirements, not IDEA requirements. In addition, Education told us that there were no written policies or procedures to assist OESE and OSEP in coordinating the development and implementation of its teacher quality policies for special education teachers. Finally, these officials did not indicate that Education was planning to develop such policies. In March 2003, Education formed a teacher quality policy team under the auspices of the Office of the Under Secretary and included other key offices in Education such as the Office of the Secretary, the Office of General Counsel, and OESE. This team, run by OESE, has focused on NCLBA implementation related to teacher qualifications, and special education teacher issues have been among the topics most frequently discussed. OSEP was not a member of this team until April 2004, when Education officials told us that OSEP had become a part of the team. NCLBA is a complex law with new requirements that hold states, districts, and schools accountable for ensuring that their teachers meet specific qualifications. Further, the law applies to all teachers, including special education teachers, resulting in states and districts having to reassess how they certify and assign special education teachers, as well as provide professional development geared toward helping teachers meet requirements. State officials reported the need for assistance on how to meet NCLBA requirements, with Education also noting the need for states to have more information on strategies to meet requirements. Because half of the states do not have subject matter competency requirements as part of special education certification, these states in particular are challenged with developing strategies to help their teachers meet NCLBA requirements. Without additional assistance on such strategies, special education teachers may not be positioned to meet requirements by the end of 2005- 2006 school year. In addition, several state education officials cited the need for additional clarification on the application of the NCLBA subject matter competency requirement to special education teachers in special circumstances, for example those providing instruction to high school age students who are performing at the elementary level. Without additional assistance from Education to resolve state concerns related to special education teacher qualification issues, some states might not be able to determine how to focus their resources to ensure that their teachers meet the act's requirements. NCLBA covers to a greater extent than did previous elementary and secondary education acts the groups that have historically been the primary responsibility of OSEP--students with disabilities and their teachers. OESE has assumed primary responsibility for implementing NCLBA, including provisions applying to special education teachers. OESE has generally not relied on OSEP staff or information produced by OSEP to develop policy or guidance. Consequently, OESE may not have fully benefited from OSEP's expertise to inform its NCLBA discussions on policies and guidance related to special education teacher issues and requirements. Although Education has recently added OSEP to its NCLBA teacher quality policy team, overall NCLBA coordination efforts among Education offices have not been formalized in writing to ensure appropriate and continuing involvement of these offices. As a result, the department may not fully address states' needs for information and assistance on the implementation of NCLBA requirements for special education teachers. To better address states' concerns about their special education teachers being positioned to meet NCLBA teacher requirements, we recommend that the Secretary of Education provide additional assistance to states on strategies to meet the requirements and clarification of subject matter competency requirements for special education teachers. To continue to improve policy development and technical assistance that Education's offices provide to states on NCLBA requirements, we recommend that Education formalize in writing coordination efforts between OESE and OSEP. For example, such efforts could include defining how OSEP's expertise and staff would be involved in developing NCLBA policies and guidance related to special education teachers and in providing technical assistance to states. We provided a draft of this report to Education for review and comment. In their comments, Education officials noted that they believed their guidance was clear but recognized that states were still struggling to identify strategies to meet requirements. Education officials provided new information in their comments on the draft that indicated improved coordination among those Education offices that are involved in NCLBA policy development and guidance. Consequently, we modified the report on both these topics to reflect Educations' comments. Education officials also provided technical comments that we incorporated into the report where appropriate. Education's comments are reproduced in appendix II. Given the difficulties states are experiencing in implementing the law and the level of uncertainty reported by state officials, we believe that additional assistance needs to be provided by Education to help states implement the requirements. In Education's comments, the department noted that states were having difficulty implementing NCLBA teacher requirements. Education officials highlighted assistance they provided and their willingness to provide additional technical assistance, depending on what states need. We believe Education could help states by identifying strategies to help states meet requirements, especially those states without subject matter competency requirements for their special education teachers. In addition, Education noted in its comments that guidance on how to apply the NCLBA subject matter competency requirement for special education teachers instructing high school age students functioning at elementary school levels was not different from guidance for all teachers. However, Education officials have also said that the assessment level of a student could be considered in determining how to apply the NCLBA teacher requirements. We encourage Education to provide assistance to explain the requirements, particularly as they relate to unusual circumstances involving varying student assessment levels. We have modified the report to reflect Education's comments. We continue to believe that improved coordination is needed. However, we modified the report to reflect Education's recent addition of OSEP to its teacher quality policy team. We acknowledge Education's effort in this regard and encourage the department to formalize its coordination policies by putting them in writing. We believe that formalizing coordination efforts will ensure that the different offices continue to be involved in developing NCLBA policies and guidance related to special education teachers. Copies of this report are being sent to the Secretary of Education, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be made 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 staff have any questions about this report. Other contacts and major contributors are listed in appendix III. In addition to those named above, Emily Leventhal, Benjamin Howe, Ron La Due Lake, Luann Moy, Jean McSween, Bob DeRoy, Bryon Gordon, Behn Kelly, and Amy Buck made key contributions to the report.

During the 2001-2002 school year, more than 400,000 special education teachers provided instructional services to approximately 6 million students with disabilities in U.S. schools. Two federal laws contain teacher qualification requirements that apply to special education teachers: the No Child Left Behind Act (NCLBA) and the Individuals with Disabilities Education Act (IDEA). Given the committee's interest in issues related to highly qualified special education teachers, we are providing information about (1) the state certification requirements, including the use of alternative certification programs, for special education teachers, and how they relate to NCLBA requirements; (2) the factors that facilitate or impede state efforts to ensure that special education teachers meet NCLBA requirements; and (3) how different offices in the Department of Education (Education) assist states in addressing NCLBA teacher requirements. In the 2002-2003 school year, all states, the District of Columbia, and Puerto Rico required that special education teachers have a bachelor's degree and be certified to teach--two of NCLBA's teacher qualification requirements--and half required special education teachers to demonstrate subject matter competency in core academic subjects, which is the third requirement. Specifically, 24 states, the District of Columbia, and Puerto Rico required their teachers to demonstrate some level of subject matter competency by having a degree or passing state tests in the core academic subjects that they wished to teach. Teachers of core academic subjects in the remaining states that did not have such requirements might not be positioned to meet the NCLBA requirements. To meet NCLBA teacher requirements, teachers would need to demonstrate competency in core academic subjects by the end of the 2005-2006 school year. State education officials reported that the availability of funds to support professional development facilitated implementation of the NCLBA teacher requirements, while other factors, such as uncertainty about how to apply the subject matter competency requirement to special education teachers, impeded implementation. State education officials and national education organizations' representatives we interviewed cited the need for more assistance from Education in explaining NCLBA's teacher requirements and identifying implementation strategies. Education has provided a range of assistance, such as site visits, Web-based guidance, and financial assistance, to help states implement the highly qualified teacher requirements. However, department coordination related to the implementation of NCLBA's teacher requirements for special education teachers has been limited.

Pursuant to Homeland Security Presidential Directive 6, the Attorney General established TSC in September 2003 to consolidate the government's approach to terrorism screening and provide for the appropriate and lawful use of terrorist information in screening processes. TSC's consolidated watch list is the U.S. government's master repository for all records of known or appropriately suspected international and domestic terrorists used for watch list-related screening. When an individual makes an airline reservation, arrives at a U.S. port of entry, or applies for a U.S. visa, or is stopped by state or local police within the United States, the frontline screening agency or airline conducts a name-based search of the individual against applicable terrorist watch list records. In general, when the computerized name-matching system of an airline or screening agency generates a "hit" (a potential name match) against a watch list record, the airline or agency is to review each potential match. Any obvious mismatches (negative matches) are to be resolved by the airline or agency, if possible, as discussed in our September 2006 report on terrorist watch list screening. However, clearly positive or exact matches and matches that are inconclusive (difficult to verify) generally are to be referred to TSC to confirm whether the individual is a match to the watch list record. TSC is to refer positive and inconclusive matches to the FBI to provide an opportunity for a counterterrorism response. Deciding what action to take, if any, can involve collaboration among the frontline screening agency, the National Counterterrorism Center or other intelligence community members, and the FBI or other investigative agencies. If necessary, a member of an FBI Joint Terrorism Task Force can respond in person to interview and obtain additional information about the person encountered. In other cases, the FBI will rely on the screening agency and other law enforcement agencies--such as U.S. Immigration and Customs Enforcement--to respond and collect information. Figure 1 presents a general overview of the process used to resolve encounters with individuals on the terrorist watch list. To build upon and provide additional guidance related to Homeland Security Presidential Directive 6, in August 2004, the President signed Homeland Security Presidential Directive 11. Among other things, this directive required the Secretary of Homeland Security--in coordination with the heads of appropriate federal departments and agencies--to submit two reports to the President (through the Assistant to the President for Homeland Security) related to the government's approach to terrorist- related screening. The first report was to outline a strategy to enhance the effectiveness of terrorist-related screening activities by developing comprehensive and coordinated procedures and capabilities. The second report was to provide a prioritized investment and implementation plan for detecting and interdicting suspected terrorists and terrorist activities. Specifically, the plan was to describe the "scope, governance, principles, outcomes, milestones, training objectives, metrics, costs, and schedule of activities" to implement the U.S. government's terrorism-related screening policies. The National Counterterrorism Center and the FBI rely upon standards of reasonableness in determining which individuals are appropriate for inclusion on TSC's consolidated watch list. In accordance with Homeland Security Presidential Directive 6, TSC's watch list is to contain information about individuals "known or appropriately suspected to be or have been engaged in conduct constituting, in preparation for, in aid of, or related to terrorism." In implementing this directive, the National Counterterrorism Center and the FBI strive to ensure that individuals who are reasonably suspected of having possible links to terrorism--in addition to individuals with known links--are nominated for inclusion on the watch list. To determine if the suspicions are reasonable, the National Counterterrorism Center and the FBI are to assess all available information on the individual. According to the National Counterterrorism Center, determining whether to nominate an individual can involve some level of subjectivity. Nonetheless, any individual reasonably suspected of having links to terrorist activities is to be nominated to the list and remain on it until the FBI or the agency that supplied the information supporting the nomination, such as one of the intelligence agencies, determines the person is not a threat and should be removed from the list. Moreover, according to the FBI, individuals who are subjects of ongoing FBI counterterrorism investigations are generally nominated to TSC for inclusion on the watch list, including persons who are being preliminarily investigated to determine if they have links to terrorism. In determining whether to open an investigation, the FBI uses guidelines established by the Attorney General. These guidelines contain specific standards for opening investigations, including formal review and approval processes. According to FBI officials, there must be a "reasonable indication" of involvement in terrorism before opening an investigation. The FBI noted, for example, that it is not sufficient to open an investigation based solely on a neighbor's complaint or an anonymous tip or phone call. If an investigation does not establish a terrorism link, the FBI generally is to close the investigation and request that TSC remove the person from the watch list. Based on these standards, the number of records in TSC's consolidated watch list has increased from about 158,000 records in June 2004 to about 755,000 records as of May 2007 (see fig. 2). It is important to note that the total number of records in TSC's watch list does not represent the total number of individuals on the watch list. Rather, if an individual has one or more known aliases, the watch list will contain multiple records for the same individual. TSC's watch list database is updated daily with new nominations, modifications to existing records, and deletions. Because individuals can be added to the list based on reasonable suspicion, inclusion on the list does not automatically prohibit an individual from, for example, obtaining a visa or entering the United States when the person is identified by a screening agency. Rather, when an individual on the list is encountered, agency officials are to assess the threat the person poses to determine what action to take, if any. From December 2003 (when TSC began operations) through May 2007, screening and law enforcement agencies encountered individuals who were positively matched to watch list records approximately 53,000 times, according TSC data. A breakdown of these encounters shows that the number of matches has increased each year--from 4,876 during the first 10-month period of TSC's operations to 14,938 during fiscal year 2005, to 19,887 during fiscal year 2006. This increase can be attributed partly to the growth in the number of records in the consolidated terrorist watch list and partly to the increase in the number of agencies that use the list for screening purposes. Our analysis of TSC data also indicates that many individuals were encountered multiple times. For example, a truck driver who regularly crossed the U.S.-Canada border or an individual who frequently took international flights could each account for multiple encounters. Further, TSC data show that the highest percentage of encounters involved screening within the United States by a state or local law enforcement agency, U.S. government investigative agency, or other governmental entity. The next highest percentage involved border-related encounters, such as passengers on airline flights inbound from outside the United States or individuals screened at land ports of entry. The lowest percentage of encounters occurred outside of the United States. The watch list has enhanced the U.S. government's counterterrorism efforts by allowing federal, state, and local screening and law enforcement officials to obtain information to help them make better-informed decisions during encounters regarding the level of threat a person poses and the appropriate response to take, if any. The specific outcomes of encounters with individuals on the watch list are based on the government's overall assessment of the intelligence and investigative information that supports the watch list record and any additional information that may be obtained during the encounter. Our analysis of data on the outcomes of encounters revealed that agencies took a range of actions, such as arresting individuals, denying others entry into the United States, and most commonly, releasing the individuals following questioning and information gathering. TSC data show that agencies reported arresting many subjects of watch list records for various reasons, such as the individual having an outstanding arrest warrant or the individual's behavior or actions during the encounter. TSC data also indicated that some of the arrests were based on terrorism grounds. TSC data show that when visa applicants were positively matched to terrorist watch list records, the outcomes included visas denied, visas issued (because the consular officer did not find any statutory basis for inadmissibility), and visa ineligibility waived. Transportation Security Administration data show that when airline passengers were positively matched to the No Fly or Selectee lists, the vast majority of matches were to the Selectee list. Other outcomes included individuals matched to the No Fly list and denied boarding (did not fly) and individuals matched to the No Fly list after the aircraft was in flight. Additional information on individuals on the watch list passing undetected through agency screening is presented later in this statement. U.S. Customs and Border Protection data show that a number of nonimmigrant aliens encountered at U.S. ports of entry were positively matched to terrorist watch list records. For many of the encounters, the agency determined there was sufficient information related to watch list records to preclude admission under terrorism grounds. However, for most of the encounters, the agency determined that there was not sufficient information related to the records to preclude admission. TSC data show that state or local law enforcement officials have encountered individuals who were positively matched to terrorist watch list records thousands of times. Although data on the actual outcomes of these encounters were not available, the vast majority involved watch list records that indicated that the individuals were released, unless there were reasons other than terrorism-related grounds for arresting or detaining the individuals, such as the individual having an outstanding arrest warrant. Also, according to federal officials, encounters with individuals who were positively matched to the watch list assisted government efforts in tracking the respective person's movements or activities and provided the opportunity to collect additional information about the individual. The information collected was shared with agents conducting counterterrorism investigations and with the intelligence community for use in analyzing threats. Such coordinated collection of information for use in investigations and threat analyses is one of the stated policy objectives for the watch list. The principal screening agencies whose missions most frequently and directly involve interactions with travelers do not check against all records in TSC's consolidated watch list because screening against certain records (1) may not be needed to support the respective agency's mission, (2) may not be possible due to the requirements of computer programs used to check individuals against watch list records, or (3) may not be operationally feasible. Rather, each day, TSC exports applicable records from the consolidated watch list to federal government databases that agencies use to screen individuals for mission-related concerns. For example, the database that U.S. Customs and Border Protection uses to check incoming travelers for immigration violations, criminal histories, and other matters contained the highest percentage of watch list records as of May 2007. This is because its mission is to screen all travelers, including U.S. citizens, entering the United States at ports of entry. The database that the Department of State uses to screen applicants for visas contained the second highest percentage of all watch list records. This database does not include records on U.S. citizens and lawful permanent residents because these individuals would not apply for U.S. visas. The FBI database that state and local law enforcement agencies use for screening contained the third highest percentage of watch list records. According to the FBI, the remaining records were not included in this database primarily because they did not contain sufficient identifying information on the individual, which is required to minimize instances of individuals being misidentified as being subjects of watch list records. Further, the No Fly and Selectee lists disseminated by the Transportation Security Administration to airlines for use in prescreening passengers contained the lowest percentage of watch list records. The lists did not contain the remaining records either because they (1) did not meet the nomination criteria for the No Fly or Selectee list or (2) did not contain sufficient identifying information on the individual. According to the Department of Homeland Security, increasing the number of records used to prescreen passengers would expand the number of misidentifications to unjustifiable proportions without a measurable increase in security. While we understand the FBI's and the Department of Homeland Security's concerns about misidentifications, we still believe it is important that federal officials assess the extent to which security risks exist by not screening against certain watch list records and what actions, if any, should be taken in response. Also, Department of Homeland Security component agencies are taking steps to address instances of individuals on the watch list passing undetected through agency screening. For example, U.S. Customs and Border Protection has encountered situations where it identified the subject of a watch list record after the individual had been processed at a port of entry and admitted into the United States. U.S. Customs and Border Protection has created a working group within the agency to study the causes of this vulnerability and has begun to implement corrective actions. U.S. Citizenship and Immigration Services--the agency responsible for screening persons who apply for U.S. citizenship or immigration benefits--has also acknowledged areas that need improvement in the processes used to detect subjects of watch list records. According to agency representatives, each instance of an individual on the watch list getting through agency screening is reviewed to determine the cause, with appropriate follow-up and corrective action taken, if needed. The agency is also working with TSC to enhance screening effectiveness. Further, Transportation Security Administration data show that in the past, a number of individuals who were on the government's No Fly list passed undetected through airlines' prescreening of passengers and flew on international flights bound to or from the United States. The individuals were subsequently identified in-flight by U.S. Customs and Border Protection, which checks passenger names against watch list records to help the agency prepare for the passengers' arrival in the United States. However, the potential onboard security threats posed by the undetected individuals required an immediate counterterrorism response, which in some instances resulted in diverting the aircraft to a new location. According to the Transportation Security Administration, such incidents were subsequently investigated and, if needed, corrective action was taken with the respective air carrier. In addition, U.S. Customs and Border Protection has issued a final rule that should better position the government to identify individuals on the No Fly list before an international flight is airborne. For domestic flights within the United States, there is no second screening opportunity--like the one U.S. Customs and Border Protection conducts for international flights. The government plans to take over from air carriers the function of prescreening passengers prior to departure against watch list records for both international and domestic flights. Also, TSC has ongoing initiatives to help reduce instances of individuals on the watch list passing undetected through agency screening, including efforts to improve computerized name-matching programs. Although the federal government has made progress in using the consolidated watch list for screening purposes, additional opportunities exist for using the list. Internationally, the Department of State has made progress in making bilateral arrangements to share terrorist screening information with certain foreign governments. The department had two such arrangements in place before September 11, 2001. More recently, the department has made four new arrangements and is in negotiations with several other countries. Also, the Department of Homeland Security has made progress in using watch list records to screen employees in some critical infrastructure components of the private sector, including certain individuals who have access to vital areas of nuclear power plants, work in airports, or transport hazardous materials. However, many critical infrastructure components are not using watch list records. The Department of Homeland Security has not, consistent with Homeland Security Presidential Directive 6, finalized guidelines to support private sector screening processes that have a substantial bearing on homeland security. Finalizing such guidelines would help both the private sector and the Department of Homeland Security ensure that private sector entities are using watch list records consistently, appropriately, and effectively to protect their workers, visitors, and key critical assets. Further, federal departments and agencies have not identified all appropriate opportunities for which terrorist-related screening will be applied, in accordance with presidential directives. A primary reason why screening opportunities remain untapped is because the government lacks an up-to-date strategy and implementation plan-- supported by a clearly defined leadership or governance structure--for enhancing the effectiveness of terrorist-related screening, consistent with presidential directives. Without an up-to-date strategy and plan, agencies and organizations that conduct terrorist-related screening activities do not have a foundation for a coordinated approach that is driven by an articulated set of core principles. Furthermore, lacking clearly articulated principles, milestones, and outcome measures, the federal government is not easily able to provide accountability and a basis for monitoring to ensure that (1) the intended goals for, and expected results of, terrorist screening are being achieved and (2) use of the list is consistent with privacy and civil liberties. These plan elements, which were prescribed by presidential directives, are crucial for coordinated and comprehensive use of terrorist-related screening data, as they provide a platform to establish governmentwide priorities for screening, assess progress toward policy goals and intended outcomes, ensure that any needed changes are implemented, and respond to issues that hinder effectiveness. Although all elements of a strategy and implementation plan cited in presidential directives are important to guide realization of the most effective use of watch list data, addressing governance is particularly vital, as achievement of a coordinated and comprehensive approach to terrorist- related screening involves numerous entities within and outside the federal government. However, no clear lines of responsibility and authority have been established to monitor governmentwide screening activities for shared problems and solutions or best practices. Neither does any existing entity clearly have the requisite authority for addressing various governmentwide issues--such as assessing common gaps or vulnerabilities in screening processes and identifying, prioritizing, and implementing new screening opportunities. Thus, it is important that the Assistant to the President for Homeland Security and Counterterrorism address these deficiencies by ensuring that an appropriate governance structure has clear and adequate responsibility and authority to (a) provide monitoring and analysis of watch list screening efforts governmentwide, (b) respond to issues that hinder effectiveness, and (c) assess progress toward intended outcomes. Managed by TSC, the consolidated terrorist watch list represents a major step forward from the pre-September 11 environment of multiple, disconnected, and incomplete watch lists throughout the government. Today, the watch list is an integral component of the U.S. government's counterterrorism efforts. However, our work indicates that there are additional opportunities for reducing potential screening vulnerabilities, expanding use of the watch list, and enhancing management oversight. Thus, we have made several recommendations to the heads of relevant departments and agencies. Our recommendations are intended to help (1) mitigate security vulnerabilities in terrorist watch list screening processes that arise when screening agencies do not use certain watch list records and (2) optimize the use and effectiveness of the watch list as a counterterrorism tool. Such optimization should include development of guidelines to support private sector screening processes that have a substantial bearing on homeland security, as well as development of an up-to-date strategy and implementation plan for using terrorist-related information. Further, to help ensure that governmentwide terrorist-related screening efforts are effectively coordinated, we have also recommended that the Assistant to the President for Homeland Security and Counterterrorism ensure that an appropriate leadership or governance structure has clear lines of responsibility and authority. In commenting on a draft of our report, which provides the basis for my statement at today's hearing, the Department of Homeland Security noted that it agreed with and supported our work and stated that it had already begun to address issues identified in our report's findings. The FBI noted that the database state and local law enforcement agencies use for screening does not contain certain watch list records primarily to minimize instances of individuals being misidentified as subjects of watch list records. Because of this operational concern, the FBI noted that our recommendation to assess the extent of vulnerabilities in current screening processes has been completed and the vulnerability has been determined to be low or nonexistent. In our view, however, recognizing operational concerns does not constitute assessing vulnerabilities. Thus, while we understand the FBI's operational concerns, we maintain it is still important that the FBI assess to what extent security risks are raised by not screening against certain watch list records and what actions, if any, should be taken in response. Also, the FBI noted that TSC's governance board is the appropriate forum for obtaining a commitment from all of the entities involved in the watch-listing process. However, as discussed in our report, TSC's governance board is responsible for providing guidance concerning issues within TSC's mission and authority and would need additional authority to provide effective coordination of terrorist-related screening activities and interagency issues governmentwide. The Homeland Security Council was provided a draft of the report but did not provide comments. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members have at this time. For questions regarding this testimony, please contact me at (202) 512- 8777 or [email protected]. Other key contributors to this statement were Danny R. Burton, Virginia A. Chanley, R. Eric Erdman, Michele C. Fejfar, Jonathon C. Fremont, Kathryn E. Godfrey, Richard B. Hung, Thomas F. Lombardi, Donna L. Miller, and Ronald J. Salo. 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 Federal Bureau of Investigation's (FBI) Terrorist Screening Center (TSC) maintains a consolidated watch list of known or appropriately suspected terrorists and sends records from the list to agencies to support terrorism-related screening. This testimony discusses (1) standards for including individuals on the list, (2) the outcomes of encounters with individuals on the list, (3) potential vulnerabilities in screening processes and efforts to address them, and (4) actions taken to promote effective terrorism-related screening. This statement is based on GAO's report (GAO-08-110). To accomplish the objectives, GAO reviewed documentation obtained from and interviewed officials at TSC, the FBI, the National Counterterrorism Center, the Department of Homeland Security, and other agencies that perform terrorism-related screening. The FBI and the intelligence community use standards of reasonableness to evaluate individuals for nomination to the consolidated terrorist watch list. In general, individuals who are reasonably suspected of having possible links to terrorism--in addition to individuals with known links--are to be nominated. As such, being on the list does not automatically prohibit, for example, the issuance of a visa or entry into the United States. Rather, when an individual on the list is encountered, agency officials are to assess the threat the person poses to determine what action to take, if any. As of May 2007, the consolidated watch list contained approximately 755,000 records. From December 2003 through May 2007, screening and law enforcement agencies encountered individuals who were positively matched to watch list records approximately 53,000 times. Many individuals were matched multiple times. The outcomes of these encounters reflect an array of actions, such as arrests; denials of entry into the United States; and, most often, questioning and release. Within the federal community, there is general agreement that the watch list has helped to combat terrorism by (1) providing screening and law enforcement agencies with information to help them respond appropriately during encounters and (2) helping law enforcement and intelligence agencies track individuals on the watch list and collect information about them for use in conducting investigations and in assessing threats. Regarding potential vulnerabilities, TSC sends records daily from the watch list to screening agencies. However, some records are not sent, partly because screening against them may not be needed to support the respective agency's mission or may not be possible due to the requirements of computer programs used to check individuals against watch list records. Also, some subjects of watch list records have passed undetected through agency screening processes and were not identified, for example, until after they had boarded and flew on an aircraft or were processed at a port of entry and admitted into the United States. TSC and other federal agencies have ongoing initiatives to help reduce these potential vulnerabilities, including efforts to improve computerized name-matching programs and the quality of watch list data. Although the federal government has made progress in promoting effective terrorism-related screening, additional screening opportunities remain untapped--within the federal sector, as well as within critical infrastructure components of the private sector. This situation exists partly because the government lacks an up-to-date strategy and implementation plan for optimizing use of the terrorist watch list. Also lacking are clear lines of authority and responsibility. An up-to-date strategy and implementation plan, supported by a clearly defined leadership or governance structure, would provide a platform to establish governmentwide screening priorities, assess progress toward policy goals and intended outcomes, consider factors related to privacy and civil liberties, ensure that any needed changes are implemented, and respond to issues that hinder effectiveness.

IHS, an agency within the Department of Health and Human Services, is responsible for providing federal health services to an estimated 1.5 million American Indians and Alaska Natives. In fiscal year 1998, IHS received appropriations of about $1.8 billion to provide these services, with about $291 million of this amount for Alaska. To provide care to Alaska's estimated 104,305 Natives, most of whom live in small and isolated villages, a three-tiered health care delivery system of local clinics, regional hospitals, and a comprehensive medical center was developed. (See table 1.) IHS' mission is to provide a comprehensive health services system, while at the same time providing opportunity for maximum tribal involvement in developing and managing programs to meet their needs. The Indian Self-Determination Act gives Alaska Native communities, as well as Indian tribes throughout the United States, the option of replacing IHS as the manager and provider of health care services. To cover the costs of operating such systems on their own, the act authorizes IHS to contract with any of the recognized Alaska Native communities or other tribal organizations, such as regional or village corporations. In Alaska, IHS has established an order of precedence for recognizing various Native entities for purposes of self-determination contracting. In this order of precedence, an individual Native community has priority over an RHO in obtaining contract awards from IHS. If a contract is awarded to an organization that performs services benefiting more than one community, the approval of each community's governing body (a resolution of support) is a prerequisite. Alaska Native communities that contract directly with IHS manage a relatively small share of health care services in Alaska. Thirty-four of Alaska's 227 Native communities (15 percent)--which represents about 10 percent of the total Alaska Native population--have obtained funding in direct contracts from IHS to provide some of the health services they receive. (See table 2.) These 34 communities comprise two main groups--25 communities that decided at some point to separate from their RHO to obtain certain services, and 9 communities, mostly in the Cook Inlet area near Anchorage, that generally have not participated in an RHO. Because some communities have banded together for contracting purposes, the 34 communities are involved in a total of 21 contracts, which account for 6.5 percent of IHS' total contract funding in Alaska under the Indian Self-Determination Act. Of those entities contracting with IHS, the 13 RHOs have the greatest capacity to deliver comprehensive inpatient and outpatient services. The RHOs vary considerably in size. The largest serves more than 20,000 Natives and has a budget of nearly $40 million; the four smallest serve fewer than 2,000 Natives each and have budgets of $2 million to $4 million. (See app. I for details on the 13 RHOs.) Six of the RHOs operate regional hospitals, and all 13 provide community health services to some outlying communities in their areas. Community health services usually include training and placement of community health aides, long-distance physician supervision for the village-based community health aides, itinerant physician and dental coverage, mental health and alcohol abuse programs, and a wide range of other health and social services. Historically, IHS has contracted with RHOs in Alaska because the RHOs were well established when the Indian Self-Determination Act became law in 1975 and because they were able to obtain resolutions of support from the Native communities they represented. However, a Native community has the option of withdrawing its resolution from an RHO and contracting directly with IHS to manage all or part of the health services that previously were provided by the RHO. Communities have pursued this option for a variety of reasons, including the belief that local control will improve the delivery of health services and help them attain self-determination goals. Under the Self-Determination Act, IHS' authority to decline such community contract proposals is very limited. Twenty-five communities have decided to stop obtaining some services through RHOs and to contract directly with IHS. In total, there are 12 contractors that separated from RHOs because some contracts cover more than one community. These contracts are generally for a limited number of services--most often alcohol and mental health services, community health aides, community health representatives, and other community-based services. Ten of the contracts, for example, involve management of village community health aide clinics, often in conjunction with alcohol education, prevention, and counseling activities. The Native populations served by the 12 contracts range in size from fewer than 30 people to nearly 2,000, and contract awards range from about $100,000 to more than $3 million. (See app. II.) Although these communities, through direct contracting, manage some of their own health services, they most often remain part of the RHO network for other services, such as community health aide supervision and training, physician and dentist services, inpatient care, and management of referrals for specialty services obtained from private providers (known as contract health care). One contractor that separated from an RHO--Ketchikan Indian Corporation (KIC)--has assumed the management of a much broader scope of services. KIC is the largest Native community contractor, serving a Native population of nearly 2,000 and with nearly $3.4 million in fiscal year 1998 funding--one quarter of the 6.5 percent share of Alaska self-determination contract funding received by community contractors. KIC manages a comprehensive primary care health center with a permanent staff of physicians, dentists, nurses, and a wide range of ancillary services, such as laboratory, X-ray, and pharmacy. KIC officials told us that the community decided to manage the health center itself because it was dissatisfied that the RHO did not provide information that it had agreed to provide, such as quarterly financial statements; did not attend KIC tribal council meetings; and had planned to replace the existing health center with a new one in the neighboring village of Saxman rather than on KIC property in Ketchikan. Nonetheless, Ketchikan continues to participate in the RHO and use the RHO's hospital in Sitka for some inpatient care. Nine of the communities that contract directly with IHS present a somewhat different picture than the 25 communities that separated from an RHO in that they did not previously obtain the contracted services from an RHO. Most of these communities are located in the Cook Inlet (Anchorage) area, where they have access to the extensive resources of the Alaska Native Medical Center. Eight of these nine contractors serve one small Native community each, with populations ranging from 11 to 392. (See app. III.) The ninth contractor, Kenaitze, is exceptionally large, serving a resident population of more than 1,400 Alaska Natives on the Kenai Peninsula south of Anchorage. Kenaitze has administered a health services contract since 1983; its current contract--which is over $1.1 million--provides for a midlevel practitioner clinic with a dentist, a community health representative, and alcohol and mental health services. In addition to the Kenaitze clinic, two other contractors manage clinics with midlevel practitioners, and two manage community health aide clinics with some additional services. Two of the contracts, which were initiated in 1997, are especially limited: Chickaloon Village, which serves 11 Natives with $46,327 in fiscal year 1998 contract funding, and Knik Tribal Council, which serves 39 Natives with $53,079 in fiscal year 1998 contract funding. The Chickaloon and Knik contracts illustrate the extent to which IHS is bound to support village self-determination decisions. When IHS identified funding to open a new midlevel clinic in the Matanuska-Susitna Valley northeast of Anchorage, three Native organizations in that area submitted proposals to manage the clinic: Southcentral Foundation (an RHO), Chickaloon, and Knik. IHS approved Southcentral's proposal to manage the clinic; in addition, IHS--under rules requiring IHS to approve any severable portion of a self-determination proposal--negotiated with Chickaloon and Knik regarding what services they could provide with their limited per-capita-based shares of the clinic funding. IHS and the villages agreed on transportation for village residents who need services in Anchorage, plus management of contract health care for Knik. Administrative costs are higher under individual community contracts than under contracts with RHOs. Under either contracting arrangement, the Native organization receives the same amount of funding for direct program costs, but IHS has determined that individual communities need more funding for administrative expenses--both to start up the contract and to administer it on an ongoing basis. The higher administrative costs generally reflect lost economies of scale that result from the smaller scope of most individual contracts. Under the Indian Self-Determination Act, an Indian tribe or Alaska Native community that chooses to contract with IHS is entitled to funding for both direct program costs and contract support costs (CSC) to cover administrative functions. In Alaska, these provisions apply both to contracts between IHS and RHOs and to contracts between IHS and individual Native communities. Direct program funding is the amount that IHS would have spent to operate the programs that were transferred to the contractors. CSC funding generally is an additional amount, not normally spent by IHS, that is needed to cover reasonable costs incurred by Native organizations to ensure compliance with the terms of the contracts and prudent management of the programs. Direct program costs are the same regardless of who manages the contracts--communities or RHOs. In contrast, CSC amounts may differ considerably. Determination of CSC needs is based on three cost categories: start-up costs, indirect costs, and direct costs. (See table 3.) The largest cost category is indirect costs, which include most ongoing overhead expenses. For most contracts, indirect costs account for over 80 percent of the recurring CSC funding needs. Our analysis of cost differences between RHO contracts and individual community contracts focused on the first two types of contract support costs--start-up and indirect costs. To provide a consistent comparison, we examined the fiscal year 1998 funding needs of each contractor for these costs as determined by IHS. New and expanded contracts are eligible for start-up CSC funding. If an individual Native community decides to contract separately for services formerly obtained through an RHO, its funding needs for start-up costs represent an increased, one-time cost for the program. IHS records show that the 12 community contracts involving services formerly provided by RHOs received IHS approval for at least $452,000 in start-up CSC needs--ranging from about $22,500 to $140,000 per contract--which were generally based on program size. On average, individual community contractors have considerably higher indirect costs than RHOs would have to manage the same programs. For fiscal year 1998, IHS determined indirect cost needs of slightly more than $3 million for the 12 individual community contracts that separated from RHOs. The IHS official responsible for negotiating these contracts told us that to estimate what the indirect costs would have been if the services provided under the 12 contracts had instead been provided through RHOs, he would use the indirect cost rates in place for the RHOs during fiscal year 1998. Using these rates that he provided, we determined the indirect costs for the RHOs to be about $1.3 million--or less than half of the indirect costs for the community contractors. (See app. IV for a contract-by-contract comparison of indirect cost needs of the Native communities and RHOs.) IHS officials said the main reason individual community contracts had higher indirect costs was that the small size of these contracts resulted in the loss of administrative economies of scale. Because RHOs have an administrative structure in place to support other contracts and services, they can spread the overhead expenses among their programs. Small communities, however, generally have to build the administrative structure for these services alone. We did not compare the indirect costs of the other nine community contracts with those of RHOs because the programs managed by these contracts were not formerly a part of an RHO. However, we found that indirect costs as a proportion of total funding needs that IHS determined for these contracts were similar to those of the 12 community contracts that cover services formerly obtained through an RHO. This would indicate that these contracts also are likely to have higher indirect costs than RHOs. To date, IHS contracting with Native communities rather than RHOs does not appear to have had a significant impact on the level of services available to Alaska Natives, although we did identify a few temporary service disruptions. The small number of these contracts; their generally restricted scope; and in some cases, their recent implementation have likely been key factors in limiting the effects on Native communities or RHOs. However, a shortfall in available CSC funding may jeopardize the continuation of this level of service. Native communities that are not in a financial position to absorb unfunded contract support costs may face the risk of having to divert funds from health services to cover their unfunded contract support needs. We found one instance, in Fort Yukon, where this may already have occurred. When individual Alaska Native communities have contracted directly with IHS to provide some of their own health services, they generally have assumed management responsibility for existing, defined service programs being operated by IHS or an RHO. Because these contracts essentially enable program transfers, the types of services provided do not change initially. In addition, the community contractors generally continue to employ the same staff and use the same facilities. Generally, we did not find that a community's takeover of services from an RHO in itself had a substantial effect on the types of services provided or service utilization. The service disruptions that we did find in some communities, such as in Ketchikan, and in some clinics staffed by community health aides tended to be transitory in nature. In Ketchikan, when KIC took over the contract from the RHO in October 1997, the health center's resources, staff, and patient population were split and two separate facilities were established. KIC's health center initially had a gap in dental services because the RHO retained both dentists when staffing was split. This gap has been partly remedied, and we observed no other gaps in services at the time of our review. However, due to uncertainty surrounding the future of this contract, the staffing situation at both the KIC and RHO clinics was not stable. A review of clinics staffed by community health aides that now are managed by community contractors revealed sharp variations in some communities over past years in the numbers of patient encounters provided. However, these variations did not appear to be related to community contracting because they occurred whether a community or an RHO was managing the services. The variations most likely reflect temporary losses of staff because in small, remote Alaska communities, it takes time and training to replace community health aides. The 1988 and 1994 amendments to the Indian Self-Determination Act clarified that CSC funding should be made available to provide Indian tribes and Alaska Native communities with additional resources to develop the capability and expertise to manage services on their own. The Senate report accompanying the 1994 amendments expressed concern that without this additional support, Indian tribes would be compelled to divert funds from health services to contract support costs. IHS has established two separate pools of CSC funding--one for the recurring CSC needs of ongoing contracts and the other for additional CSC needs of new or expanded contracts. IHS-wide, CSC funding for ongoing contracts has increased from about $100.6 million in fiscal year 1993 to $168.7 million in fiscal year 1998; and since 1994, the Congress has appropriated $7.5 million per year specifically for the CSC needs of new or expanded contracts. However, the demand for CSC funding has greatly exceeded these appropriations. As a result, while IHS has agreed with each contractor on the amount of their CSC funding needs, it has not been able to fully fund those needs. The contractors have the option of delaying or going ahead without full CSC funding, and most of them have chosen to begin implementing their contracts without full funding. Since 1995, IHS has reported a shortfall in CSC funding each year, largely because of the rapid increase in tribal assumption of IHS programs nationwide. For fiscal year 1997, the shortfall totaled $82 million nationwide, over $12 million of it in Alaska. As a mechanism for allocating available CSC funds among contractors, IHS maintains a waiting list for new contractors that have chosen to operate without full CSC funding. Available funding is allocated on a first-come, first-served basis, and a new contractor's waiting time for full CSC funding may be at least several years. For example, contractors that entered into contracts in 1994 are now at the top of the waiting list and expect to be funded in fiscal year 1998, a 3- to 4-year wait. IHS reports that a continued lack of sufficient CSC funds could, by necessity, result in tribes funding administrative functions with moneys that otherwise would have been used to provide direct health care services. This condition could occur if tribes are unable to realize efficiency gains or do not have other resources to help offset their CSC funding shortfalls. This risk is present in Alaska. Fourteen of the 21 direct community contractors were operating with CSC shortfalls in fiscal year 1998, and 7 of these shortfalls represented between 30 to 74 percent of the contract's total recurring CSC funding needs. (See app. V for details on the CSC shortfalls by contractor.) Shortfalls of this magnitude could make it difficult for tribes to continue to maintain the same level of health services. The risk is less for RHOs, which also may have CSC shortfalls but generally are in a better financial position than community contractors to manage these shortfalls because they manage large multimillion-dollar operations that can benefit from economies of scale and have multiple sources of revenue that can generate positive cash flow. The varying effects of substantial CSC shortfalls on communities that contract directly with IHS can be seen in Ketchikan and Fort Yukon--which are served by the two largest direct community contractors. In Ketchikan, the large CSC shortfall of over $500,000 a year has not had a negative impact on overall services to the communities involved because both the community contractor, KIC, and the RHO, Southeast Alaska Regional Health Consortium (SEARHC), were able--at least temporarily--to provide additional resources to make up for the funding gap. Prior to October 1997, SEARHC was managing the Ketchikan Indian health center to serve six Native communities--Ketchikan, Saxman, and four outlying communities on Prince of Wales Island. When the health center contract was split, KIC received 58 percent of the funding to serve Ketchikan Natives and SEARHC retained the remainder to serve Saxman and the other communities. Loss of economies of scale occurred in two ways. First, additional clinic space was leased to operate two separate clinics. Second, additional staff were needed to deliver the same level of services in two facilities. For example, the total number of clinical and administrative staff for the clinic before the split was 59.5 full time equivalents (FTE). After the split, the two clinics had a combined total of 68 FTEs. Most of the increase was for duplicated administrative functions, such as the need to have two clinic directors, two business office directors, and two computer programmers. Both SEARHC and KIC had the additional resources to initially absorb the additional costs. SEARHC is a large RHO that manages many federal and state health programs and services for the benefit of Alaska Natives in Southeast Alaska. At the end of fiscal year 1996, its annual budget was over $50 million and it had over $23 million in net assets. Although the Ketchikan clinic had 2 years remaining on its lease, SEARHC decided to lease a new facility nearby for its own clinic to serve Saxman and the outlying communities, asserting that it was not practical to share the original building with KIC. SEARHC spent almost an additional $1 million of its own resources on this new clinic. With the new clinic and additional staff, clinic waiting times for the Saxman Native community were reduced. KIC assumed management of the original clinic with a contract award of nearly $3.4 million and a CSC shortfall of over $500,000. Although it is too soon to determine the long-term impact of this shortfall, KIC has been able to use its tribal government resources--especially management staff from other programs--to reduce the additional administrative need. A large tribe by Alaska standards, Ketchikan has a well-established tribal government with a staff of more than 70 that administers BIA and other federal and state-funded programs totaling at least $2.5 million in addition to the IHS contract. CSC shortfalls have created significant difficulties for the Council of Athabascan Tribal Governments (CATG) in managing the small Fort Yukon clinic and community health aide services in the Yukon Flats area northeast of Fairbanks. CATG, which is a consortium of eight small Native communities, has been operating its $1.8 million contract with an annual CSC shortfall of about $500,000. This shortfall represents almost 53 percent of CATG's total recurring CSC funding needs. According to its most recent audit report, CATG did not have any additional resources to compensate for a shortfall of this size. The official responsible for CATG operations told us that because CATG did not have resources to cover the CSC funding gap, it had no option but to use some program funds to support administrative functions. There were some indications that CATG's financial strain may have contributed to other operational problems. In 1997, for example, there was considerable turnover in the Fort Yukon clinic's physician assistant staff, resulting in vacancies that were not immediately filled. Although the number of outpatient visits at the clinic did not decline substantially, the Native Village of Fort Yukon was so dissatisfied with CATG's failure to fill the clinic vacancies and with other matters that the village considered asking IHS or the RHO to resume management of the clinic or contracting directly with IHS. In the end, however, no action was taken; and as of April 1998, the Native Village of Fort Yukon remained a member of CATG and was receiving health services through its contract. Through the Indian Self-Determination Act, the Congress has clearly expressed support for Alaska Native communities to exercise their preferences for managing health care resources, such as through an RHO or on their own. Many Native communities view the option to contract directly with IHS as fundamental to their ability to achieve self-determination and self-governance objectives, and about 15 percent of Native communities in Alaska have chosen to do so. However, funds have been available to only partially support the additional administrative costs created by lost economies of scale when Native communities contract directly with IHS. These funding shortfalls appear not to have greatly affected the availability of health services in Alaska at this time, but maintaining the availability of services in the future could pose challenges to some Native community contractors. To the extent that Native communities assume management of a greater portion of their health services in a time of increasing CSC funding shortfalls, the risk for adverse impacts on health services delivery also increases. We provided a draft of this report to IHS officials, who concurred with the report's findings. In addition, they provided some technical comments, which we incorporated as appropriate. Appendix VI contains the full text of IHS' comments. We are sending copies of this report to the Secretary of Health and Human Services, the Director of Indian Health Service, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others upon request. The information contained in this report was developed by Frank Pasquier, Assistant Director; Sophia Ku; and Ellen M. Smith. Please contact me at (202) 512-6543 or Frank Pasquier at (206) 287-4861 if you or your staff have any questions. This appendix presents data to describe the 13 Alaska Native RHOs in terms of the amount of their fiscal year 1998 contract awards, numbers of Alaska Natives and Native communities served in 1998, and types of facilities operated. Six of the RHOs operate regional hospitals, and all 13 use the Alaska Native Medical Center in Anchorage for treatment of serious illnesses and injuries. Outpatient medical care is provided at three types of facilities: (1) health centers staffed with physicians and dentists; (2) midlevel clinics staffed with physician assistants or nurse practitioners; and (3) village-based clinics that rely on community health aides--who usually are village residents with special training--to provide first aid in emergencies, primary care, and preventive health services under telephone supervision by physicians. Includes communities in the Anchorage and Cook Inlet areas that do not participate in Southcentral Foundation. This appendix describes the 12 community contractors that separated from an RHO, listing the facilities operated and some of the services provided under each contract. Some of the services are somewhat unique to Alaska, and they may vary from one contractor to another, but they generally can be considered as follows: Community health aides usually are village residents trained to give first aid in emergencies, examine the ill, report symptoms by telephone to a supervising physician, and carry out recommended treatments, including dispensing prescription drugs. They also provide preventive health services, such as fluoride treatments, and health education. Community health representatives differ from community health aides by focusing more on social and support services than on health care, although there may be overlap in some areas. Community health representatives may provide general health care, including home health care visits to the elderly and new mothers, along with health education and outreach. Midlevel clinics most often are staffed by nurse practitioners and physician assistants. Contract health care programs purchase services for Alaska Natives from private providers when the services are not available from IHS or tribally operated programs. Alcohol, substance abuse, and mental health programs at the village level often are provided by local residents trained as behavioral counselors, supported by regional professionals. Many program elements are intended to prevent alcoholism, especially in youth, including Alcoholics Anonymous meetings, activities to promote sobriety, and home visits. Emergency medical services at the community level generally focus on safety training and injury prevention, such as swimming and bicycle safety and first aid and CPR (cardiopulmonary resuscitation) training. Some programs provide and monitor fire extinguishers and smoke alarms in the homes. Patient transportation programs generally help coordinate patient travel for necessary health services with local and outside health providers. This appendix describes the nine community contractors that did not separate services from an RHO. (See app. II for definitions of the types of services and facilities these contractors operate.) This appendix compares the recurring funding needs of the 12 community contractors that separated from RHOs with the funding needs of the RHOs for managing the same programs. The total funding needs include direct program costs and direct and indirect contract support costs. A comparison of indirect cost needs is also provided since this is the major cost category that can vary depending on who manages the contract. The indirect cost need for each affiliated RHO is estimated by applying the RHO's indirect cost rates to the community contractor's program costs; it represents what the indirect costs would have been if the services provided by the community contractor had instead been managed by the RHO. This appendix details the amount and the magnitude of CSC shortfalls for each of the 21 community contractors. The amount of CSC shortfall is computed by subtracting each contract's CSC funding from its recurring CSC needs. The magnitude of each contractor's CSC shortfall is shown by the percent of its recurring CSC needs that is represented by the shortfall. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a legislative requirement, GAO reviewed the impact of individual Indian Health Service (IHS) contracts, focusing on the: (1) extent to which Alaska Native communities contract directly with IHS to manage their own health care services; and (2) effects these contracts are having on costs and the availability of services. GAO noted that: (1) relatively few Alaska Native communities have contracted directly with IHS, and those that have done so generally contracted for a limited range of health services and thus continue to receive many services through a regional health organization (RHO); (2) fifteen percent of the 227 Alaska Native communities have some form of direct contract with IHS; (3) the dollar amount of these direct contracts represents about 6.5 percent of all IHS contracts in Alaska under the Indian Self-Determination Act; (4) GAO found that communities with their own contracts have higher administrative costs than RHOs; (5) IHS works with each contractor to determine the amount of administrative costs needed to manage the contracts; (6) indirect costs--the major component of the administrative costs--include such expenses as financial and personnel management, utilities and housekeeping, and insurance and legal services; (7) community contracts need about twice the amount of indirect costs that a RHO would need to manage the same programs; (8) when a community chooses the contract directly with IHS for services previously provided by a RHO, it also has a need for one-time start-up costs that increase the administrative cost differences between community contracts and RHOs; (9) determining the effects of individual community contracts on service availability proved difficult because contracts involving a switch from RHOs to local communities are relatively few in number, cover few services, and some have been in effect for a short time; (10) the limited comparisons that can be made show that service levels have not been greatly affected by the switches thus far; (11) however, under current IHS funding limitations, new contractors are receiving only part of their funding needs for administrative costs and may have to wait several years to receive full funding; (12) if communities decide to contract for service programs but do not receive full funding for administrative costs and do not have other resources from which to pay for these costs, they face the risk of having to divert funds from services to cover their unfunded administrative costs; (13) while funding shortfalls have not yet resulted in widespread adverse effects on health services availability in Alaska, the long-term picture raises cause for concern; and (14) in choosing to operate their health services without waiting for sufficient administrative funding, Alaska Native communities may have little option but to accept a potential for reduced services as a trade-off for managing elements of their health care systems.

Mobilization is the process of assembling and organizing personnel and equipment, activating or federalizing units and members of the National Guard and Reserves for active duty, and bringing the armed forces to a state of readiness for war or other national emergency. It is a complex undertaking that requires constant and precise coordination between a number of commands and officials. Mobilization usually begins when the President invokes a mobilization authority and ends with the voluntary or involuntary mobilization of an individual Reserve or National Guard member. Demobilization is the process necessary to release from active duty units and members of the National Guard and Reserve components who were ordered to active duty under various legislative authorities. Mobilization and demobilization times can vary from a matter of hours to months, depending on a number of factors. For example, many air reserve component units are required to be available to mobilize within 72 hours, while Army National Guard brigades may require months of training as part of their mobilizations. Reserve component members' usage of accrued leave can greatly affect demobilization times. Actual demobilization processing typically takes a matter of days once the member arrives back in the United States. However, since members earn 30 days of leave each year, they could have up to 60 days of leave available to them at the end of a 2-year mobilization. DOD has six reserve components: the Army Reserve, the Army National Guard, the Air Force Reserve, the Air National Guard, the Naval Reserve, and the Marine Corps Reserve. Reserve forces can be divided into three major categories: the Ready Reserve, the Standby Reserve, and the Retired Reserve. The Total Reserve had approximately 1.2 million National Guard and Reserve members at the end of fiscal year 2004. However, only the 1.1 million members of the Ready Reserve were subject to involuntary mobilization under the partial mobilization declared by President Bush on September 14, 2001. Within the Ready Reserve, there are three subcategories: the Selected Reserve, the Individual Ready Reserve (IRR), and the Inactive National Guard. Members of all three subcategories are subject to mobilization under a partial mobilization. At the end of fiscal year 2004, DOD had 859,406 Selected Reserve members. The Selected Reserve's members included individual mobilization augmentees--individuals who train regularly, for pay, with active component units--as well as members who participate in regular training as members of National Guard or Reserve units. At the end of fiscal year 2004, DOD had 284,201IRR members. During a partial mobilization, these individuals--who were previously trained during periods of active duty service--can be mobilized to fill requirements. Each year, the services transfer thousands of personnel who have completed the active duty or Selected Reserve portions of their military contracts, but who have not reached the end of their military service obligations, to the IRR. However, IRR members do not participate in any regularly scheduled training, and they are not paid for their membership in the IRR. At the end of fiscal year 2004, the Inactive National Guard had 1,428 Army National Guard members. This subcategory contains individuals who are temporarily unable to participate in regular training but who wish to remain attached to their National Guard unit. Most reservists who were called to active duty for other than normal training after September 11, 2001, were mobilized under one of the three legislative authorities listed in table 1. On September 14, 2001, President Bush declared that a national emergency existed as a result of the attacks on the World Trade Center in New York City, New York, and the Pentagon in Washington, D.C., and he invoked 10 U.S.C. SS 12302, which is commonly referred to as the "partial mobilization authority." On September 20, 2001, DOD issued mobilization guidance that, among a host of other things, directed the services as a matter of policy to specify in initial orders to Ready Reserve members that the period of active duty service under 10 U.S.C. SS 12302 would not exceed 12 months. However, the guidance allowed the service secretaries to extend orders for an additional 12 months or to remobilize reserve component members under the partial mobilization authority as long as an individual member's cumulative service did not exceed 24 months under 10 U.S.C. SS 12302. The guidance further specified that "No member of the Ready Reserve called to involuntary active duty under 10 U.S.C. 12302 in support of the effective conduct of operations in response to the World Trade Center and Pentagon attacks, shall serve on active duty in excess of 24 months under that authority, including travel time to return the member to the residence from which he or she left when called to active duty and use of accrued leave." The guidance also allowed the services to retain members on active duty after they had served 24 or fewer months under 10 U.S.C. SS 12302 with the member's consent if additional orders were authorized under 10 U.S.C. SS 12301(d). Combatant commanders are principally responsible for the preparation and implementation of operation plans that specify the necessary level of mobilization of reserve component forces. The military services are the primary executors of mobilization. At the direction of the Secretary of Defense, the services prepare detailed mobilization plans to support the operation plans and provide forces and logistical support to the combatant commanders. The Assistant Secretary of Defense for Reserve Affairs, who reports to the Under Secretary of Defense for Personnel and Readiness, is to provide policy, programs, and guidance for the mobilization and demobilization of the reserve components. The Chairman of the Joint Chiefs of Staff, after coordination with the Assistant Secretary of Defense for Reserve Affairs, the secretaries of the military departments, and the commanders of the Unified Combatant Commands, is to advise the Secretary of Defense on the need to augment the active forces with members of the reserve components. The Chairman of the Joint Chiefs of Staff also has responsibility for recommending the period of service for units and members of the reserve components ordered to active duty. The service secretaries are to prepare plans for mobilization and demobilization and to periodically review and test the plans to ensure the services' capabilities to mobilize reserve forces and to assimilate them effectively into the active forces. Figure 1 shows reserve component usage on a per capita basis since fiscal year 1989 and demonstrates the dramatic increase in usage that occurred after September 11, 2001. It shows that the ongoing usage-- which includes support for operations Noble Eagle, Enduring Freedom, and Iraqi Freedom--exceeds the usage rates during the 1991 Persian Gulf War in both length and magnitude. While reserve component usage increased significantly after September 11, 2001, an equally important shift occurred at the end of 2002. Following the events of September 11, 2001, the Air Force initially used the partial mobilization authority more than the other services. However, service usage shifted in 2002, and by the end of that year, the Army had more reserve component members mobilized than all the other services combined. Since that time, usage of the Army's reserve component members has continued to dominate DOD's figures. On January 19, 2005, more than 192,000 National Guard and Reserve members were mobilized. About 85 percent of these mobilized personnel were members of the Army National Guard or Army Reserve. Under the current partial mobilization authority, DOD increased not only the numbers of reserve component members that it mobilized, but also the length of the members' mobilizations. The average mobilization for Operations Desert Shield and Desert Storm in 1990-1991 was 156 days. However, on March 31, 2004, the average mobilization for the three ongoing operations had increased to 342 days, and that figure was expected to continue to rise. DOD does not have the strategic framework and associated policies necessary to maximize reserve component force availability for a long-term Global War on Terrorism. The availability of reserve component forces to meet future requirements is greatly influenced by DOD's implementation of the partial mobilization authority and by the department's personnel policies. Furthermore, many of DOD's policies that affect mobilized reserve component personnel were implemented in a piecemeal manner, and were focused on the short-term needs of the services and reserve component members rather than on long-term requirements and predictability. The availability of reserve component forces will continue to play an important role in the success of DOD's missions because requirements that increased significantly after September 11, 2001, are expected to remain high for the foreseeable future. As a result, there are early indicators that DOD may have trouble meeting predictable troop deployment and recruiting goals for some reserve components and occupational specialties. On September 14, 2002, DOD broke with its previous pattern of addressing mobilization requirements with a presidential reserve call-up before moving to a partial mobilization. By 2004 DOD was facing reserve component personnel shortages and considered a change in its implementation of the partial mobilization authority. The manner in which DOD implements the mobilization authorities currently available can result in either an essentially unlimited supply of forces or running out of forces available for deployment, at least in the short term. DOD has used two mobilization authorities to gain involuntary access to its reserve component forces since 1990. In 1990, the President invoked Title 10 U.S.C. Section 673b, allowing DOD to mobilize Selected Reserve members for Operation Desert Shield. The provision was then commonly referred to as the Presidential Selected Reserve Call-up authority and is now called the Presidential Reserve Call-up authority. This authority limits involuntary mobilizations to not more than 200,000 reserve component members at any one time, for not more than 270 days, for any operational mission. On January 18, 1991, the President invoked Title 10 U.S.C. Section 673, commonly referred to as the "partial mobilization authority," thus providing DOD with additional authority to respond to the continued threat posed by Iraq's invasion of Kuwait. The partial mobilization authority limits involuntary mobilizations to not more than 1 million reserve component members at any one time, for not more than 24 consecutive months, during a time of national emergency. During the years between Operation Desert Shield and September 11, 2001, DOD invoked a number of separate mission-specific Presidential Reserve Call- up authorities for operations in Bosnia, Kosovo, Southwest Asia, and Haiti, and the department did not seek a partial mobilization authority for any of these operations. After the events of September 11, 2001, the President immediately invoked the partial mobilization authority without a prior Presidential Reserve Call- up. Since the partial mobilization for the Global War on Terrorism went into effect in 2001, DOD has used both the partial mobilization authority and the Presidential Reserve Call-up authorities to involuntarily mobilize reserve component members for operations in the Balkans. The manner in which DOD implements the partial mobilization authority affects the number of reserve component forces available for deployment. When DOD issued its initial guidance concerning the partial mobilization authority in 2001, it limited mobilization orders to 12 months but allowed the service secretaries to extend the orders for an additional 12 months or remobilize reserve component members, as long as an individual member's cumulative service under the partial mobilization authority did not exceed 24 months. Under this cumulative implementation approach, it is possible for DOD to run out of forces during an extended conflict, such as a long-term Global War on Terrorism. During our 2003-2004 review of mobilization and demobilization issues, DOD was already facing some critical personnel shortages. At that time, to expand its pool of available personnel, DOD was considering a policy shift that would have authorized mobilizations under the partial mobilization authority of up to 24 consecutive months with no limit on cumulative months. Under the considered approach, DOD would have been able to mobilize its forces for less than 24 months, send them home, and then remobilize them, repeating this cycle indefinitely and providing essentially an unlimited flow of forces. After our review was complete, DOD said it would continue its implementation of the partial mobilization authority that limits mobilizations to a cumulative total of 24 months. However, DOD did not clarify how it planned to meet its longer-term requirements for the Global War on Terrorism as successive groups of reserve component personnel reach the 24-month mobilization point. DOD's policies related to reserve component mobilizations were not linked within the context of a strategic framework to meet the force availability goals, and many policies have undergone significant changes. Overall, the policies reflected DOD's past use of the reserve components as a strategic force, rather than DOD's current use of the reserve component as an operational force responding to the increased requirements of the Global War on Terrorism. Faced with some critical personnel shortages, the policies focused on the short-term needs of the services and reserve component members, rather than on long-term requirements and predictability. Lacking a strategic framework containing human capital goals concerning reserve component force availability to guide its policies, OSD and the services made several changes to their policies to increase the availability of the reserve component forces. As a result of these changes, predictability declined for reserve component members. Specifically, reserve component members have faced uncertainties concerning the cohesion of their units, the likelihood of their mobilizations, the length of their service commitments, the length of their overseas rotations, the types of missions they would be asked to perform, and the availability of their equipment. The partial mobilization authority allows DOD to involuntarily mobilize members of the Ready Reserve, including the IRR; but after the President invoked the partial mobilization authority on September 14, 2001, DOD and service policies encouraged the use of volunteers and generally discouraged the involuntary mobilization of IRR members. DOD officials stated that they wanted to focus involuntary mobilizations on the paid, rather than unpaid, members of the reserve components. However, our prior reports documented the lack of predictability that resulted from the volunteer and IRR policies. Our August 2003 mobilization report showed that the policies were disruptive to the integrity of Army units because there had been a steady flow of personnel among units. Personnel were transferred from nonmobilizing units to mobilizing units that were short of personnel, and when the units that had supplied the personnel were later mobilized, they in turn were short of personnel and had to draw personnel from still other units. From September 11, 2001 to May 15, 2004, the Army Reserve mobilized 110,000 reservists, but more than 27,000 of these reservists were transferred and mobilized with units that they did not normally train with. In addition, our November 2004 report on the National Guard noted that between September 11, 2001, and July 2004, the Army National Guard had transferred over 74,000 personnel to deploying units. The reluctance to use the IRR is reflected in the differences in usage rates between Selected Reserve and IRR members. About 42 percent of the personnel who were members of Selected Reserve on November 30, 2004, had been mobilized since September 2001, compared to about 3 percent of the IRR members. Within the Army, use of the IRR had been less than 2 percent. Because the IRR makes up about one-quarter of the Ready Reserve, policies that discourage the use of the IRR will cause members of the Selected Reserve to share greater exposure to the hazards associated with national security and military requirements, and could cause DOD's pool of available reserve component personnel to shrink by more than 276,000 personnel. At various times since September 2001, all of the services have had "stop-loss" policies in effect. These policies are short-term measures that increase the availability of reserve component forces while decreasing predictability for reserve component members who are prevented from leaving the service at the end of their enlistment periods. Stop-loss policies are often implemented to retain personnel in critical or high-use occupational specialties. The only stop-loss policy in effect when we ended our 2004 review of mobilization and demobilization issues was an Army policy that applied to units rather than individuals in critical occupations. Under that policy, Army reserve component personnel were not permitted to leave the service from the time their unit was alerted until 90 days after the date when their unit was demobilized. Because many Army units undergo several months of training after being mobilized but before being deployed overseas for 12 months, stop-loss periods can reach 2 years or more. According to Army officials, a substantial number of reserve component members have been affected by the changing stop-loss policies. As of June 30, 2004, the Army had over 130,000 reserve component members mobilized and thousands more alerted or demobilized less than 90 days. Because they have remaining service obligations, many of these reserve component members would not have been eligible to leave the Army even if stop-loss policies had not been in effect. However, from fiscal year 1993 through fiscal year 2001, Army National Guard annual attrition rates exceeded 16 percent, and Army Reserve rates exceeded 25 percent. Even a 16 percent attrition rate means that 20,800 of the mobilized 130,000 reserve component soldiers would have left their reserve component each year. If attrition rates exceed 16 percent or the thousands of personnel who are alerted or who have been demobilized for less than 90 days are included, the numbers of personnel affected by stop-loss policies would increase even more. When the Army's stop-loss policies are eventually lifted, thousands of servicemembers could retire or leave the service all at once, and the Army's reserve components could be confronted with a huge increase in recruiting requirements. Following DOD's issuance of guidance concerning the length of mobilizations in September 2001, the services initially limited most mobilizations to 12 months, and most services maintained their existing operational rotation policies to provide deployments of a predictable length that are preceded and followed by standard maintenance and training periods. However, the Air Force and the Army later increased the length of their rotations, and the Army increased the length of its mobilizations as well. These increases in the length of mobilizations and rotations increased the availability of reserve component forces, but they decreased predictability for individual reserve component members who were mobilized and deployed under one set of policies but later extended as a result of the policy changes. From September 11, 2001, to March 31, 2004, the Air National Guard mobilized more than 31,000 personnel, and the Air Force Reserve mobilized more than 24,000 personnel. Although most Air Force mobilizations were for 12 months or less, more than 10,000 air reserve component members had their mobilization orders extended to 24 months. Most of these personnel were in security-related occupations. Before September 2001, the Army mobilized its reserve component forces for up to 270 days under the Presidential Reserve Call-up authority, and it deployed these troops overseas for rotations that lasted about 6 months. When it began mobilizing forces under the partial mobilization authority in September 2001, the Army generally mobilized troops for 12 months. However, troops that were headed for duty in the Balkans continued to be mobilized under the Presidential Reserve Call-up authority. The Army's initial deployments to Iraq and Afghanistan were scheduled for 6 months, just like the overseas rotations for the Balkans. Eventually, the Army increased the length of its rotations to Iraq and Afghanistan to 12 months. This increased the availability of reserve component forces, but it decreased predictability for members who were mobilized and deployed during the transition period when the policy changed. When overseas rotations were extended to 12 months, mobilization periods, which must include mobilization and demobilization processing time, training time, and time for the reserve component members to take any leave that they earn, required a corresponding increase in length. DOD has a number of training initiatives under way that will increase the availability of its reserve component forces to meet immediate needs. Servicemembers are receiving limited training--called "cross-training"-- that enables them to perform missions that are outside their area of expertise. In the Army, field artillery and air defense artillery units have been trained to perform some military police duties. Air Force and Navy personnel received additional training and are providing the Army with additional transportation assets. DOD also has plans to permanently convert thousands of positions from low-use career fields to stressed career fields. Because the combatant commander has required Army National Guard units to have modern, capable, and compatible equipment for recent operations, the Army National Guard adapted its units and transferred equipment to deploying units from nondeploying units. However, this has made equipping units for future operations more challenging. National Guard data showed that between September 2002 and June 2004, the Army National Guard had transferred more than 35,000 pieces of equipment to units that were deploying in support of operations in Iraq. The equipment included night vision goggles, machine guns, radios, chemical monitors, and vehicles. As a result, it has become increasingly challenging for the National Guard to ready later deploying units to meet warfighting requirements. While it remains to be seen how the uncertainty resulting from changing mobilization and personnel policies will affect recruiting, retention, and the long-term availability of the reserve components, there are already indications that some portions of the force are being stressed. For example, the Army National Guard achieved only 87 percent of its recruiting goals in both fiscal years 2003 and 2004, and in the first quarter of fiscal year 2005 it achieved only 80 percent of its goal. The Secretary of Defense established a force-planning metric to limit involuntary mobilizations to "reasonable and sustainable rates" and has set the metric for such mobilizations at 1 year out of every 6. However, on the basis of current and projected usage, it appears that DOD may face difficulties achieving its goal within the Army's reserve components in the near term. Since February 2003, the Army has continuously had between 20 and 29 percent of its Selected Reserve members mobilized. To illustrate, even if the Army were to maintain the lower 20 percent mobilization rate for Selected Reserve members, it would need to mobilize one-fifth of its Selected Reserve members each year. DOD is aware that certain portions of the force are used at much higher rates than others, and it plans to address some of the imbalances by converting thousands of positions from lower-demand specialties into higher-demand specialties. However, these conversions will take place over several years, and even when the positions are converted, it may take some time to recruit and train people for the new positions. It is unclear how DOD plans to address its longer-term personnel requirements for the Global War on Terrorism, given its current implementation of the partial mobilization authority. Requirements for reserve component forces increased dramatically after September 11, 2001, and are expected to remain high for the foreseeable future. In the initial months following September 11, 2001, the Air Force used the partial mobilization authority more than the other services, and it reached its peak with almost 38,000 reserve component members mobilized in April 2002. However, by July 2002, Army mobilizations surpassed those of the Air Force, and since December 2002, the Army has had more reserve component members mobilized than all the other services combined. According to OASD/RA data, about 42 percent of DOD's Selected Reserve forces had been mobilized from September 14, 2001, to November 30, 2004. Although many of the members who have been called to active duty under the partial mobilization authority have been demobilized, as of January 19, 2005, more than 192,000 of DOD's reserve component members were still mobilized and serving on active duty, and DOD has projected that for the next 3 to 5 years it will have more than 100,000 reserve component members mobilized, with most of these personnel continuing to come from the Army National Guard or Army Reserve. While Army forces may face the greatest levels of involuntary mobilizations over the next few years, all the reserve components have career fields that have been highly stressed. For example, across the services, 82 percent of enlisted security forces have been called up since September 11, 2001. Our September 2004 report detailed Navy, Marine Corps, and Air Force career fields that have been stressed. In June 2004, DOD noted that about 30,000 reserve members had already been mobilized for 24 months. Under DOD's cumulative approach, these personnel will not be available to meet future requirements under the current partial mobilization. The shrinking pool of available personnel, along with the lack of a strategic plan to clarify goals regarding the reserve component force's availability, will present the department with additional short- and long-term challenges as it tries to fill requirements for mobilized reserve component forces. As the Global War on Terrorism stretches into its fourth year, DOD officials have made it clear that they do not expect the war to end soon. Furthermore, indications exist that certain components and occupational specialties are being stressed, and the long-term impact of this stress on recruiting and retention is unknown. Moreover, although DOD has a number of rebalancing efforts under way, these efforts will take years to implement. Because this war is expected to last a long time and requires far greater reserve component personnel resources than any of the smaller operations of the previous two decades, DOD can no longer afford individual policies that are developed to maximize short-term benefits and must have an integrated set of policies that address both the long-term requirements for reserve component forces and individual reserve component members' needs for predictability. For example, service rotation policies are directly tied to other personnel policies, such as policies concerning the use of the IRR and the extent of cross training. Policies to fully utilize the IRR would increase the pool of available servicemembers and would thus decrease the length of time each member would need to be deployed, based on a static requirement. Policies that encourage the use of cross-training for lesser-utilized units could also increase the pool of available servicemembers and decrease the length of rotations. Until DOD addresses its personnel policies within the context of an overall strategic framework, it will not have clear visibility over the forces that are available to meet future requirements. In addition, it will be unable to provide reserve component members with clear expectations of their military obligations and the increased predictability that DOD has recognized is a key factor in retaining reserve component members who are seeking to successfully balance their military commitments with family and civilian employment obligations. In our previously published reports, we made several recommendations aimed at increasing the long-term availability of reserve component forces. In particular, we recommended that DOD develop a strategic framework that sets human capital goals concerning the availability of its reserve force to meet the longer-term requirements of the Global War on Terrorism, and we recommended that DOD identify policies that should be linked within the context of the strategic framework. DOD generally agreed with our recommendations concerning long-term availability of reserve component forces. For answers to questions about this statement, please contact Derek B. Stewart at (202) 512-5140 or [email protected] or Brenda S. Farrell at (202) 512-3604 or [email protected]. Individuals making key contributions to this statement included Michael J. Ferren, Kenneth E. Patton, and Irene A. Robertson. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Defense (DOD) has six reserve components: the Army Reserve, the Army National Guard, the Air Force Reserve, the Air National Guard, the Naval Reserve, and the Marine Corps Reserve. DOD's use of Reserve and National Guard forces increased dramatically following the events of September 11, 2001, and on January 19, 2005, more than 192,000 National Guard and Reserve component members were mobilized. About 85 percent of these personnel were members of the Army National Guard or the Army Reserve. Furthermore, the availability of reserve component forces will continue to play an important role in the success of DOD's future missions, and DOD has projected that over the next 3 to 5 years, it will continuously have more than 100,000 reserve component members mobilized. Since September, 2001, GAO has issued a number of reports that have dealt with issues related to the increased use of Reserve and National Guard forces. For this hearing, GAO was asked to provide the results of its work on the extent to which DOD has the strategic framework and policies necessary to maximize reserve component force availability for a long-term Global War on Terrorism. DOD does not have a strategic framework with human capital goals concerning the availability of its reserve component forces. The manner in which DOD implements its mobilization authorities affects the number of reserve component members available. The partial mobilization authority limits involuntary mobilizations to not more than 1 million reserve component members at any one time, for not more than 24 consecutive months, during a time of national emergency. Under DOD's current implementation of the authority, members can be involuntarily mobilized more than once, but involuntary mobilizations are limited to a cumulative total of 24 months. Given this implementation, DOD could eventually run out of forces. During GAO's 2004 review, DOD was facing shortages of some reserve component personnel, and officials considered changing their implementation of the partial mobilization authority to expand the pool of available personnel. Under the proposed implementation, DOD could have mobilized personnel for less than 24 consecutive months, sent them home for a period, and remobilized them, repeating this cycle indefinitely and providing an essentially unlimited flow of forces. After GAO's review was done, DOD said it would retain its current implementation that limits mobilizations to a cumulative total of 24 months. However, DOD did not clarify how it planned to meet its longer-term requirements for the Global War on Terrorism as additional forces reach the 24-month mobilization point. By June 2004, 30,000 reserve component members had already been mobilized for 24 months. DOD's policies also affect the availability of reserve component members. Many of the policies that affect reserve component availability were focused on the services' short-term requirements or the needs of individual service members rather than on long-term requirements and predictability. For example, DOD implemented stop-loss policies, which are short-term measures that increase force availability by retaining active or reserve component members on active duty beyond the end of their obligated service. Because DOD's various policies were not developed within the context of an overall strategic framework, they underwent numerous changes as DOD strove to meet current requirements, and they did not work together to meet the department's long-term Global War on Terrorism requirements. These policy changes created uncertainties for reserve component members concerning the likelihood of their mobilization, the length of service commitments and overseas rotations, and the types of missions they will have to perform. The uncertainties may affect future retention and recruiting efforts, and indications show that some parts of the force may already be stressed.

According to USPS data, in fiscal year 2013, USPS delivered mail to a network of more than 150 million delivery points, including 133 million delivery points served by more than 230,000 career carriers that comprised almost half of the career workforce. In addition, USPS employed more than 75,000 non-career carriers who were mostly part- time employees, such as substitute carriers on rural routes. Mail delivery is USPS's largest cost area, comprising 41 percent of total costs in fiscal year 2013. The extent to which USPS uses each mode of delivery and the mode's associated costs play a substantial role in USPS's overall financial condition. USPS uses three basic modes for residential and business mail delivery: Door delivery includes delivery to mail slots in the door as well as mailboxes attached to houses and delivery made to businesses such as delivery to mail slots in the door, mailboxes attached to the business near the door, or locations within office buildings. Door delivery is the most costly because the carrier must walk from door to door, which is often the case on foot routes or park-and-loop routes. Curbline delivery (also referred to as curbside delivery) includes delivery to curbline mailboxes that are commonly used on routes serving residential customers, such as those living in rural and suburban areas. Curbline mailboxes are typically unlocked mail receptacles on a post. USPS regulations require curbline mailboxes to be located at the curb where they can be efficiently, safely, and conveniently served by the carrier from the carrier's vehicle, and so that customers have reasonable and safe access. Curbline delivery is less costly than door delivery, as it takes less time for the carrier to move between curbline mailboxes, particularly when the carrier can load mail into the mailbox directly from the delivery vehicle. Centralized delivery is provided to centrally-located mail receptacles, such as apartment house mailboxes and cluster box units. Both wall mounted and cluster box units can be installed to service both residential and business delivery. Cluster boxes are generally pedestal-mounted units located outdoors with individually locked mail receptacles for each delivery point. Cluster boxes and apartment house mailboxes have become more secure over time, as USPS developed and implemented regulations for higher security standards for manufacturers. The newer Cluster Box Units (CBUs) also include locked receptacles for parcels and outgoing mail, unlike older Neighborhood Delivery and Cluster Box Units (NDCBU). This mode of delivery is also less costly than door delivery as it takes less time to service a cluster box than to walk from door to door, particularly when the carrier can drive between cluster boxes. Figure 1 shows the types of mail receptacles commonly used for each major mode of delivery. According to USPS data, in fiscal year 2013 about 41 percent of existing delivery points received curbline delivery, about 30 percent received centralized, and about 28 percent had other modes, which primarily consist of door delivery. These percentages have changed little over the past 5 years (see fig. 2). From fiscal years 2008 to 2013, the total number of door delivery points declined by about 308,000--including about 287,000 residential door delivery points, and about 21,000 business door delivery points--leaving about 32.2 million residential door delivery points and about 5.6 million business delivery points (see fig. 3). According to a USPS official, these changes mostly reflect redevelopment, such as replacement of older homes that had door delivery with new apartment buildings with centralized delivery, and new business developments such as office parks and strip malls. While the number of door delivery points declined by 1.2 percent from fiscal years 2008 to 2013, the number of curbline and centralized delivery points--the primary modes of delivery--increased by 0.1 percent and 1.1 percent respectively. From fiscal years 2008 to 2013, the number of centralized delivery points increased by 2.8 million, while the number of curbline delivery points increased by 1.9 million. See appendix II for details on the number of delivery points for each mode in fiscal years 2008 through 2013. USPS is required to provide prompt, reliable, and efficient services to patrons in all areas. USPS has the flexibility to revise its regulations to convert delivery points from more costly to less costly modes of delivery, and postal statutory provisions provide that USPS is required to fulfill its mission by operating an efficient delivery network. USPS is specifically required to plan, develop, promote, and provide adequate and efficient postal services at fair and reasonable rates and fees. USPS estimates of delivery mode costs and potential savings from converting to less costly modes have limitations because they rely on cost estimates and data from a 1994 USPS study. USPS increased these 1994 cost estimates for each mode of delivery by 55 percent, based on the total percent change in the Consumer Price Index for All Urban Consumers (CPI-U) from fiscal year 1994 to 2012, which may not have been the same as changes in USPS delivery costs. USPS estimates updated through fiscal year 2012 based on the 1994 data show door delivery costs greatly exceed costs for other modes of delivery. USPS officials stated that although many aspects of postal operations have changed over the past 20 years, the manner in which a carrier delivers mail on the street has changed little. USPS's estimated costs of door delivery were about 160 percent higher than curbline delivery and estimated door delivery costs were more than double that of centralized delivery. Based on the differences in delivery mode costs, USPS estimates that it could realize large savings from large-scale mandatory conversions of both residential and business delivery points from costly door delivery. We determined that these were the only data available and have limitations for estimating delivery costs and potential savings. However, these estimates may not be the best source to inform decisions about conversion approaches, as estimates based on updated data may yield differing results. USPS estimates of delivery mode costs and potential savings from converting to less costly modes have limitations because they rely on cost estimates and data from a 1994 USPS study.on the time postal employees used to prepare and deliver mail for each mode of delivery. These data were then combined with postal wage and benefit cost data, as well as other data (e.g., delivery vehicle costs), to estimate the costs for each mode of delivery. In lieu of current data, USPS increased these 1994 cost estimates for each mode of delivery by The study collected data 55 percent, based on the total percent change in the Consumer Price Index for All Urban Consumers (CPI-U) from fiscal year 1994 to 2012. (See app. III for further details on USPS's methodology for conducting this study.) Because CPI-U is a measure of inflation for the U.S. economy, changes in CPI-U over this period of time may not have been the same as changes in USPS delivery costs, which are affected by factors such as postal wage rates, postal benefit costs, and gasoline prices. In fact, according to USPS officials, key delivery-related costs increased more than inflation from 1994 to 2012. These cost increases may have been offset by gains in postal productivity, such as automated mail sorting by delivery sequence, which reduces the amount of carrier time needed for manual sorting,estimates are generally understated or overstated. so it is unclear whether USPS's Another potential weakness in the estimates is USPS's application of the same 55 percent increase in the 1994 data for the cost of each delivery mode--a method that assumes that the cost for each delivery mode increased at the same rate from fiscal years 1994 to 2012. Available evidence suggests this assumption may not be correct. According to USPS, since the original study was conducted, it has adopted work rules that disproportionately increase the cost of door delivery. For example, to comply with current collective bargaining agreement work rules, city postal carriers must manually collate some advertising mailing before loading it into satchels to carry on foot routes and park-and-loop routes, This work rule does which are largely door delivery, according to USPS. not apply to motorized routes, such as curbline routes where carriers load mailboxes from the delivery vehicle. In addition, to the extent that some modes of delivery are more labor intensive than others, the actual increase in USPS wage and benefit costs from fiscal years 1994 to 2012 may have affected the costs of some delivery modes more than others. The work rule specifies that city letter carriers on foot routes and park-and-loop routes will not be required to carry more than three bundles of mail pursuant to USPS's collective bargaining agreement with the National Association of Letter Carriers, which represents city carriers. Government auditing standards state that managers are responsible for providing reliable, useful, and timely information for transparency and accountability of programs and their operations. Legislators, oversight bodies, and the public need to know whether or not government services are provided effectively, efficiently, and economically. This standard is particularly relevant because pending postal reform legislation in the House and Senate would mandate the conversion of some delivery points from door delivery to centralized or curbline delivery. Furthermore, the administration's budget for fiscal year 2015 also proposes "allowing the Postal Service to begin shifting to centralized and curbside delivery where appropriate." Internal controls for federal agencies state that financial information is needed to support operating decisions, monitor performance, and allocate resources. Without such information on costs of modes and on potential savings through delivery conversions, USPS and lawmakers may not have an accurate understanding of the impact of delivery mode changes on which to base their decisions. USPS officials told us that its estimates of delivery mode costs and potential savings "have validity" despite the use of the inflation adjustment in lieu of updated data. USPS officials stated that although many aspects of postal operations have changed over the past 20 years, the manner in which a carrier delivers mail on the street has changed little. However, USPS officials also acknowledge the weakness of USPS's delivery mode data. USPS estimates the cost of a new delivery study using ongoing operational data at $75,000 to $100,000, and the cost of a more extensive study collecting new data at $250,000 to $750,000. Mail delivery represents the largest cost area relative to USPS's annual expenses of approximately $72 billion, and updating the 1994 study would be relatively low cost compared to those expenses. Without a current delivery cost study, USPS may be less able to determine accurate cost savings from various delivery mode conversion scenarios. USPS estimates updated through fiscal year 2012 based on the 1994 data show door delivery costs greatly exceed costs for other modes of delivery. Estimated costs of door delivery were about 160 percent higher than curbline delivery and estimated door delivery costs were more than double that of centralized delivery. Specifically, USPS estimated that its delivery costs in fiscal year 2012 ranged from about $380 annually for the average door delivery point to about $240 for curbline delivery and about $170 for centralized delivery such as cluster boxes and apartment house mailboxes (see fig. 4). Based on the differences in delivery mode costs, USPS provided us with estimates showing that it could realize large savings from large-scale mandatory conversions of both residential and business delivery points from costly door delivery even as it continues to add new delivery points every year. For example, there were about 770,000 new delivery points added in fiscal year 2013, an increase of about half of 1 percent from fiscal year 2012 levels. Specifically, USPS estimates that potential ongoing annual savings exceeding $2 billion could be achieved by mandatory conversion of 12.2 million door delivery points over the next decade to a mix of centralized and curbline boxes (see fig. 5). This level of conversion is about one-third of the 38 million door delivery points and would still provide future opportunities to realize savings from additional conversions. About 85 percent of these conversions would be residential and 15 percent would be business delivery points. Based on USPS's schedule for these conversions, the potential savings would be realized in the first full fiscal year after full implementation--fiscal year 2024--and every following fiscal year. USPS also estimated proportionately smaller savings from less extensive mandatory conversions (see fig. 5). We determined that these were the only data available and have limitations for estimating delivery costs and potential savings. However, these estimates may not be the best source to inform decisions about conversion approaches, as estimates based on updated data may yield differing results. According to USPS officials, its estimates are based on what they could reasonably accomplish with a deliberate pace of mandatory conversions that would be feasible for postal operations and customers. USPS officials told us that this pace--converting up to 1.5 million delivery points annually--would enable them to realign delivery routes to achieve ongoing savings from modes of delivery that are less labor intensive. Based on this pace, USPS officials said they could achieve sufficient savings to recoup costs to buy and install cluster boxes within the same year. To understand how USPS estimates it could realize these savings, it is important to understand how the changes would reduce USPS's workload and how this would translate into lower USPS costs. Conversion of delivery points from door to curbline and centralized delivery would reduce the time required to organize and deliver the mail. Motorized routes with centralized and curbline delivery require less of a carrier's time than walking from door to door. Reducing carrier workload through mandatory conversions could enable USPS to reorganize delivery into smaller numbers of routes, with each route including a larger number of delivery points. The resulting decrease in the number of routes could help reduce the number of carriers needed to fulfill delivery needs. USPS has historically reduced its workforce through attrition and has no-layoff provisions in its collective bargaining agreements with its four major postal unions. In this regard, large numbers of career carriers are expected to retire in the coming years. In addition to realigning delivery routes, our prior work has found that USPS can use established work methods for accomplishing delivery to a given geographic area with fewer carriers. reducing overtime as well as the number of hours worked by carriers with flexible schedules. In this regard, most door delivery is made to city delivery routes served by city carriers. The average hourly wage and benefit costs of all city carriers, including career and non-career employees, exceeds $41 per hour, according to USPS data. For example, USPS often divides up an unstaffed route among multiple carriers who each cover a part of this route in addition to their regular route--a work method that is used to augment the work of some carriers with less than 8 hours of workload on their route. See GAO-09-696. According to USPS officials, conversions from door delivery would also decrease the time and costs associated with organizing mail for delivery. For example, the organization of mail for delivery would take less time as it would no longer involve strapping bundles of mail to help keep it organized for carriers. The officials also said that, in cases in which delivery mode conversion enabled a foot route to convert to a motorized route, mail would no longer be prepositioned along those routes. Additionally, USPS could avoid manual handling of some advertising mail for routes converted to motorized delivery. In April 2012, USPS updated its policy regarding assigning delivery modes to new addresses. USPS revised its Postal Operations Manual--a --to regulation of the USPS pursuant to the Code of Federal Regulationsspecify that USPS determines the mode of delivery for new addresses. According to USPS officials, USPS used to provide for customer preferences as a factor in deciding on the mode of delivery. The revised Postal Operations Manual states that new business addresses must receive centralized delivery unless USPS approves an exception, and the modes approved for new residential delivery are curbline delivery, centralized delivery, and sidewalk delivery, unless an exception is granted or the new address area is a continuation of an existing block. The manual continues to provide that customers can request changes to their mode of delivery on a hardship basis, which USPS considers "where service by existing methods would impose an extreme physical hardship on an individual customer."USPS to implement delivery mode conversions on a mandatory basis. Instead USPS is required to obtain customer signatures to document that a delivery mode conversion is made on a voluntary basis before the delivery mode is changed. Finally, the manual does not authorize In 2013, USPS implemented voluntary conversion for businesses as part of its Delivering Results, Innovation, Value and Efficiency (DRIVE) initiative. In this effort, USPS provides conversion goals to its field officials who then identify specific businesses as candidates for conversion from door delivery to centralized delivery. USPS field officials told us that strip malls and high-rise office buildings receiving door delivery are good candidates for conversion because these delivery routes are labor intensive and the facilities could have suitable space to install a centralized mail receptacle. For example, in Chicago, USPS converted a high-rise office building, with mail delivered individually to all 50 tenant suites and twice a day mail pick-up, to centralized delivery and pickup. However, the DRIVE program has not converted as many businesses from door delivery as originally expected, and large savings are not likely due to the low number of conversions that have occurred. According to a USPS official, USPS set an overall goal for the total number of conversions for each fiscal year starting with fiscal year 2013. For the first year, USPS set a nationwide goal of voluntary conversions of 279,718 of the approximately 5.6 million business door delivery points to centralized delivery. USPS achieved 43,333 such conversions, about 15 percent of its goal--or about 0.8 percent--of the about 5.6 million business door delivery points. USPS officials explained that based on the fiscal year 2013 results, they set a lower goal of 34,652 voluntary business conversions for fiscal year 2014. They reported 11,488 conversions in the first quarter--about 33 percent of their goal. This initiative is solely focused on business conversions, and USPS has not set any goals for converting residential door delivery points to different modes of delivery. USPS did achieve some voluntary residential conversions in fiscal year 2013. USPS reported 36,302 out of about 32.2 million residential door delivery points--or about 0.1 percent--were converted to centralized delivery. As stated above, USPS's potential savings estimates show that achieving large savings would require large-scale door delivery conversions. However, according to USPS officials, USPS has been reluctant to mandate conversions. Under the voluntary conversion process, customers on a route may choose to maintain door delivery, or a high number of customers may request and receive hardship exemptions for elderly persons or those with special needs, which would allow them to keep door delivery service, thus reducing the number of conversions and lowering potential savings. Furthermore, field officials we spoke with said that voluntary conversions are time consuming and labor intensive due to the amount of direct outreach and follow-up required, and a short-term cost increase may result from undertaking these efforts to generate long- term savings. Large-scale mandatory conversions have the potential to achieve large savings, but USPS faces impediments, such as customer inconvenience and safety and security concerns. USPS officials and several mailing industry stakeholders we spoke with told us that many postal customers are resistant to service changes, especially changes that might inconvenience them. USPS officials told us that some of the concerns could be addressed though hardship exceptions to continue door delivery. Stakeholders also said that service changes would particularly affect city letter carriers, by reducing the total number of carrier work hours and associated routes.concerns could diminish as they become accustomed to the new service. However, USPS officials stated some customer Among the impediments to increased use of less costly modes were concerns raised about personal safety and mail security. Several mailing industry stakeholders we met with identified the placement of CBUs in convenient, well lit and secure areas as a means to ensure customer safety when accessing mail, especially in higher crime areas. USPS officials said they take placement of centralized delivery locations into consideration, as both carriers and customers are affected when a CBU is placed in an improper or unsafe location. For example, in Chicago, USPS officials said they converted existing door delivery in some areas of the city to centralized delivery to address the personal safety concerns of residents and mail carriers generated from increased crime rates in those areas of the city. Some stakeholders also noted mail security issues, such as the potential for increases in theft of mail from people picking up their mail or break-ins to centralized mail receptacles. Others indicated that there are opportunities to increase mail security by converting the mode of delivery from unlocked mailboxes, like those affixed near doors or many curbline mail boxes, to CBUs with locked receptacles for mail and parcels. USPS officials told us that the new model CBUs are more secure than the old model NDCBUs, which are considered legacy equipment. The materials used to construct CBUs combined with design changes have improved the security of mail delivered to them. Although USPS engineering officials told us they test the security of each type of cluster box and provide some guidance on door and curbline mail receptacles, no data are available on the relative security of each receptacle type once they are put in place and in use. Data are collected on mail theft and convictions for mail theft and other mail security violations, but these data do not generally specify the type of mail receptacle involved in a mail theft or related incident. We met with officials of the U.S. Postal Inspection Service, which collects complaint data on lost or stolen mail, and they told us that while there are fields on the online form for mail receptacle type, these fields usually are not completed by the mail customer reporting the theft. Customers can also call a USPS help line or go to a post office in-person to report mail loss or theft, and often in those cases the mail receptacle data are not collected. U.S. Postal Inspection Service officials said that for their investigative purposes, the complaint does not need to include the receptacle type in order to pursue cases of lost or stolen mail. See appendix IV for available data on convictions for mail theft and other mail security violations. Finally, according to USPS officials, there are places, such as densely populated urban areas, where it is difficult to find suitable locations for CBUs. This could make converting existing door delivery to centralized or curbline boxes that meet both customer needs and USPS requirements difficult. Field officials we spoke with in Washington, D.C., and Los Angeles, California, noted this concern. For example, a field official in Washington, D.C. noted that with extensive street parking and limited common space, it can be very difficult to find a suitable location for CBU units. A USPS official noted that if public space was not available for a CBU on a delivery route, gaining access rights to install one requires working with local governments and can be cumbersome. He said that easements or other property access rights vary across localities and regions and some neighborhoods would not have sufficient or convenient space available for installation of CBUs. However, as shown in fig. 1, CBUs and other centralized delivery methods have a range of types and sizes that could be used to accommodate the available footprint and placement options. USPS cost estimates for each mode of delivery and potential savings from converting door delivery points to other delivery modes are based on a 20-year-old study and are of questionable accuracy. Although USPS extrapolated fiscal year 1994 delivery mode costs to fiscal year 2012 by applying inflationary increases to the cost of each delivery mode, it is unclear whether this extrapolation reflects the actual change in postal costs, such as changes in carrier wage and benefits, which increased faster than inflation over this period. Because USPS productivity also increased, the accuracy of USPS's fiscal year 2012 cost estimates is unknown. USPS officials acknowledge the weakness of USPS's delivery mode data. We believe that accurate data are needed for Congress, USPS, and other stakeholders to understand the cost-saving potential for delivery mode conversions as compared with other savings options to improve USPS's financial viability. This is particularly relevant because pending postal reform legislation would mandate the conversion of some delivery points from costly door delivery to other modes. USPS's estimates of the cost of a new delivery study using ongoing operational data at $75,000 to $100,000, or a more extensive study at $250,000 to $750,000 do not seem cost prohibitive given USPS's annual expenses of about $72 billion. Thus, we conclude that the benefits of obtaining current, reliable data on delivery mode costs would make the cost of doing so a worthwhile investment. To improve information needed for USPS and congressional decision making as well as transparency for all stakeholders, we recommend that the Postmaster General and USPS's executive leaders collect and analyze updated data on delivery mode costs and the potential savings from converting delivery points to less costly modes of delivery and establish a time frame for publicly reporting the results. We provided a draft of this report to USPS for review and comment. USPS provided comments, which are reprinted in appendix V. USPS concurred with our recommendation and agreed that steps should be taken to improve the accuracy and reliability of delivery mode cost estimates and potential savings from converting delivery points to less costly modes of delivery. Further, USPS plans to initiate efforts to determine how to most efficiently capture cost data, create a project plan, and determine a timeline to produce results. If you or your staff have any questions about this report, please contact me at 202-512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff making key contributions to this report are listed in appendix VI. To discuss the costs and potential savings associated with converting to less costly delivery modes, we obtained available U.S. Postal Service (USPS) data on the cost of each delivery mode from fiscal years 1994 through 2012, the most recent year for which data are available. We obtained USPS documentation on the assumptions and methodology used in developing these cost data. This documentation included a USPS report of the 1994 USPS study that measured the costs of each mode of delivery and the USPS methodology for increasing these costs by inflation to estimate delivery mode costs from fiscal years 1995 through 2012. We requested that USPS officials generate estimates, similar to those they created for Congress and USPS internal use, of the potential savings from increasing its reliance on less costly modes of delivery. We reviewed documentation of the assumptions, methodology, calculations, and underlying data for these estimates. We had extensive discussions with USPS officials regarding delivery mode cost and savings data, and obtained detailed written responses to follow-up questions regarding their reliability. We identified concerns with the quality of available USPS delivery mode cost and savings data. We interviewed USPS officials about the methodology used to develop the estimates and determined that these were the only data available and found the data to have limitations for estimating delivery costs and potential savings, which we discuss in the report. Further, we reviewed whether there were any opportunities to improve the quality of these data. USPS officials provided detailed written responses that identified such opportunities, including the scope, methodology, and estimated costs of a new USPS study to measure delivery mode costs, and USPS's views on the merits of such a study. To discuss USPS's actions to convert delivery modes to less costly modes and any impediments to conversion, we reviewed pertinent USPS documentation, such as information on the Delivering Results, Innovation, Value and Efficiency (DRIVE) initiative, and interviewed USPS delivery operations officials and field officials, on USPS's efforts to promote voluntary conversion of some business addresses to less costly modes of delivery. We also obtained written responses from USPS officials and interviewed them on policies, regulations, and procedures that govern decisions when adding new delivery points and converting existing delivery points to a different mode of delivery. These interviews included USPS headquarters officials in the Washington, D.C., area and USPS field officials in Washington, D.C.; Chicago, IL; Seattle, WA; Los Angeles, CA; and Dallas and Coppell, TX. We selected these field locations to reflect different population densities and climates, near GAO headquarters and field offices, and geographically dispersed in five of the seven USPS areas.use of less costly delivery modes, we obtained USPS data on conversions of delivery points to less costly modes of delivery for fiscal year 2013 and the first quarter of fiscal year 2014, the only periods for which national data were available. We also obtained and reviewed USPS data on the number of delivery points for each mode of delivery for fiscal years 2008 through 2013. We obtained written responses regarding the reliability of these data, analyzed their consistency with other USPS data, and determined that they were sufficiently reliable for the purposes of this report. To identify any impediments to delivery mode conversions, we obtained written USPS responses, including some made in recent public proceedings, and interviewed USPS headquarters and field officials. In addition, we interviewed postal stakeholders, including postal unions representing city and rural letter carriers. We also interviewed 11 organizations representing different groups that use the mail in their business including Alliance of Nonprofit Mailers, American Catalog Mailers Association, Association for Magazine Media, Association of Postal Commerce, Direct Marketing Association, Greeting Card Association, Major Mailers Association, National Newspaper Association, Newspaper Association of America, Parcel Shippers Association, and Saturation Mailers Coalition. We also met with U.S. Postal Inspection Service officials to obtain information on mail security issues and discussed mail and identity theft generally, including complaints made to the Inspection Service in these areas. We obtained data on convictions for offenses related to mail theft maintained by the U.S. Postal Inspection Service and the USPS Office of Inspector General, obtained written and oral responses regarding data reliability, and determined the data were sufficiently reliable for the purposes of this report. Cluster boxes include Cluster Box Units and Neighborhood Delivery and Cluster Box Units. Other centralized delivery includes delivery to centralized locations such as apartment house mailboxes. Door delivery/other includes door delivery to mail slots, mailboxes near the door, and locations within office buildings, as well as other locations, such as along sidewalks. Most door delivery/other points receive door delivery, according to USPS officials. All other delivery points include various types of Post Office Boxes, delivery points where a university or other entity then provides final delivery to the recipient, and delivery points where the recipient picks up mail in bulk quantities such as remittance mail. Cluster boxes include Cluster Box Units and Neighborhood Delivery and Cluster Box Units. Other centralized delivery includes delivery to centralized locations such as apartment house mailboxes. Door delivery/other includes door delivery to mail slots, mailboxes near the door, and locations within office buildings, as well as other locations, such as along sidewalks. Most door delivery/other points receive door delivery, according to USPS officials. All other delivery points include various types of Post Office Boxes, delivery points where a university or other entity then provides final delivery to the recipient, and delivery points where the recipient picks up mail in bulk quantities such as remittance mail. USPS estimates of delivery mode costs rely on a 1994 study of delivery mode costs, which is the most recent study that USPS has conducted in this area. USPS continues to rely on this study to estimate the potential for savings through the option of converting addresses to less costly modes of delivery. According to a USPS report on the 1994 study, USPS employees and retired postal managers served as data collectors who, through direct observation, recorded the actual time to deliver mail for each mode of delivery from July 5, 1994 to September 9, 1994 on 735 USPS also estimated the time randomly selected city delivery routes.required for carriers to organize their mail for each mode of delivery. The cost of delivery was computed by factoring in the compensation costs associated with delivery times, delivery vehicle costs, as well as the costs to purchase, install, and maintain cluster boxes. USPS subsequently applied an inflation adjustment to the 1994 data to increase the cost for each delivery mode according to the annual change in the Consumer Price Index for All Urban Consumers (CPI-U), which produced cost estimates for fiscal years 1995 through 2012 (see fig. 5 in report). This inflation adjustment increased all delivery mode costs by the same percentage. (18 U.S.C. SS 1705). According to the USPS Office of Inspector General, where federal prosecution is declined and state or local prosecution is sought, charges can include variations of larceny/theft, embezzlement, and misuse of public position/public trust based on the jurisdiction. In addition to the individuals named above, Amelia Shachoy, Assistant Director; Derrick Collins; Geoffrey Hamilton; Kenneth John; Joshua Ormond; Amy Rosewarne; Kelly Rubin; and Betsey Ward-Jenks made key contributions to this report.

USPS is expected to provide prompt, reliable and efficient nationwide service while remaining self-supporting, but it is facing serious fiscal challenges with insufficient revenues to cover its expenses. Mail delivery is USPS's largest cost area, totaling about $30 billion annually. Although USPS lacks authority to make certain changes that could reduce costs, it does have the authority to convert from more expensive to less expensive delivery modes. GAO was asked to examine potential cost savings and issues related to delivery conversion. This report discusses: (1) the estimated costs of each delivery mode and potential savings associated with converting to less costly modes and (2) USPS actions to convert to less costly delivery modes and any impediments to conversions. GAO obtained and analyzed USPS estimates from fiscal years 1994 through 2012 on delivery mode costs as well as potential savings from conversions to less costly modes and determined that the estimates have limitations, which we discuss in the report. GAO also interviewed officials from USPS and mailing industry stakeholders. The U.S. Postal Service (USPS) estimates of delivery mode costs and potential savings from converting to less costly modes show that door-to-door delivery is much more costly than delivery to a curbside or centralized mailbox and that USPS could achieve large savings by mandating large-scale conversions from door delivery to other modes. For fiscal year 2012, USPS estimated average annual costs of about $380 per delivery point for door delivery, compared with about $240 for delivery to the curb, and about $170 for delivery to a central location. USPS also estimated potential ongoing savings of over $2 billion annually from mandating conversion of about one-third of door deliveries to other modes. However, USPS's estimates of these specific costs and savings have limitations, in part because they rely on data from a 1994 USPS study. In lieu of current data, USPS adjusted the 1994 data according to increases in the Consumer Price Index--an adjustment that may not have been the same as changes in USPS delivery costs, which are affected by factors such as increases in postal wage rates, postal benefit costs, and gasoline prices. USPS officials estimate a new study could be conducted to replace the 1994 study for a total of about $100,000 to $750,000, depending on the extent of the study. Without current information on costs of delivery modes and on potential savings through delivery conversions, USPS and lawmakers may not have an accurate understanding of the impact of delivery mode changes on which to base their decisions. USPS has taken some actions to shift door deliveries to less costly delivery modes on a voluntary basis, but it faces stakeholder resistance and other impediments to mandatory conversions. USPS revised its regulations in April 2012 specifying that USPS determines the mode of delivery for new addresses and that new addresses must receive less costly modes, such as centralized delivery, unless USPS approves an exception. Additionally, USPS implemented voluntary business conversions in fiscal year 2013. USPS reported that 43,333 out of about 5.6 million business door delivery points--or about 0.8 percent--were voluntarily converted in fiscal year 2013. USPS has set a modest goal of about 35,000 additional voluntary business conversion goals for fiscal year 2014. USPS also converted about 36,302 out of about 32.2 million residential door delivery points--or about 0.1 percent--to centralized delivery on a voluntary basis in fiscal year 2013. Through the voluntary conversion process, customers on a route may choose to maintain door delivery, reducing the number of conversions and lowering potential savings. Large-scale mandatory conversions have the potential to achieve large savings. However, USPS is reluctant to mandate conversions. There is some evidence that USPS would face resistance from customers, USPS employees, and mailing industry stakeholders if it were to implement mandatory conversion of delivery to less costly modes. Stakeholder concerns include personal safety, mail security, and difficulty finding suitable urban locations for boxes to deliver mail to a curbside or centralized location. GAO recommends that USPS collect updated data on delivery mode costs and the potential savings of converting to less costly modes of delivery and establish a time frame for publicly reporting the results. USPS agreed with the recommendation.

FAA currently employs almost 20,000 employees to operate and manage the nation's air traffic control system. Most of these employees (about 15,250) are air traffic control specialists, or controllers, who are responsible for controlling the takeoff, landing, and ground movement of planes and are assigned to field facilities. (NATCA represents these controllers.) In addition, about 4,500 managers, supervisors, and staff specialists within FAA's Air Traffic Services work to oversee and administer the air traffic control program. (About 3,900 of these 4,500 managers, supervisors, and specialists work in the various field facilities around the country and the other 600 provide management, direction, and oversight, as well as overall support, of the air traffic control system at headquarters and regional locations.) For this report, we focused our analysis on these two groups in FAA's occupational job series 2152, which we refer to as controllers and managers, respectively. In 1994, Congress directed the Secretary of Transportation to undertake a study of management, regulatory, and legislative reforms that would enable FAA to provide better air traffic control services. FAA's resulting 1995 report to Congress stated that existing federal personnel rules and procedures limited FAA's ability to attract and retain qualified staff at key facilities or to reassign employees in response to changing needs. The report also stated that exemption from federal personnel regulations would provide FAA with the flexibility to hire, reward, and relocate employees to better manage the air traffic control system. On November 15, 1995, Congress directed the FAA Administrator to develop and implement a new personnel management system to provide greater flexibility in the hiring, training, compensation, and location of personnel. The 1996 Department of Transportation Appropriations Act exempted FAA from most provisions of title 5 of the United States Code and other federal personnel laws. On April 1, 1996, FAA introduced a set of new personnel policies and procedures that included, among other things, personnel reforms for locating its workforce more effectively. Controllers and managers may make PCS moves for promotions,downgrades, or lateral transfers. To be eligible for promotion within the controller or manager ranks or from controller to manager, individuals may be required to make a PCS move. For example, promotion for a controller may require making a PCS move to a higher-level facility (i.e., one with higher levels of operational complexity). Promotion for a manager may require gaining greater experience with more complex and diverse air traffic operations. This may involve a PCS move to a regional office or FAA headquarters for policy and management experience. To be eligible for promotion from controller to manager, an individual may have to move to a lower-level facility where supervisory positions are available, to a regional office, or to FAA headquarters. Downgrades and lateral transfers are generally made for personal reasons but may also benefit the government. Under title 5 rules, federal agencies may elect to pay for the expenses of transportation of immediate family and of household goods and personal effects to and from the assignment location for a PCS move when it is in the interest of the federal government. According to FAA Air Traffic Services and Human Resources officials, FAA historically interpreted title 5 rules as a requirement to fully reimburse all PCS moves, since FAA considered all such moves to be in the interest of the government. As part of its personnel reform, FAA delegated the authority to determine eligibility for and the amount of PCS benefits to each line of business and provided three PCS funding options: (1) full PCS reimbursement, (2) fixed relocation payments, and (3) unfunded moves. If the move is determined to be in the interest of the government, FAA will fully reimburse the individual for costs associated with the move. According to FAA, the average agencywide PCS cost for fully reimbursed PCS moves in fiscal year 2001 was about $54,000 (based on a sample of 100 fully funded PCS moves in that fiscal year.) Under its personnel reform, FAA may offer a fixed relocation payment if it determines that the agency will derive some benefit from a move, even though the move is not in the interest of the government. For example, Air Traffic Services may offer a fixed relocation payment as a recruitment tool, when necessary, to attract enough qualified candidates for a position. If a move is not in the interest of the government and FAA does not determine that it will derive some benefit from the move, there is no basis for offering PCS funding. However, as a result of FAA's personnel reforms, employees may choose to make unfunded moves at their own expense for personal reasons, to gain experience needed for professional advancement, or for promotion. Before 1996, when FAA's policy did not allow unfunded moves, many vacancies went unfilled for lack of PCS funds, according to FAA's Personnel Reform Executive Committee Task Force Report. The intent of the change in policy was to (1) improve employee morale by allowing willing employees to relocate and (2) allow FAA to relocate more employees without increasing the PCS budget. In February 2000, FAA signed a memorandum of understanding with NATCA that allowed FAA to offer controllers unfunded PCS moves to higher-level facilities. These moves to higher-level facilities are considered promotions because controllers' pay increases with the level of the facility. FAA's policies on eligibility for PCS reimbursement, created as a result of FAA's 1996 personnel reform and implemented for air traffic controllers in the agency's February 2000 memorandum of understanding with NATCA, do not differentiate between air traffic controllers and managers. However, the amount of the fixed relocation payment that Air Traffic Services may offer controllers and managers for PCS moves does differ. The February 2000 memorandum of understanding established a fixed relocation payment of $27,000 for controllers as a result of negotiations between FAA management and NATCA. This amount is set for all fixed relocation payments provided to controllers. Conversely, the amounts of fixed relocation payments for air traffic control managers are determined on a case-by-case basis up to a maximum of $25,000. The average PCS fixed relocation payment for managers' moves between field offices during fiscal years 1999 through 2001 (based on FAA estimates) was about $19,500. Air traffic controllers were less likely than air traffic managers to receive funding for their moving expenses when moving between facilities. According to Air Traffic Services data, controllers and managers made 1,466 and 173 PCS moves, respectively, between field facilities from fiscal year 1999 through fiscal year 2001; these moves comprise 78 percent of all 2,107 Air Traffic PCS moves. About half of those moves (864) were for promotions. As shown in figure 1, 84 percent of controllers' PCS moves between field facilities for promotions (651 of 774) were unfunded during fiscal years 1999 through 2001, while 62 percent of managers' PCS moves for promotions (56 of 90) were unfunded. Similarly, controllers were less likely than managers to receive funding for lateral moves. From fiscal year 1999 through fiscal year 2001, controllers and managers made 291 PCS moves for lateral assignment between field facilities. As shown in figure 2, 94 percent of controllers' lateral moves (236 of 250) were unfunded, compared with 66 percent of managers' lateral moves (27 of 41). Data were not available on the type of funding alternatives used for other PCS moves (from headquarters to the field, for example, and from regional offices to headquarters). However, data on whether any type of funding was provided for these other moves indicated that 91 percent of those by controllers were unfunded during fiscal years 1999 through 2001 (250 of 275), compared with 53 percent of those by managers (102 of 193). According to the February 2000 memorandum of understanding between FAA and NATCA, 65 percent of PCS funding is to be allocated to controllers and 35 percent to the rest of air traffic staff. Thus, while they account for 77 percent of the combined workforce, controllers get a smaller proportion--65 percent--of air traffic PCS funding. FAA officials said that this resulted in a higher percentage of managers who received funding for PCS moves. Although managers were more likely than controllers to receive funding for PCS moves for promotion in the field, they were less likely to make PCS moves between field locations for promotions. From fiscal year 1999 through fiscal year 2001, about 2 percent of the total population of managers (4,490) made promotional moves between field facilities, compared with about 5 percent of the controller workforce (15,248). Lateral and downgrade moves between field facilities during the same period accounted for less than 3 percent of managers' and controllers' respective workforces. For other PCS moves (between headquarters, regional offices, and field facilities), managers (4 percent) were more likely to make moves than controllers (2 percent). Although FAA officials said that PCS costs have decreased and FAA's ability to quickly fill vacant controller positions has improved since the new PCS policies took effect, they did not have the data to determine to what extent the annual decreases or improvement in the agency's ability to fill vacancies in field facilities are attributable to the new PCS policies implemented in 1998. For example, from fiscal year 1997, Air Traffic Services' PCS costs decreased from $31.8 million to $17.5 million in fiscal year 1998 (see fig. 3). FAA has attributed these decreases to reductions in its budget rather than to the new PCS policies providing fixed relocation payments for PCS moves and allowing staff to pay for their own moves. However, officials noted that they lacked data to support this determination. FAA officials also said that the new PCS policies have improved their ability to fill controller vacancies in field facilities, but again, they lacked data to support their views. Officials from FAA's Office of Human Resources said they had agencywide plans to begin collecting information on the time to fill positions and survey new recruits on, among other things, the reasons they applied for the position into which they were hired. This information should help FAA determine the impacts of its PCS policies. FAA also lacks data to respond to questions raised by the FAA Conference Managers Association about the potential impacts of FAA's new PCS policies. In the Association's view, the change from the determination that a promotional opportunity is in the best interest of the government (under title 5 rules) to a determination based on general criteria by each of the lines of business that only some promotional opportunities are in the best interest of the government (under rules revised as a part of personnel reform) made the decision-making process too subjective. In March 2002,Association representatives expressed concern about the potential for unintended effects of the change in FAA's PCS policy including a reduction in the number of qualified applicants that could weaken FAA's leadership and a reduction in the diversity of potential applicant pools that could result in discrimination in filling positions. The Association also said that a disparate provision of PCS benefits due to funding concerns could have a negative impact on morale. According to the managers association, some qualified managers may be reluctant to bid on opportunities for promotion because of the cost of partially or fully funding their own PCS moves. (As was shown in fig. 1, almost two-thirds of these moves for managers are unfunded.) The Association was concerned that, because not all qualified potential applicants may apply for promotions, less qualified managers may bid on and be selected for promotion opportunities because they are willing to make the financial commitment to pay for some or all of the costs associated with a PCS move. The Association believes this outcome could weaken the quality of FAA's leadership. Another Association concern is that selecting officials may be unable to determine whether the pool of candidates who bid on unfunded PCS or fixed-funded PCS positions is representative of FAA managers. Specifically, the Association has suggested that this pool of candidates may not be as diverse as the pool of candidates who would bid on a position with a fully reimbursed PCS move. As a result, the Association believes the new PCS policies may inadvertently lead to discrimination. Finally, Association officials expressed concern that FAA's implementation of the variable PCS policy would be affected by fluctuations in FAA's budget. In their view, the effect of using PCS funding to create an incentive for filling hard-to-staff positions (as is done under the new policies) rather than to fully reimburse all PCS moves (as was done under title 5 rules) was to reduce the funding for PCS moves. With less PCS funding available, the officials said managers' decisions to fund PCS moves could be more sensitive to current funding issues than to operational staffing needs. As a result, the Association said comparable positions could be filled in different budget years at the same location using different levels of PCS benefits. Thus, two managers could receive disparate PCS benefits for essentially the same type of move. The Association acknowledged that there were no data that showed these unintended effects had occurred. Likewise, without information such as the qualifications of employees and managers who applied for promotions before and after the change in policies, the qualifications of those who did not apply, and the funding for comparable positions over time, we could not determine whether the potential unintended effects identified by the Association had occurred. Air Traffic Services officials said they were still reviewing the concerns and planned to comment in the near future. We provided a copy of the draft report to Department of Transportation and FAA officials who agreed with the contents of the report and provided a technical clarification regarding our description of the allocation of PCS funding under the 2000 Memorandum of Agreement between FAA and NATCA. They did not provide written comments on the report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 10 days from the report date. At that time, we will send copies of this report to interested congressional committees and to the Honorable Norman Y. Mineta, Secretary of Transportation; the Honorable Marion Blakely, Administrator, FAA; and the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report or would like to discuss it further, I can be reached at (202) 512-2834. Key contributors to this report are acknowledged in appendix II. We obtained and analyzed data on trends in funding for permanent change of station (PCS) moves in the Federal Aviation Administration's (FAA's) Air Traffic Services line of business (the FAA line of business for air traffic controllers and air traffic managers) since fiscal year 1996 and analyzed data on the type of funding (fully funded, fixed payments, or unfunded) and purpose (promotion, lateral transfer, or downgrade) of controllers' and managers' PCS moves between field offices from 1999 through 2001, the only years for which these data were available. The PCS moves between field offices account for about 80 percent of all Air Traffic PCS moves. The only information available for other moves (for example, between headquarters and field offices or between regional offices and headquarters) was the total number of moves and whether they were funded or unfunded. To assess the reliability of the data, we (1) discussed the data collection methods with responsible agency staff and (2) reviewed the information for reasonableness. We did not independently verify these data. In addition to the individual named above, Elizabeth Eisenstadt, Michele Fejfar, David Hooper, Chris Keisling, and E. Jerry Seigler made key contributions to this report.

In fiscal year 2001, the Federal Aviation Administration (FAA) spent more than $15 million to move air traffic controllers and their managers to new permanent duty locations. FAA classifies the funds that it spends for these moves as permanent change of station (PCS) benefits. In 1998, as part of a broader effort to reform its personnel policies, FAA changed its policies on PCS benefits. Instead of fully reimbursing the costs of all PCS moves and prohibiting unfunded PCS moves, as it once did, FAA now determines the amount of PCS benefits to be offered on a position-by-position basis and allows employees and managers to move at their own expense. Under its new polices, FAA can fully reimburse the costs of a move if it determines that he move is in the interest of the government, or it can offer partial fixed relocation benefits if it determines that the agency will derive some benefit from the move. FAA's policies on eligibility for PCS benefits are the same for air traffic controllers and their managers, but the amounts of the benefits vary. According to these policies, eligibility depends on a determining official's decision about how critical a position is and/or whether FAA will benefit from the move. Air traffic controllers have been less likely than air traffic managers to be offered PCS benefits when they move between facilities. Between fiscal year 1999 and 2001, Air Traffic Services funded 16 percent of moves involving a promotion and 6 percent of lateral moves between field facilities for controllers, compared with 38 percent of promotional moves and 34 percent of lateral moves for managers. According to FAA officials, PCS costs have decreased and FAA's ability to quickly fill vacant controller positions has improved since the new PCS policies took effect.

In 1968, in recognition of the increasing amount of flood damage, the lack of readily available insurance for property owners, and the cost to the taxpayer for flood-related disaster relief, the Congress enacted the National Flood Insurance Act (P.L. 90-448) that created the National Flood Insurance Program. Since its inception, the program has sought to minimize flood-related property losses by making flood insurance available on reasonable terms and encouraging its purchase by people who need flood insurance protection--particularly those living in flood- prone areas known as special flood hazard areas. The program identifies flood-prone areas in the country, makes flood insurance available to property owners in communities that participate in the program, and encourages floodplain management efforts to mitigate flood hazards. The program has paid about $12 billion in insurance claims, primarily from policyholder premiums that otherwise would, to some extent, have increased taxpayer-funded disaster relief. Under the program, flood insurance rate maps (FIRM) have been prepared to identify special flood hazard areas--also known as 100-year floodplains--that have a 1-percent or greater chance of experiencing flooding in any given year. For a community to participate in the program, any structures built within a special flood hazard area after the FIRM was completed must be built according to the program's building standards that are aimed at minimizing flood losses. A key component of the program's building standards that must be followed by participating communities is a requirement that the lowest floor of the structure be elevated to or above the base flood level--the highest elevation at which there is a 1-percent chance of flooding in a given year. The administration has estimated that the program's standards for new construction are saving about $1 billion annually in flood damage avoided. When the program was created, the purchase of flood insurance was voluntary. To increase the impact of the program, however, the Congress amended the original law in 1973 and again in 1994 to require the purchase of flood insurance in certain circumstances. Flood insurance was required for structures in special flood hazard areas of communities participating in the program if (1) any federal loans or grants were used to acquire or build the structures or (2) the structures are secured by mortgage loans made by lending institutions that are regulated by the federal government. Owners of properties with no mortgages or properties with mortgages held by unregulated lenders were not, and still are not, required to purchase flood insurance, even if the properties are in special flood hazard areas. The National Flood Insurance Reform Act of 1994 that amended the program also reinforced the objective of using insurance as the preferred mechanism for disaster assistance. The act expanded the role of federal agency lenders and regulators in enforcing the mandatory flood insurance purchase requirements. It prohibited further flood disaster assistance for any property where flood insurance was not maintained even though it was mandated as a condition for receiving prior disaster assistance. Regarding the prohibition on further flood disaster assistance, the act prohibits borrowers who have received certain disaster assistance, and then failed to obtain flood insurance coverage, from receiving future disaster aid. FEMA's Federal Insurance and Mitigation Administration has been responsible for managing the flood insurance program. However, the Homeland Security Act of 2002 transferred this responsibility to the Department of Homeland Security (DHS). As part of the largest reorganization of the federal government in over 50 years, the legislation combined about 170,000 federal employees, 22 agencies, and various missions--some that have not traditionally been considered security related--into the new department. FEMA's responsibilities, including the flood insurance program, were placed in their entirety into DHS, effective March 1, 2003. Responsibility for the flood insurance program now resides in DHS's Emergency Preparedness and Response Directorate. Historically, federal government programs, including the National Flood Insurance Program, report income and expenditures on a cash basis-- income is recorded when received and expenditures are recorded when paid. Over the years, the annual reporting of the program's premium revenues and its claims losses and expenses has shown wide fluctuations in cash-based operating net income or losses. For example, for fiscal year 2002, the program had a net income of $755 million, but in the previous year it had a net loss of $518 million. For the life of the program, the program has shown a net loss of $531 million. The program has, on numerous occasions, borrowed from the U.S. Treasury to fund claims losses. This "cash-based" budgeting, although useful for many government programs, may present misleading financial information on the flood insurance program. In 1997 and again in 1998, we reported that cash- based budgeting has shortcomings for federal insurance programs. Specifically, its focus on single period cash flows can obscure the program's cost to the government and thus may (1) distort the information presented to policymakers, (2) skew the recognition of the program's economic impact, and (3) cause fluctuations in the deficit unrelated to long-term fiscal balance. The focus on annual cash flows--the amounts of funds into and out of a program during a fiscal year--may not reflect the government's cost because the time between the extension of the insurance, the receipt of premiums, the occurrence of an insured event, and the payment of claims may extend over several fiscal years. For the flood insurance program, cash-based budgeting may not provide the information necessary to signal emerging problems, make adequate cost comparisons, or control costs. For example, under its current practices, the program provides subsidized policies without explicitly recognizing the potential cost to the government. Under current policy, the Congress has authorized subsidies to be provided to a significant portion of the total policies in force, without providing annual appropriations to cover the potential cost of these subsidies. The program, as designed, does not charge a premium sufficient to cover its multiyear risk exposure. As a result, not only is the program actuarially unsound, but also the size of the shortfall is unknown. This is a concern that the administration has recognized and identified as a financial challenge to the flood insurance program. The use of accrual-based budgeting for the flood insurance program has the potential to overcome a number of the deficiencies in cash-based budgeting. Accrual-based budgeting (1) recognizes transactions or events when they occur, regardless of cash flows; (2) matches revenues and expenses whenever it is reasonable and practicable to do so; (3) recognizes the cost for future insurance claim payments when the insurance is extended; and (4) provides a mechanism for establishing reserves to pay those costs. In short, because of the time lag between the extension of an insurance commitment, the collection of premiums, and the payment of claims, measuring the financial condition of the flood insurance program by comparing annual premium income and losses creates a budgetary distortion. That distortion, together with the misinformation it conveys, could be reduced or eliminated by accrual- based budgeting. In our 1997 report, we pointed out that developing accrual-based budgets would be challenging, requiring the development of models to generate reasonably reliable cost estimates of the risks assumed by federal insurance programs. Nevertheless, the potential benefits to the flood insurance program, as well as other federal insurance programs, warrant the effort to develop these risk-assumed cost estimates. We suggested that the Congress consider encouraging the development and subsequent reporting of annual risk-assumed cost estimates for all federal insurance programs. At this time, the flood insurance program is still using cash- based budgeting for reporting its financial performance. We continue to believe that the development of accrual-based budgets for the flood insurance program would be a valuable step in developing a more comprehensive approach for reporting on the operations and real costs of this program. The National Flood Insurance Program has raised financial concerns because, over the years, it has lost money and at times has had to borrow funds from the U.S. Treasury. Two reasons--policy subsidies and payments for repetitive losses--have been consistently identified in our past work and by FEMA to explain financial challenges in the National Flood Insurance Program. First, the flood insurance program has sustained losses, and is not actuarially sound, largely because many policies in the program are subsidized. The Congress authorized the program to make subsidized flood insurance rates available to owners of structures built before a community's FIRM was prepared. For a single- family pre-FIRM property, subsidized rates are available for the first $35,000 of coverage, although any insurance coverage above that amount must be purchased at actuarial rates. These pre-FIRM structures are generally more likely to sustain flood damage than later structures because they were not built according to the program's building standards. The average annual premium for a subsidized policy is $637, representing about 35-40 percent of the true risk premium for these properties. According to flood insurance program officials, about 29 percent of the 4.4 million policies in force are currently subsidized. Although this percentage of subsidized policies is substantially lower than it was in the past, it still results in a significant reduction in revenues to the program. Program officials estimate that the total premium income from subsidized policyholders is currently about $500 million per year less than it would be if these rates had been actuarially based and participation remained the same. Originally, funds to support subsidized premiums were appropriated for the flood insurance program; however, since the mid-1980s no funds have been appropriated, and the losses resulting from subsidized policies must be borne by the program. As we reported in July 2001, increasing the premiums charged to subsidized policyholders to improve the program's financial health could have an adverse impact. Elimination of the subsidy on pre-FIRM structures would cause rates on these properties to rise, on average, to more than twice the current premium rates. Program officials estimate that elimination of the subsidy would result in an annual average premium of about $1,300 for pre-FIRM structures. This would likely cause some pre- FIRM property owners to cancel their flood insurance. Cancellation of policies on these structures--which are more likely to suffer flood loss-- would in turn increase the likelihood of the federal government having to pay increased costs for flood-related disaster assistance to these properties. The effect on the total federal disaster assistance costs of phasing out subsidized rates would depend on the number of policyholders who would cancel their policies and the extent to which future flood disasters affecting those properties occurred. Thus, it is difficult to estimate whether the increased costs of federal disaster relief programs would be less than, or more than, the cost of the program's current subsidy. In addition to revenue lost because of subsidized policies, significant costs to the program result from repetitive loss properties. According to FEMA, about 38 percent of all claims historically, and about $200 million annually, represent repetitive losses--properties having two or more losses greater than $1,000 within a 10-year period. About 45,000 buildings currently insured under the program have been flooded on more than one occasion and have received flood insurance claims payments of $1,000 or more for each loss. Over the years, the total cost of these multiple-loss properties to the program has been about $3.8 billion. Although repetitive loss properties represent about one-third of the historical claims, these properties make up a small percentage of all program policies. A 1998 study by the National Wildlife Federation noted that repetitive loss properties represented only 2 percent of all properties insured by the program, but they tended to have damage claims that exceeded the value of the insured structure and most were concentrated in special flood hazard areas. For example, nearly 1 out of every 10 repetitive loss homes has had cumulative flood loss claims that exceeded the value of the house. Furthermore, over half of all nationwide repetitive loss property insurance payments had been made in Louisiana and Texas. About 15 states accounted for 90 percent of the total payments made for repetitive loss properties. Not only does the National Flood Insurance Program face challenges with its financial condition, but also in achieving one of the purposes for which it was created--to make flood insurance the mechanism for property owners to cover flood losses. Participation rates--the percentage of structures in special flood hazard areas that are insured--provide a measure to indicate the degree to which the owners of properties vulnerable to flooding are protected from financial loss through insurance, the financial risk to the government from flood-related disaster assistance is decreasing, and the program is obtaining high levels of premium income. The rate of participation in the program, however, may be low. In its fiscal year 2004 budget request, the administration noted that less than half of the eligible properties in flood areas participate in the program, a participation rate that was significantly lower than the nearly 90 percent participation rate for wind and hurricane insurance in at-risk areas. No comprehensive data are available to measure nationwide participation rates. However, various studies have identified instances where low levels of participation existed. For example: A 1999 DeKalb County, Georgia, participation study determined that of over 17,000 structures in the special flood hazard areas, about 3,100--18 percent--had flood insurance. A 1999 FEMA post-disaster study of 11 counties in Vermont found that 16 percent of homes sampled in the special flood hazard areas had flood insurance. A 1999 study by the Strategic Advocacy Group of two counties in Kentucky that had experienced flood disasters found that flood insurance was in force for 52 percent of homes mortgaged since 1994 and was in force for 30 percent of homes mortgaged before 1994. An August 2000 FEMA Inspector General study that noted that statistics from North Carolina showed that of about 150,000 structures in special flood hazard areas, 33 percent were covered by flood insurance. FEMA estimates that one-half to two-thirds of those structures in special flood hazard areas do not have flood insurance coverage, because the uninsured owners either are not aware that homeowner's insurance does not cover flood damage or do not perceive the serious flood risk to which they are exposed. One area of flood insurance participation that should not be of concern, yet is, are those properties for which the purchase of flood insurance is mandatory. Flood insurance is required for properties located in flood- prone areas of participating communities for the life of mortgage loans made or held by federally regulated lending institutions, guaranteed by federal agencies, or purchased by government-sponsored enterprises. No definitive data exist on the number of mortgages meeting these criteria; however, according to program officials, most mortgages made in the country meet the criteria, and for those in a special flood hazard area, the property owners would have to purchase and maintain flood insurance over the life of the loan. The level of noncompliance with this mandatory purchase requirement is unknown. As we reported in June 2002, federal banking regulators and government-sponsored enterprises believe noncompliance is very low on the basis of their bank examinations and compliance reviews. Conversely, flood insurance program officials view noncompliance with the mandatory purchase requirement to be significant, based on aggregate statistics and site-specific studies that indicate that noncompliance is occurring. Neither side, however, is able to substantiate its differing claim with statistically sound data that provide a nationwide perspective on noncompliance. Data we collected and analyzed for our June 2002 report help address some concerns with the issue of noncompliance, but the issue remains unresolved. We analyzed available flood insurance, mortgage purchase, and flood zone data to determine whether noncompliance was a concern at the time of loan origination. Our analysis of mortgage and insurance data for 471 highly flood-prone areas in 17 states showed that, for most areas, more new insurance policies were purchased than mortgages issued, which suggests noncompliance was not a problem in those areas at the time of loan origination. However, data to determine whether insurance is retained over the life of loans are unavailable, and this issue remains unresolved. There are indications that some level of noncompliance exists. For example, an August 2000 study by FEMA's Office of Inspector General examined noncompliance for 4,195 residences in coastal areas of 10 states and found that 416--10 percent--were required to have flood insurance but did not. Flood insurance program officials continue to be concerned with required insurance policy retention and are working with federal banking regulatory organizations and government-sponsored enterprises to identify actions that can be taken to better ensure borrowers are required to renew flood insurance policies annually. The administration and the Congress have recognized the challenges facing the flood insurance program and have proposed actions to improve it. These actions include the following: Reducing or eliminating subsidies for certain properties. In the fiscal year 2004 budget request, the administration proposed ending premium subsidies for second homes and vacation properties. According to flood insurance program officials, this change would affect 30 percent of the properties currently receiving subsidized premiums and would increase revenue to the program by $200 million annually. Additionally, program officials plan to increase the rates on all subsidized properties by about 2 percent in May 2003. Changing premium rates for repetitive loss properties. Two bills--H.R. 253 and H.R. 670--have been introduced to amend the National Flood Insurance Act of 1968 that would, among other things, change the premiums for repetitive loss properties. Under these bills, premiums charged for such properties would reflect actuarially based rates if the property owner has refused a buyout, elevation, or other flood mitigation measure from the flood insurance program or FEMA. Improving efforts to increase program participation. The administration has identified three strategies it intends to use to increase the number of policies in force: expanded marketing, program simplification, and increasing lender compliance. With regard to lender compliance, DHS plans to conduct an education effort with financial regulators about the mandatory flood insurance requirements for properties with mortgages from federally regulated lenders. Additionally, DHS plans to evaluate the program's incentive structure to attract more participation in the program. Conducting a remapping of the nation's flood zones. Many of the nation's FIRMs are old and outdated, and for some communities FIRMs have never been developed. The administration has initiated a multiyear, $1 billion effort to map all flood zones in the country and reduce the average age of FIRMs from 13 to 6 years. While we have not fully analyzed these actions, on the basis of a preliminary assessment, they appear to address some of the challenges to the flood insurance program, including two of the key challenges--the program's financial losses and the perceived low level of participation in the program by property owners in flood-prone areas. Reducing subsidies and repetitive loss properties has the potential to help improve the program's financial condition, and increasing program participation would better protect those living in at-risk areas and potentially lower federal cost for disaster assistance after flood events. However, as mentioned earlier, actions such as increasing premiums to subsidized policyholders could cause some of these policyholders to cancel their flood insurance, resulting in lower participation rates and possibly raising federal disaster assistance costs. The remapping of flood zones could potentially affect both participation rates and the program's financial condition. Remapping could identify additional properties in special flood hazard areas that do not participate in the program and for which DHS will need to undertake efforts to encourage their participation in the program. Further, these additional properties may not meet the program's building standards since they were built before the FIRM that included properties in the special flood hazard area was developed. This could cause the program to offer subsidized insurance rates for these properties, potentially exacerbating the losses to the program resulting from subsidized properties. At the Subcommittee's request, we have begun a review to examine the remapping effort and its effects, and will report on the results later this year. None of these proposals, however, addresses the need to move the program's current cash-based budgeting for presenting the program's financial condition to accrual-based budgeting. As we noted earlier, the current method of budgeting does not accurately portray the program's financial condition and does not allow the program to create reserves to cover catastrophic losses and be actuarially sound. If a catastrophic loss occurs, this may place the program in the position of again having to borrow substantial sums from the Treasury in order to satisfy all claims losses. One additional challenge facing the flood insurance program relates to its placement in DHS. As we discussed in a January 2003 report on FEMA's major management challenges and program risks, the placement in DHS of FEMA and programs such as flood insurance that have missions not directly related to security represents a significantly changed environment under which such programs will be conducted in the future. DHS is under tremendous pressure to succeed in its primary mission of securing the homeland, and the possibility exists that the flood insurance program may not receive adequate attention, visibility, and support as part of the department. For the flood insurance program to be fully successful, it will be important for DHS management to ensure that sufficient management capacity and accountability are provided to achieve the objectives of the program. In this regard, the President's fiscal year 2004 budget request notes that additional reforms to the flood insurance program are being deferred until the program is incorporated into DHS. This incorporation has now occurred, and congressional oversight--such as through hearings like this one today--should help to ensure that DHS maintains appropriate focus on managing and improving the flood insurance program and championing the reforms necessary to achieve the program's objectives. For further information on this testimony, please contact JayEtta Z. Hecker at (202) 512-2834 or William O. Jenkins at (202) 512-8777. Individuals making key contributions to this testimony included Christine E. Bonham, Lawrence D. Cluff, Kirk Kiester, John T. McGrail, and John R. Schulze.

Floods have been, and continue to be, the most destructive natural hazard in terms of economic loss to the nation. The National Flood Insurance Program is a key component of the federal government's efforts to minimize the damage and financial impact of floods. The program identifies flood-prone areas of the country, makes flood insurance available in the nearly 20,000 communities that participate in the program, and encourages flood-plain management efforts. Since its inception in 1969, the National Flood Insurance has provided $12 billion in insurance claims to owners of flood-damaged properties, and its building standards are estimated to save $1 billion annually. The program has been managed by the Federal Emergency Management Agency, but along with other activities of the agency, it was recently placed into the Department of Homeland Security. GAO has issued a number of reports on the flood insurance program and was asked to discuss the current challenges to the widespread success of the program. The program faces the following challenges in operating the program effectively and protecting property owners from loss from floods. Improving information on the program's financial condition: Cash-based budgeting, which focuses on the amount of funds that go in and out of a program in a fiscal year, obscures the program's costs and does not provide information necessary to signal emerging problems, such as shortfalls in funds to cover the program's risk exposure. Accrual-based budgeting better matches revenues and expenses, recognizes the risk assumed by the government, and has the potential to overcome the deficiencies of cash-based budgeting. Reducing losses to the program resulting from policy subsidies and repetitive loss properties: The program has lost money and is not actuarially sound because about 29 percent of the policies in force are subsidized but appropriations are not provided to cover the subsidies. Owners of structures built before the flood zone was included in the program pay reduced premiums that represent only about 35-40 percent of the true risk premium. Further, repetitive loss properties--properties with two or more losses in a 10-year period--add to program losses as they represent 38 percent of claims losses but account for 2 percent of insured properties. Increasing property owner participation in the program: The administration has estimated that less than 50 percent of eligible properties in flood plains participate in the program. Additionally, even when the purchase of insurance is mandatory, the extent of noncompliance with the mandatory purchase requirement is unknown and remains a concern. Actions have been initiated or proposed by the administration or in the Congress to address some of the challenges. However, the affect of some actions on the program is not clear. For example, reducing subsidies may cause some policyholders to cancel their policies, reducing program participation and leaving them vulnerable to financial loss from floods. Further, placement of the program within the Department of Homeland Security has the potential to decrease the attention, visibility, and support the program receives.

USPS's financial condition deteriorated in fiscal year 2008. According to USPS, this was due largely to declines in the economy--particularly in the financial and housing sectors--that were reflected in a 4.5 percent decline in total mail volumes and flattened revenues despite rate increases. In addition, fuel prices increased costs by over $500 million, and cost-of- living allowances provided to postal employees increased costs by about $560 million. Even after reducing over $2 billion in costs, primarily by cutting more than 50 million work hours, USPS was not able to close the gap between revenues and expenses. Thus, USPS finished fiscal year 2008 with a $2.8 billion loss--the second-largest loss since 1971 (see app. I). Further, USPS productivity decreased 0.5 percent in fiscal year 2008, which was the first decline since fiscal year 1999. According to USPS, productivity declined because its cost-cutting efforts were not sufficient to offset the impact of declining mail volume. USPS debt increased by $3 billion in fiscal year 2008--the annual statutory limit--and reached $7.2 billion in total outstanding debt at the end of the fiscal year, or nearly half of the $15 billion statutory debt limit. At the end of fiscal year 2005, USPS had no outstanding debt. At this pace, USPS would be constrained at the end of fiscal year 2011 by the $15 billion statutory debt limit. As USPS has reported, it experienced the single largest volume drop in its history in fiscal year 2008 when mail volume fell by 9.5 billion pieces (see app. II). First-Class Mail volume (e.g., correspondence, bills, payments, and statements) declined 4.8 percent, while Standard Mail (primarily advertising) declined 4.3 percent. Volume declines accelerated during fiscal year 2008 (see fig. 1). Preliminary results for the first quarter of fiscal year 2009 indicate that the trend of accelerating volume declines is continuing. According to USPS, difficulties faced by the hard-hit financial and housing sectors, which are major mail users, contributed to mail volume declines in fiscal year 2008. Advertising mail was adversely affected, particularly credit card, mortgage, and home equity solicitations. Volume declines also came from catalogue retailers, the printing and publishing business, and the services sector. Mail volume in fiscal year 2008 was also affected by the continuing shift of mail to electronic communication and payment alternatives. The accelerating declines in mail volumes resulted in a similar trend for total USPS revenues. USPS stepped up cost-cutting efforts during fiscal year 2008 but did not cut costs sufficiently to offset the impact of declining mail volumes. USP S has large overhead (institutional) costs that are hard to change in the short term, including providing 6-day delivery and retail services at close to 37,000 post offices and retail facilities across the country. Compensatio and benefits for USPS's workforce, which was about 663,000 career employees and nearly 102,000 noncareer employees at the end of fisc year 2008, generated close to 80 percent of USPS costs. USPS has collective bargaining agreements with its four largest unions that e 2010 and 2011. These agreements include layoff protections, as well as work rules that constrain USPS's flexibility. They also include semiannu cost-of-living allowances (COLA) linked to the Consumer Price Index (CPI). In addition, the agreements cover many benefits, such as the employer and employee contributions to health benefits premiums. U the current collective bargaining agreements, USPS's share of the employee health benefit premiums was 85 percent in fiscal year 20 07 and will decrease by 1 percent each year beginning in fiscal year 2008 or 2009 through 2011 or 2012, depending on the terms of the agreements with the unions. USPS's share of the premiums in fiscal year 2007 was about 13 percent more than for most other federal agencies. According to USPS officials, USPS's financial outlook has continued to deteriorate based on preliminary results for the first quarter of fiscal year 2009, as well as updated projections for mail volume and revenue. Preliminary first quarter results indicate that USPS incurred a deficit, as expense reductions did not fully offset large declines in volume and revenue. In response, USPS has cut work hour targets for its field operations for the rest of the fiscal year. However, USPS officials told us these targets could be difficult to achieve, and they expect the net loss for fiscal year 2009 to exceed last year's net loss. In light of these results and updated projections, USPS officials told us this month that they expect fiscal year 2009 mail volume to decline by 10 billion to 15 billion pieces. USPS officials project revenues to fall below the target in USPS's original budget and for debt to increase by $3 billion. USPS officials said they expect to have sufficient cash reserves to make mandated year-end payments for retiree health benefits and workers' compensation, unless the USPS net loss for fiscal year 2009 exceeds $5 billion. Given difficult and uncertain economic conditions, it will be important for USPS to continue providing Congress and stakeholders timely and sufficiently detailed information to understand USPS's current financial situation and outlook. Various options or actions are available for USPS to remain financially viable in the short and long term. In the short term, USPS has asked Congress to consider its proposal for immediate financial relief. In the long term, aggressive USPS action beyond its current cost-cutting effort urgently needed to reduce costs and improve efficiency, particularly in light of accelerated declines in mail volume and changes in the public's use of mail. We agree with the Postal Regulatory Commission (PRC) that unfavorable mail volume and revenue trends may imperil USPS's financial viability and that USPS must dramatically reduce its costs to remain viable. As the PRC has noted, current pressures from declining revenue and volume do not appear to be abating, but rather seem to be increasing. During the economic downturn, there has been accelerated diversion of business and individual mail, and some mailers have left the market entirely. An economic recovery may not bring a corresponding recov mail volume due to continuing social and technological trends that have changed the way that people communicate and use the mail. Specifically: First-Class Mail volume has declined in recent years and is expected to decline for the foreseeable future as businesses, nonprofit organizations, governments, and households continue to mo ve their correspondence and transactions to electronic alternatives, such as Internet bill payment, automatic deduction, and direct deposit. USPS analysis has found that electronic diversion is associated with the growing adoption of broadband technology. As PRC reported, available alternatives to mail eventually result in substitution effects. It is unclear whether Standard Mail will continue to grow with an economic recovery. Standard Mail now faces growing competition from electronic alternatives, such as Internet-based search engine marketing, e-mail offers, and advertisements on Web sites. In addition, Standard Mail is price-sensitive, as was demonstrated when catalog advertising declined in response to the 2007 postal rate increase. Although Standard Mail rate increases are limited by the price cap, future rate increases will likely have some impact on volume. Periodicals (e.g., mailed newspapers and magazines) volume has been declining due to changing reading preferences and these declines are expected to continue. Overall newspaper readership is falling. Also, the Christian Science Monitor and U.S. News and World Report recently announced that they would discontinue their printed editions. Businesses and consumers are becoming more likely to obtain news and information from the Internet, a trend that is particularly evident among young people. Several options could assist USPS through its short-term difficulties, some of which would require congressional action. Although we recognize the need to provide USPS with immediate financial relief, such relief should meet its short-term needs and is no substitute for aggressive USPS action to preserve its long-term viability. Key options include the following: Reduce USPS payments for retiree health benefits for 8 years. USPS has proposed that Congress give it immediate financial relief by reducing its retiree health benefits payments by an estimated $25 billion from 2009 through 2016. Specifically, USPS has proposed that Congress change the statutory obligation to pay retiree health benefits premiums for current retirees from USPS to the Postal Service Retiree Health Benefits Fund (Fund) for the next 8 years. Because the Fund would pay the estimated $25 billion in premium payments over the next 8 years, this would decrease the Fund by approximately $32 billion (including interest charges) as of 2017. With this option, starting in fiscal year 2017, USPS would have a total unfunded retiree health benefits obligation currently estimated at about $75 billion, rather than an estimated $43 billion, that would then need to be amortized in future years. In the long term, the large impact this unfunded obligation would have on the Fund would create the risk that USPS would have difficulty making future payments, particularly considering mail volume trends and the impact of payments on postal rates if mail volume declines continue. USPS's proposal would also shift responsibility for paying the benefits of postal employees from current rate payers to future rate payers. USPS would continue to make annual payments ranging from $5.4 billion to $5.8 billion from fiscal years 2009 through 2016 (as shown in Table 1) for its obligation for future retiree health benefits, as required by PAEA. Thus, under USPS's proposal, it would save $2 billion in fiscal year 2009. Reduce USPS payments for retiree health benefits for 2 years. Another option would be for Congress to provide USPS with 2-year relief for retiree health benefits premium payments, totaling about $4.3 billion, which would be consistent with providing immediate financial relief, while having much less impact on the Fund than USPS's proposal. Specifically, Congress could revise USPS's statutory obligation so that it would not pay for current retiree health benefits for fiscal years 2009 and 2010. USPS has provided information related to its financial situation for fiscal years 2009 and 2010 which projected that its financial condition would improve beginning in 2010. Therefore, we believe that the option to provide 2-year relief totaling $4.3 billion would be preferable to USPS's proposal. Under this short- term option Congress could revisit USPS's financial condition to determine whether further relief is needed and also review what actions USPS has taken to assure its long-term financial viability. Work with unions to modify work rules. One option that would not require congressional action is similar to actions taken by other financially stressed entities, whereby USPS and its unions could agree on ways to achieve additional short-term savings, such as by modifying work rules to facilitate reducing work hours. For example, USPS and the National Association of Letter Carriers recently agreed on a new procedure to expedite the evaluation and adjustment of city delivery carrier routes. According to USPS officials, this new process is aimed at enhancing USPS's ability to respond to declining mail volumes and is expected to make a key contribution to the budgeted savings of $1.3 billion in city delivery costs in fiscal years 2009 and 2010. Other options are based on provisions in the statute and could include 1) seeking regulatory approval for an exigent rate increase and 2) increasing USPS's annual borrowing limit. USPS could request PRC approval for an exigent rate increase that would increase rates for market-dominant classes of mail above the statutory price cap. Mailers have voiced strong concern about the potential impact of an exigent rate increase on their businesses. In our view, this option should be a last resort. Such an increase could be self-defeating for USPS in both the short and long term because it could increase incentives for mailers to further reduce their use of the mail. Congress could also temporarily expand the statutory $3 billion annual limit on increases in USPS debt, which would provide USPS with access to funding if it has difficulty making mandated year-end payments. Raising USPS's annual debt limit could address a cash shortage and would be preferable to an exigent rate increase. However, it is unclear when USPS would repay any added debt, which would move USPS closer to the $15 billion statutory debt limit. In our view, this option should be regarded only as an emergency stopgap measure. Action is urgently needed to streamline USPS costs in two areas where it has been particularly difficult--the compensation and benefits area, which generates close to 80 percent of its costs, and USPS's mail processing and retail networks. As USPS's mail volumes decline, it does not have sufficient revenue to cover the growing costs of providing service to new residences and businesses, while also maintaining its large network of processing and retail facilities. We have reported for many years that USPS needs to rightsize its workforce and realign its network of mail processing and retail facilities. USPS has made some progress, particularly by reducing its workforce by more than 100,000 employees with no layoffs and by closing some smaller mail processing facilities. Yet, more will need to be done. USPS has several options for realigning its mail processing operations to eliminate excess capacity and costs, but has taken only limited action. In 2005, we reported that according to USPS officials, declining mail volume, worksharing, and the evolution of mail processing operations from manual to automated equipment led to excess capacity that has impeded efficiency gains. While USPS has terminated operations at 54 Airport Mail Centers in fiscal years 2006 through 2008, it has closed only one of over 400 major mail processing facilities as a result of consolidating its mail processing operations. Another realignment option USPS is considering is outsourcing operations in its network of 21 bulk mail processing centers. Another option we reported on would be for USPS to close unnecessary retail facilities, and by reducing the number of facilities, USPS could lower the costs of maintaining its network of facilities. USPS's network of retail facilities has been largely static despite population shifts and changes in mailing behavior. In considering options to provide retail services at a lower cost, it is important to note that large retail facilities--generally located in large urban areas--generate much larger costs for the retail network than the smallest rural facilities and may therefore potentially generate more cost savings. Closing postal facilities is often controversial but is necessary to streamline costs. Congress encouraged USPS to expeditiously move forward in its streamlining efforts in PAEA. We recommended that USPS enhance transparency and strengthen accountability of its realignment efforts to assure stakeholders that realignment would be implemented fairly and achieve the desired results. USPS has taken steps to address our recommendations and thus should be positioned to take action. Other long-term options for reducing costs include more fundamental changes that would have public policy implications for Congress to consider--such as potential changes in USPS's universal service from 6 to 5 delivery days per week as discussed in a recent PRC study, and potential changes to USPS's business model, which we will be discussing in a PAEA- required report that will be issued by December 2011. These studies will provide Congress with information about how to address challenges for USPS to meet the changing needs of mailers and the public. We asked USPS to comment on a draft of our testimony. USPS generally agreed with the accuracy of our statement and provided technical corrections and some additional perspective, which we incorporated where appropriate. USPS reiterated its position regarding the funding of retiree health benefits and the difficulties related to its cost-cutting efforts. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or the Members of the Subcommittee may have. For further information regarding this statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Shirley Abel, Teresa Anderson, Joshua Bartzen, Heather Frevert, David Hooper, Kenneth John, Emily Larson, Susan Ragland, and Crystal Wesco. (Loss) Total Revenues Total Expenses Outstanding debt $(175) (13) (439) (989) (1,176) (687) (380) (306) (588) (251) (223) (597) (874) (1,469) (536) (1,765) (914) (199) (1,680) (676) 1,800 (Loss) Total Revenues Total Expenses Outstanding debt (5,142) (2,806) (millions) Standard Mail volume: percent change (millions) Total international volume (millions) (millions) 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.

When Congress passed the Postal Accountability and Enhancement Act in December 2006, the U.S. Postal Service (USPS) had just completed fiscal year 2006 with its largest mail volume ever--213 billion pieces of mail and a net income of $900 million. Two years later, USPS's mail volume dropped almost 5 percent--the largest single-year decline. The Postmaster General testified last March before this subcommittee that USPS was facing a potential net loss of over $1 billion for fiscal year 2008. He noted that USPS anticipated continued deterioration due to the economic slowdown, as the financial, credit, and housing sectors are among its key business drivers. He also said that the shifts in transactions and messages from mail to electronic communications and from advertising mail to lower-cost electronic media have affected the USPS's financial situation. This testimony focuses on (1) USPS's financial condition and outlook and (2) options and actions for USPS to remain financially viable in the short and long term. It is based on GAO's past work and updated postal financial information. We asked USPS for comments on our statement. USPS generally agreed with the accuracy of our statement and provided technical corrections and some additional perspective, which we incorporated where appropriate. USPS has reported that the declining economy accelerated declines in mail volume in fiscal year 2008 and flattened revenues despite postal rate increases. In fiscal year 2008, mail volume fell by 9.5 billion pieces, fuel prices increased costs by over $500 million, and cost-of-living allowances for postal employees increased costs by $560 million. Cutting costs by $2 billion--primarily by cutting over 50 million work hours--did not close the gap between revenues and expenses. Thus, USPS recorded a loss of $2.8 billion for fiscal year 2008. Its debt increased by $3 billion by the end of the year to $7.2 billion. USPS's outlook for fiscal year 2009 has become more pessimistic. USPS projects a volume decline of 10 billion to 15 billion pieces, another loss, and $3 billion more in debt. At this pace, USPS could reach its $15 billion statutory debt limit by fiscal year 2011. In the short term, several options could assist USPS through its difficulties, some of which would require congressional action. USPS has proposed that Congress give it immediate financial relief totaling about $25 billion over the next 8 years by changing the funding of its retiree health benefits. Although GAO recognizes the need to provide USPS with immediate financial relief, such relief is no substitute for aggressive USPS action to preserve its long-term viability. USPS projects an improvement in its financial condition in fiscal year 2010. Therefore, GAO believes it would be preferable to provide 2-year relief totaling $4.3 billion. This would have less impact on the retiree health benefits fund, and then Congress could revisit USPS's financial condition to determine whether additional relief is needed. In the long term, USPS action beyond its current cost-cutting efforts is urgently needed to reduce costs and improve efficiency. GAO agrees with the Postal Regulatory Commission that unfavorable mail volume and revenue trends may imperil USPS's financial viability and that USPS must dramatically reduce its costs to remain viable. Two areas for further action to reduce costs include compensation and benefits, which is close to 80 percent of its costs, and mail processing and retail networks. GAO previously reported that excess capacity in USPS's mail processing infrastructure has impeded efficiency gains. USPS has considered several options to realign its facility network, such as outsourcing operations in some mail processing facilities, but has taken only limited action. Another option would be for USPS to close unnecessary retail facilities and thereby reduce its large maintenance backlog. While it has been difficult for USPS to take action in these areas, Congress encouraged USPS to expeditiously move forward in its streamlining efforts in the postal reform act of 2006. GAO recommended that USPS enhance transparency and strengthen accountability of its realignment efforts to assure stakeholders that realignment would be implemented fairly and achieve the desired results, and it has made improvements in this area. Accelerated volume declines and changes in the public's use of mail indicate that USPS needs to move beyond incremental efforts and take aggressive action to streamline its workforce and network costs to assure its long-term viability.

CDC issues recommendations for clinicians to follow in order to prevent and control HAIs. CDC issues these recommendations in the form of evidence-based guidelines and other informal communications, such as clinical reminders, which are generally recognized as authoritative interpretations of the current scientific knowledge base regarding the prevention of HAIs. CDC develops these guidelines in collaboration with the Healthcare Infection Control Practices Advisory Committee (HICPAC)--a federal advisory committee that provides recommendations to the Secretary of HHS and to CDC and includes members from outside the federal government selected for their expertise on infection control. In 2007, CDC issued its most recent infection control guideline outlining Standard Precautions, which serves as the foundation for preventing transmission of infections during patient care in all health care settings, and includes recommendations for safe injection practices. Examples of safe injection practices include administering medication from one syringe to only one patient, administering medications from single-dose vials to only one patient, and using bags or bottles of intravenous solution for only one patient. Additionally, CDC also helps to provide assistance to state and local health departments in their investigations of possible blood- borne pathogen outbreaks resulting from unsafe injection practices, and maintains information on blood-borne pathogen outbreaks. See 42 U.S.C. SS 1395k(a)(2)(F)(i). For ASCs, CMS calls its health and safety standards "conditions for coverage." 42 C.F.R. Part 416, Subpart C (2011). For other types of ambulatory care facilities, such as end-stage renal disease facilities, rural health clinics, and federally qualified health centers, CMS has established different standards for participation in Medicare. See 42 C.F.R. Part 405, Subpart U (for end-stage renal disease facilities) and 42 C.F.R. Part 491, Subpart A (for rural health clinics and federally qualified health centers). Medicare and qualify for Medicare facility payments. As part of the agency's certification process, CMS contracts with state survey agencies to conduct on-site surveys of facilities subject to CMS's standards. These surveys include on-site inspections by a survey team, generally of two or more surveyors, who review documents, interview staff and patients, observe practices, and examine medical records to ensure compliance with CMS's standards. When surveyors find that a facility's practices do not meet CMS's health and safety standards, these discrepancies are cited as deficiencies and reported to CMS. Additionally, ASCs may choose to instead undergo accreditation by CMS-approved accrediting organizations that CMS has determined meet or exceed its standards. Facilities that are deemed as meeting CMS's standards through this means are also eligible to participate in Medicare and receive facility payments. As part of this accreditation process, accrediting organizations conduct periodic on-site surveys to ensure that facilities meet their standards, including those related to infection control. Not all ambulatory care settings are subject to CMS's health and safety standards. For example, patients may receive a wide array of services similar to those provided at ASCs, such as endoscopy and pain management services, in facilities designated as physician offices, which may range in scale from a small office facility with a single physician to a large clinic with multiple physicians and extensive medical or surgical capabilities. However, physician offices are not subject to CMS oversight, and thus these facilities do not undergo on-site surveys. In addition, even ambulatory care facilities that could potentially meet CMS's definition of an ASC may choose not to participate in Medicare as an ASC. Consequently, these facilities would not undergo the Medicare certification or deeming processes and not receive ASC Medicare facility payments. These efforts by CDC and CMS to prevent unsafe injection practices represent efforts to change clinical practices, which research shows can be challenging. Making clinicians aware of the scientific basis for specific practices to achieve patient safety plays a role in changing their behavior, but on its own tends to bring about only modest improvement. Researchers point to other barriers that need to be overcome, including the challenge of integrating the new practice into established work flow patterns, organizational cultures in many health care settings that can be resistant to change, and the challenge of establishing open communication and accountability across distinct professional groups with differing hierarchical status, such as nurses and physicians. efforts to ensure that every clinician performs hand washing or other hand hygiene prior to contact with each patient is an example of the difficulty of achieving consistent compliance with even the most basic and noncontroversial patient safety measures. See, for example, John Ovretveit, Economics and Effectiveness of Interventions for Improving Quality and Safety of Health Care - A Review of Research (Stockholm: Medical Management Centre, Karolinska Institute, 2007). Data on the extent of blood-borne pathogen outbreaks related to unsafe injection practices in ambulatory care settings are limited and likely underestimate the full extent of such outbreaks. Additionally, comprehensive data on the cost of blood-borne pathogen outbreaks to the health care system do not exist, but CDC and other officials believe these costs can be substantial for those affected by such outbreaks, including individuals, state and local health departments, and clinicians and health care facilities. According to CDC officials and others we interviewed, there are relatively few sources of information available on the extent of blood-borne pathogen outbreaks resulting from unsafe injection practices in ambulatory care settings, and these data likely underestimate the full extent of such outbreaks. Specifically, CDC tracks and keeps records of reported blood-borne pathogen outbreaks related to unsafe injection practices in the United States, which it identifies through state and local health departments seeking investigative assistance for potential outbreaks. According to CDC records, from 2001 through 2011, there were 18 known outbreaks--episodes of infection transmission where 2 or more patients became infected--of viral hepatitis associated with unsafe injection practices at ASCs and other ambulatory care settings in the United States. In these known outbreaks in ambulatory care settings, nearly 100,000 individuals were notified to seek testing for possible exposure to viral hepatitis and HIV, and 358 of them were infected with (See app. I for more comprehensive information on the viral hepatitis.18 blood-borne pathogen outbreaks related to unsafe injection practices in ambulatory care settings.) In addition, over 17,000 other patients were also notified of possible exposure to blood-borne pathogens because of unsafe injection practices in ambulatory care settings outside of these 18 recognized outbreaks. These notification events were not identified as outbreaks because they did not meet CDC's definition of a blood-borne pathogen outbreak, which is an episode of transmission where two or more patients became infected and where these infections could be epidemiologically linked to a specific health care facility or clinician. Our analysis of CDC's data on the 18 known blood-borne pathogen outbreaks in ambulatory care settings indicates that these incidents were associated with one or more types of unsafe injection practices and most were related to improper use of syringes that led to contaminated medication vials or saline bags that were then reused for multiple patients (see table 1). These outbreaks were in a number of different ambulatory care facility types across multiple states. Specifically, of the 18 outbreaks, 5 occurred in pain management clinics, 5 occurred in endoscopy clinics, 3 occurred in alternative medicine clinics, and 2 occurred in hematology- oncology clinics. Additionally, two of the facilities that had outbreaks were participating in Medicare as ASCs, according to CDC officials. With the exception of these two facilities, the facilities that have experienced outbreaks were not subject to CMS's health and safety standards, which require facilities to take steps to prevent unsafe injection practices from occurring, because they are considered physician offices. Finally, while some states may appear to have more outbreaks than others, CDC officials noted that some states are more advanced in identifying, investigating, and reporting blood-borne pathogen outbreaks than others, which may make them appear to have more outbreaks. For a number of reasons, CDC officials and others we interviewed believe that the known outbreaks do not represent the full extent of blood-borne pathogen outbreaks related to unsafe injection practices in ambulatory care settings. First, blood-borne pathogen infections, regardless of how they are contracted, can be difficult to detect. According to CDC officials and others we interviewed, as well as published literature we reviewed, blood-borne pathogen infections may go undetected because most people infected with viral hepatitis either do not have symptoms for years or have only mild nonspecific symptoms. For example, a 2010 study by the Institute of Medicine reports that about 65 to 75 percent of individuals infected with hepatitis are unaware that they are infected. Many people infected with hepatitis are not aware that they have been infected until they have symptoms of cirrhosis or liver cancer many years later. Second, when symptoms do occur, it may be too late to determine the exact incident that caused the infection. Clinicians are generally required to report cases of acute hepatitis B and C infections to their state or local health department, though this varies by state. However, according to health department officials we interviewed, tracking an infection to a specific health care facility can be difficult because treatment in a health care facility is not generally considered to be an important risk factor for these types of infections. Third, CDC officials said that while state and local health departments and even medical staff often may choose to notify CDC about potential blood-borne pathogen outbreaks, including those possibly related to unsafe injection practices, there is no requirement for such reporting. CDC officials said that the agency generally identifies that potential blood-borne pathogen outbreaks related to unsafe injection practices have occurred when state or local health departments seek CDC assistance during their investigations of potential outbreaks. However, CDC officials said that because of the variability in states' surveillance and investigation capacity, many outbreaks may not come to the attention of the health department or CDC. Lastly, available evidence indicates that the unsafe injection practices that can cause blood-borne pathogen outbreaks may be prevalent in ASCs, which increases the likelihood that other such outbreaks are occurring undetected in addition to those that have been identified. Specifically, CDC researchers found in a 2008 survey of a randomly selected sample of 68 ASCs in three states that about 28 percent of ASCs were cited for deficiencies related to injection practices or medication handling-- primarily for the use of single-dose vials for more than one patient--and about 68 percent were cited for at least one lapse in basic infection control. According to CDC officials and others we contacted, while the financial costs to the health care system of blood-borne pathogen outbreaks related to unsafe injection practices can be substantial, there are no comprehensive data on the total costs attributed to such outbreaks. CDC officials said that assessing such costs is difficult because the costs are borne by different groups--for example, individuals, state and local health departments, and clinicians and health care facilities--and the costs are often intermingled with other health care costs. However, various parties have developed estimates of some of the potential and actual costs associated with such outbreaks for each of these three groups. Individuals. For individuals who are notified that they are at risk of a blood-borne pathogen infection, costs may be incurred for testing. For example, in response to a large hepatitis C outbreak in Nevada-- which required notification of more than 60,000 patients to seek blood-borne pathogen testing--the Southern Nevada Health Department estimated that the laboratory costs for testing all of the potentially exposed patients would be $13.8 million. Additionally, for individuals who are infected, costs include those for short- and long- term treatment. For example, the Southern Nevada Health Department estimated that the cost of treatment for an infected patient would be about $30,000, including the direct costs for professional services, laboratory testing, and medication, but excluding the costs of annual monitoring and possible complications related to cirrhosis or liver transplants. State and local health departments. State and local health care departments may incur costs for investigating and responding to potential outbreaks, including the costs of notifying and potentially providing blood-borne pathogen testing for patients who may have been exposed to unsafe injection practices. Generally, according to health department officials we interviewed, state and local health departments do not track such costs because investigating and responding to such outbreaks is considered part of their normal duties. One exception is the case of the Nevada outbreak, where officials said such costs were calculated because of the magnitude of the outbreak. Specifically, the Southern Nevada Health Department estimated that from January 2008 through May 2009, the outbreak investigation and response cost the health department about $830,000, including $255,605 in staff time by health department employees. Clinicians and health care facilities. Clinicians and health care facilities that are directly involved in outbreaks may incur costs associated with lawsuits and settlements. For example, following the Nebraska outbreak in 2002, the Nebraska Excess Liability Fund--a fund administered by the Nebraska Department of Insurance for medical professional liability coverage--paid nearly $9 million in indemnity costs to settle 83 cases as of December 2010. In addition, clinicians who cause blood-borne pathogen outbreaks through their use of unsafe injection practices may be at risk of losing their medical licenses or facing felony charges related to the outbreak. For example, the physician and two nurse anesthetists involved in the Nevada outbreak currently face state criminal charges tied to the outbreak. In 2009, CMS substantially expanded its oversight of unsafe injection practices in ASCs by increasing both the intensity of the examination of safe injection and other infection control practices and the number of on- site surveys conducted in ASCs to determine compliance with CMS's health and safety standards. Within these health and safety standards, those relating to infection control specifically require ASCs to maintain an infection control and prevention program designed to minimize the occurrences of HAIs, such as blood-borne pathogen infections resulting from unsafe injection practices, and have a qualified professional direct this program. Safe injection practices are included under several of CMS's broader health and safety standards, which also address a number of other topics related to infection control and medication administration. To document whether ASCs are following CMS's health and safety standards related to infection control, which include safe injection practices, CMS directed all surveyors who inspect ASCs to use CMS's surveyor instrument--the Infection Control Surveyor Worksheet. The worksheet includes a section on injection practices that separately addresses such topics as the reuse of needles and syringes as well as using single- and multi-dose medication vials for multiple patients. CMS also directed the surveyors to use a tracer methodology in conjunction with the worksheet, which according to CMS officials involves observing a patient at the beginning and end of a procedure or through his or her entire procedure. In addition, for the large majority of ASCs that are surveyed by state survey agencies--about 75 percent--CMS expanded the number of ASCs that are to be surveyed each year. Specifically, for fiscal years 2011 and 2012, CMS expects that state survey agencies will survey at least 25 percent of nonaccredited ASCs each year, an increase from its expectation that at least 10 percent of nonaccredited ASCs would be surveyed annually in fiscal year 2009, and 5 percent in fiscal year 2008. CMS also required in fiscal years 2010 and 2011 that some of the ASCs surveyed by state survey agencies be randomly selected by CMS so the agency could obtain a nationally representative sample. As part of implementing the expanded oversight of ASCs, CMS collected and plans to analyze detailed information from the Infection Control Surveyor Worksheets, but only for fiscal years 2010 and 2011. Specifically for these 2 fiscal years, CMS required state surveyors to submit a completed copy of the worksheet for every ASC that they surveyed, in addition to their routine reporting of citations for lack of compliance with particular standards. According to the CMS officials, the agency plans to use the data collected from the surveyor worksheets to determine the differences in the type and level of citations given by state survey agencies to ASCs identified as noncompliant with the agency's health and safety standards. As of May 2012, CMS officials expected to have this analysis completed in July 2012. Additionally, CMS officials said that the agency has provided CDC with the surveyor worksheet data to examine the extent of infection control problems, including unsafe injection practices, in a sample of ASCs nationwide, from which CDC officials expect to create a baseline assessment of unsafe injection practices in these settings. As of April 2012, CDC officials did not have a firm deadline for when they plan to complete this analysis because they are uncertain of how long it will take to obtain access to usable data, but the officials expect that it will be completed at some point in 2012. Although CMS will continue to direct surveyors to use the infection control worksheet to guide what surveyors observe in conducting their examinations of ASC practices, CMS officials said that the agency decided to stop collecting data directly from surveyor worksheets after fiscal year 2011. The officials said that this decision was, in part, because of the burden that this additional data collection process placed on surveyors. According to these officials, surveyor teams--which generally consist of at least two individuals--found it time consuming to consolidate and transcribe the observations of multiple surveyors into a single document and send the consolidated worksheet to CMS, in addition to their routine reporting of citations for noncompliance with particular standards. Additionally, CMS officials said the agency did not want to burden the surveyors with collecting more information from the worksheets until CMS had analyzed the information already collected. However, without continuing to collect the data from the Infection Control Surveyor Worksheets after fiscal year 2011, CMS will lose its capacity to monitor ASC compliance specifically with respect to safe injection practices, which would be necessary to track the effectiveness of its increased efforts to prevent unsafe practices. CMS officials reported that they do not have access to information that would allow them to identify which citations stem in whole or in part from unsafe injection practices because the citation reports that are routinely submitted by surveyors after an ASC is inspected are based on standards that cover a mix of injection-related and other infection control or medication administration practices. Furthermore, the lack of the worksheet data will reduce CMS's ability to check the accuracy and completeness of surveyor assessments of unsafe injection practices going forward. Finally, CMS's decision to stop collecting surveyor worksheet data will prevent CDC from using these data to conduct its own analyses of the extent of unsafe injection practices in ASCs over time. While CMS has noted that collecting these data has been burdensome for surveyors, there may be various ways to ameliorate this burden so that CMS could continue to collect the information needed to track the effectiveness of its increased oversight of ASCs. For example, after 2 years of requiring a completed worksheet for every ASC surveyed, CMS could reduce the burden placed on surveyors by limiting this requirement to only those ASCs included in a random, nationally representative sample. In addition, it could adjust the size of the sample or collect the worksheet information less frequently than every year. In order to help encourage safe injection practices, various HHS agencies have developed efforts to communicate information on these practices to clinicians since our last report on HAIs was released in 2009. For example, to expand awareness and understanding of CDC's guidelines for infection control, CDC released tools targeted to specific health care settings in 2011. These tools include a summary guide for ambulatory care settings with an accompanying checklist and an infection control and prevention plan specifically for outpatient oncology centers, both of which provide basic infection prevention guidance and reaffirm adherence to CDC's infection control guidelines, including those related to safe injection practices. In addition to communicating information on safe injection practices through guidance documents, CDC has also been involved in communicating such information to clinicians in various health care settings through an educational campaign, called the One and Only Campaign. CDC developed this educational campaign in collaboration with the Safe Injection Practices Coalition--a partnership of health-care- related organizations that was formed to promote safe injection practices in all U.S. health care settings. Organizations participating in the Safe Injection Practices Coalition include clinician and facility associations, patient advocacy organizations, foundations, industry partners, and CDC. The campaign was developed in 2009 in response to patients who have been notified of possible exposure to blood-borne pathogens, in order to help ensure that patients are protected each and every time they receive a medical injection. The One and Only Campaign is led by CDC and the Safe Injection Practices Coalition and is funded by members of the coalition and the agency through the CDC Foundation--an independent, nonprofit organization that connects CDC with private-sector organizations and individuals to build public health programs. Since starting in 2009, the campaign's education and awareness efforts have included developing educational materials for clinicians and patients, such as brochures, posters, a video, and a continuing education webinar on safe injection practices for clinicians. Additionally, CDC funded positions in state health departments to partner with the Safe Injection Practices Coalition to help disseminate information from the One and Only Campaign and develop state-based activities to raise awareness of safe injection practices.educational materials for the campaign, these state health department partners utilized focus groups and surveys to ensure that the contents were understandable to both clinicians and patients. According to CDC and CDC Foundation officials, the state health department partners also developed varied approaches to reach health care clinicians, such as developing work groups to target insurance companies to make them aware of safe injection practices and developing tool kits for clinicians and state and local health departments to promote safe injection practices. For example, the State and Local Health Department tool kit was released in April 2012 and includes injection safety specific resources from CDC and the Safe Injection Practices Coalition, such as an educational video, posters, brochures, as well as other resources specific to state and local health department needs, such as information on how to build a work group and working with the media. CDC and the Safe Injection Practices Coalition have used the One and Only Campaign to target certain types of clinicians and health care settings that have previously experienced blood-borne pathogen outbreaks related to unsafe injection practices as well as to focus on clinicians more broadly. For example, the Safe Injection Practices Coalition disseminated the campaign's educational materials through the American Association of Nurse Anesthetists and the Accreditation Association for Ambulatory Health Care, both of which are coalition members. Additionally, according to CDC Foundation officials, the One and Only Campaign's educational efforts are also focused generally on all health care clinicians, and the demand for the campaign's educational materials does not appear to be driven by a particular group of clinician types or health care settings. For example, according to CDC nearly 50,000 people viewed the Safe Injection Practices Coalition's continuing medical education activity on unsafe injection practices from July 2011 to February 2012. Viewers included a wide range of clinicians, such as anesthesiologists, surgeons, pediatricians, nurse practitioners, physician assistants, pharmacists, and other types of health care clinicians, although CDC does not have information on the health care settings in which these clinicians practice. Though CDC and the Safe Injection Practices Coalition have targeted the One and Only Campaign at certain types of clinicians and health care settings that have experienced blood-borne pathogen outbreaks in the past, these targeted efforts at the national level have generally not included other settings that have experienced outbreaks and are not overseen by CMS. injection practices, but the settings not overseen by CMS, such as physician offices, may be particularly at risk for unsafe injection practices because they have not been subject to CMS's increased oversight efforts, including the use of the Infection Control Surveyor Worksheet. Furthermore, CDC does not have information on the extent to which the general efforts of the campaign have reached these settings not overseen by CMS. As a result, it is not clear if these specific settings are being reached by the campaign. According to CDC, each of the state health department partners has targeted clinicians and health care settings that were identified as problem areas in its states, which in some cases included ambulatory care settings that are not overseen by CMS. HHS, Department of Defense, and Department of Veterans Affairs, National Action Plan to Prevent Healthcare-Associated Infections: Roadmap to Elimination (Draft) (April 2012) accessed May 22, 2012, http://www.hhs.gov/ash/initiatives/hai/infection.html. and end-stage renal disease facilities.draft plan that describes various next steps to prevent HAIs in these settings and proposes measurable outcomes and 5-year goals to assess progress. For ASCs this includes continuing to disseminate evidence- based guidelines and training for infection control and safe injection practices through CDC and the One and Only Campaign. With respect to end-stage renal disease facilities, the draft plan calls for identifying the prevalence and incidence of hepatitis infections and recommendations to prevent hepatitis infections. HHS officials expect this next phase of the agency's consolidated effort to prevent HAIs to be finalized by fall 2012. Available data from CDC, though limited, indicate that there have been repeated, widespread blood-borne pathogen outbreaks related to unsafe injection practices in the United States from 2001 through 2011. In these outbreaks patients have been infected with blood-borne pathogens-- specifically hepatitis--when receiving health care in ambulatory care settings, and these infections are likely more common than is currently identified. These infections have long-term consequences that can affect a patient's health and ultimately lead to death, and the costs to all involved can be substantial. In light of the blood-borne pathogen outbreaks that have occurred, HHS agencies have taken some steps in the last few years to help prevent unsafe injection practices that can lead to blood-borne pathogen outbreaks in ambulatory care settings. CMS has expanded its oversight of health and safety standards in ASCs in ways that should help to prevent unsafe injection practices that can lead to blood-borne pathogen outbreaks, such as by using the detailed Infection Control Surveyor Worksheet to determine if facilities are following safe injection practices. If CDC and CMS proceed with their plans to analyze data collected from these worksheets, 2 years of data that CMS has already collected will be used to establish a baseline assessment of the extent of unsafe injection practices in ASCs and help CMS assess its oversight efforts to improve infection control. However, CMS may be undermining its efforts by stopping data collection after fiscal year 2011, in part because of concerns that the time and effort required in collecting the data placed a burden on surveyors. Information provided by CMS and CDC indicate that reducing unsafe injection practices is a long-term project, and their efforts may take several years to show clear results. Without some form of continued data collection, CMS will lose its capacity to monitor ASC compliance with its health and safety standards related to safe injection practices and to monitor how well the state surveyors collect and assess information about unsafe injection practices. In addition, CDC would not have a source of nationally representative data with which to track overall trends in injection safety in ASCs. Instead of eliminating this unique source of data on injection practices altogether, CMS could address concerns regarding the burden on surveyors through other means. For example, rather than collecting the data from all surveyed ASCs, CMS could limit this data collection to a random sample of ASCs, and the size of the sample could be adjusted. In addition, it may be possible to collect the data less frequently than every year. In addition to CMS's oversight of health and safety standards for ASCs, CDC is leading important efforts to encourage safe injection practices through the One and Only Campaign. The campaign has focused on making information generally available to all clinicians, as well as targeting some types of clinicians and health care settings that have been involved in prior blood-borne pathogen outbreaks. While raising awareness among clinicians and health care facilities will not, by itself, ensure the adoption of safe injection practices, it is an important first step. The One and Only Campaign is especially important because CMS's oversight of health and safety standards--one primary way for HHS to influence clinicians and health care facilities to use safe practices--is only statutorily authorized for certain settings, such as ASCs. Therefore, the One and Only Campaign represents a unique opportunity to reach clinicians and facilities, such as physician offices, that are not subject to CMS's standards. While the campaign's efforts so far have targeted some types of clinicians and health care settings that have been involved in prior outbreaks, additional targeting of the campaign's efforts to settings that are not overseen by CMS, such as physician offices, could help to focus available resources on the best opportunities to improve patient safety. To help strengthen HHS efforts aimed at protecting patients from infection by preventing unsafe injection practices in ambulatory care settings, we recommend that the Secretary of HHS take the following three actions: Direct CMS and CDC to work together to resume collecting data on unsafe injection practices from the Infection Control Surveyor Worksheet, or from any alternative source of comparable data, that will permit continued monitoring and assessment of unsafe injection practices in ASCs beyond fiscal year 2011. Direct CMS and CDC to use the data collected on unsafe injection practices for CMS to continue monitoring ASC compliance with health and safety standards related to infection control and for CDC to continue monitoring trends in the prevalence of unsafe injection practices in ASCs. Direct CDC to strengthen its targeting of the One and Only Campaign to health care settings that CDC has identified as having blood-borne pathogen outbreaks related to unsafe injection practices that are not overseen by CMS. We provided a draft of this report to HHS for review, and HHS provided written comments, which are reprinted in appendix II. In its comments, HHS concurred with our recommendations and stated that CMS and CDC have worked together to improve injection safety practices in ASCs, as well as other settings, such as dialysis facilities, nursing homes, and hospitals. HHS stated that CMS intends to resume collection of the Infection Control Surveyor Worksheet data beginning in fiscal year 2013 for a state-stratified, randomly selected subset of ASCs surveyed in that year and repeat this sampling and data collection approximately every 3 years thereafter. Additionally, HHS stated that CMS will use the data collected on unsafe injection practices to continue to monitor ASC compliance with the agency's health and safety standards related to infection control. HHS also believes that the data it collects can be used to assess trends in injection practices in ASCs over time. Lastly, HHS stated that CDC supports targeting the outreach of the One and Only Campaign toward specific clinician groups and setting types, though the agency further noted that broad outreach also remains critical as demonstrated by the wide variety of settings where blood-borne pathogen outbreaks and unsafe injection practices have been identified. We agree that broad outreach is important and should be ongoing; however, additional targeted outreach to settings that are not overseen by CMS represents an opportunity to help focus available resources to reach clinicians and facilities that have not been reached through other means, such as CMS's oversight. HHS also provided us with technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Number of individuals notified 3,287 2 Suspected syringe reuse contaminating medication vials; use of single-dose vials of propofol for more than one patient hepatitis B, or both 2 Syringe reuse contaminating medication vials; use of single-dose vials of contrast, lidocaine, and sodium bicarbonate for more than one patient; failure to use aseptic technique when accessing medication vials 5 Syringe reuse; narcotics diversion by clinician 2 Suspected syringe reuse contaminating medication vials; single-dose vials of propofol used for more than one patient Florida Department of Health, unpublished data. R. D. Greeley, S. Semple, N. D. Thompson, P. High, E. Rudowski, E. Handschur, et al., "Hepatitis B Outbreak Associated with a Hematology-Oncology Office Practice in New Jersey, 2009," American Journal of Infection Control, vol. 39, no. 8 (2011): 663-670. New York City Department of Health and Mental Hygiene, unpublished data. E. Bancroft and S. Hathaway, "Hepatitis B Outbreak in an Assisted Facility," in Los Angeles County Department of Public Health, Acute Communicable Diseases Program, Special Studies Report 2010, 33-36, accessed June 26, 2012, http://publichealth.lacounty.gov/acd/reports/SpecialStudiesReport2010.pdf. W. Hellinger, L. Bacalis, R. Kay, and S. Lange, "Cluster of Healthcare Associated Hepatitis C Virus Infections Associated with Drug Diversion" (paper presented at the Society for Healthcare Epidemiology of America 2011 Annual Scientific Conference, Dallas, Tex. April 2004). W. C. Hellinger, L. P. Bacalis, R. S. Kay, N. D. Thompson, G. Xia, Y. Lin, Y. E. Khudyakov, and J. F. Perz, "Health Care-Associated Hepatitis C Virus Infections Attributed to Narcotic Diversion," Annals of Internal Medicine. vol. 156, no. 7 (2012): 477-482. "2100 More Patients to Have Hep C Test," News4Jax.com. September 20, 2010. New York City Department of Health and Mental Hygiene, unpublished data. In addition to the contact named above, Will Simerl, Assistant Director; George Bogart; Leonard Brown; Rebecca Hendrickson; Krister Friday; Eric Peterson; and Pauline Seretakis made key contributions to this report.

Recent outbreaks of blood-borne pathogens--specifically hepatitis B and C--that were linked to a specific health care facility or clinician have resulted when clinicians use unsafe injection practices. Such infections can have serious long-term consequences for patients, including cirrhosis or liver cancer. Of the known incidents of blood-borne pathogen outbreaks attributed to unsafe injection practices--which include reusing syringes for multiple patients--most have occurred in ambulatory care settings, such as ASCs and physician offices. CMS oversees injection practices by setting and enforcing health and safety standards that apply to ASCs but not physician offices. GAO was asked to examine (1) available information on the extent and cost of blood-borne pathogen outbreaks related to unsafe injection practices in ambulatory care settings, (2) the changes in federal oversight to prevent unsafe injection practices in ambulatory care settings since 2009, and (3) other federal efforts to improve injection safety practices in ambulatory care settings. GAO reviewed CDC and CMS documentation and CDC data, and interviewed officials from various HHS agencies and other stakeholders. Data on the extent and cost of blood-borne pathogen outbreaks related to unsafe injection practices in ambulatory care settings are limited and likely underestimate the full extent of such outbreaks. An agency within the Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC), collects data on outbreaks identified by state and local health departments. These data show that from 2001 through 2011, there were at least 18 outbreaks of viral hepatitis associated with unsafe injection practices in ambulatory settings, such as physician offices or ambulatory surgical centers (ASC). CDC officials and others believe that the known outbreaks do not represent the full extent of such outbreaks for a number of reasons, such as infections often being difficult to detect and trace to specific health care facilities. Additionally, comprehensive data on the cost of blood-borne pathogen outbreaks to the health care system do not exist, but CDC and other officials believe these costs can be substantial for those affected. For example, individuals may face treatment costs and health departments may face costs for investigating and notifying patients of potential exposure to infection. Another HHS agency, the Centers for Medicare & Medicaid Services (CMS), has expanded its oversight of unsafe injection practices in ASCs since 2009 by requiring surveyors who inspect these facilities to use its Infection Control Surveyor Worksheet to document the extent to which ASCs are following safe injection practices and to survey more facilities to determine compliance with CMS's health and safety standards. Safe injection practices are included under several of CMS's broader health and safety standards that also address a number of other topics related to infection control and medication administration. As part of implementing the expanded oversight of ASCs, CMS collected and plans to analyze detailed information from these surveyor worksheets for fiscal years 2010 and 2011. This information will be used to assess CMS's oversight efforts to improve infection control and also allow CDC--with which CMS shared its data--to determine a baseline assessment of the extent of unsafe injection practices in ASCs nationally. However, in part because of concerns that collecting these data is a burden to surveyors, CMS officials said the agency stopped collecting data from surveyor worksheets after fiscal year 2011. Without some form of continued collection and analysis of injection safety data, CMS will lose its capacity to oversee how well surveyors monitor unsafe injection practices, and CDC will be unable to determine the extent of these practices. To improve injection practices, various HHS agencies have taken steps to communicate information on safe injection practices to clinicians. For example, CDC has developed tools to communicate its evidence-based guidelines to clinicians in ambulatory care settings. In partnership with other health-care-related organizations, CDC also developed an educational campaign--the One and Only Campaign--that seeks to broadly educate both clinicians and patients about safe injection practices. While the campaign has targeted some types of clinicians and health care settings that have experienced a blood-borne pathogen outbreak related to unsafe injection practices, additional targeted outreach is needed for health care settings not overseen by CMS. GAO recommends that HHS (1) resume collecting data on unsafe injection practices that will permit continued monitoring of such practices, (2) use those data for continued monitoring of ASCs, and (3) strengthen the targeting efforts of the One and Only Campaign for health care settings not overseen by CMS. HHS agreed with GAO's recommendations.

It is perfectly legal for U.S. persons to hold money offshore. Taxpayers may hold foreign accounts and credit cards for a number of legitimate reasons. For example, taxpayers may have worked or traveled overseas extensively or inherited money from a foreign relative. As shown in figure 1, although holding money offshore is legal, taxpayers must generally report their control over accounts valued at more than $10,000. Taxpayers must also report income, whether earned in the United States, or offshore. The type and extent of individual taxpayers' illegal offshore activity varies. In 2004, we reviewed OVCI to provide information to Congress on the characteristics of taxpayers who came forward regarding their noncompliant offshore activities, and to understand how those taxpayers became noncompliant. According to IRS data, OVCI applicants were a diverse group, for instance with wide variations in income and occupation. In each of the 3 years of OVCI we reviewed, at least 10 percent of the OVCI applicants had original adjusted gross incomes (AGI) of more than half a million dollars, while the median original AGI of applicants ranged from $39,000 in tax year 2001 to $52,000 in tax year 2000. Applicants listed over 200 occupations on their federal tax returns, including accountants, members of the clergy, builders, physicians, and teachers. Some OVCI applicants' noncompliance appeared to be intentional, while others' appeared to be inadvertent. Those applicants who had hidden money offshore through fairly elaborate schemes involving, for instance, multiple offshore bank accounts, appeared to be deliberately noncompliant. Other applicants appeared to have fallen into noncompliance inadvertently, for example, by inheriting money held in a foreign bank account and not realizing that income earned on the account had to be reported to IRS on their tax returns. OVCI applicants' median adjustment to taxes due was relatively modest. For tax year 2001, the median additional taxes owed were $4,401, median penalties assessed were $657, and median interest owed was $301. However, other examples of offshore evasion have involved very substantial sums, complex structures and clear nefarious intent. For example, in 2006, Congress found several cases involving taxpayers with relatively large sums involved in abusive offshore transactions, including a U.S. businessman who, with the guidance of a prominent offshore promoter, moved from $400,000 to $500,000 in untaxed business income offshore. In another case, in 2006 a wealthy American pled guilty to tax evasion accomplished by creating offshore corporations and trusts, and then using a series of assignments, sales and transfers to place about $450 million in cash and stock offshore. According to the indictment, the businessman used these methods to evade more than $200 million in federal and District of Columbia income taxes. Limited transparency regarding U.S. persons' financial activities in foreign jurisdictions contributes to the risk that some persons may use offshore entities to hide illegal activity from U.S. regulators and enforcement officials. For instance, individuals can sometimes use corporate entities to disguise ownership or income. Abusive offshore schemes are often accomplished through the use of limited liability corporations (LLC), limited liability partnerships and international business corporations, as well as trusts, foreign financial accounts, debit or credit cards, and other similar instruments. According to IRS, offshore schemes can be complex, often involving multiple layers and multiple transactions used to hide the true nature and ownership of the assets or income that the taxpayer is attempting to hide from IRS. In addition, creation of offshore entities and structures can be relatively easy and inexpensive. For example, establishing a Cayman Islands exempted company can be accomplished for less than $600 (not taking into account service providers' fees), and the company is not required to maintain its register of shareholders in the Cayman Islands or hold an annual shareholders meeting. Other offshore jurisdictions provide similar services to those wishing to set up offshore entities. Another factor that makes it easier for individuals to avoid paying taxes through the use of offshore jurisdictions is that taxpayers' compliance is largely based on voluntary self-reporting. When reporting is entirely voluntary, compliance can suffer. IRS has found that when there is little or no reporting of taxpayers' income by third parties to taxpayers and IRS, taxpayers include less than half of the income on their tax returns. One way that taxpayers are required to self-report foreign holdings is through the Report of Foreign Bank and Financial Accounts (FBAR) form. Citizens, residents, or persons doing business in the United States with authority over a financial account or accounts in another country exceeding $10,000 in value at any time during the year are to report the account to the Department of the Treasury (Treasury). U.S. persons transferring assets to or receiving distributions from a foreign trust are required to report the activity to IRS on Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. From 2000 through 2007, the number of FBARs received by Treasury has increased by nearly 85 percent, according to IRS. In 2008, IRS also said that, despite the significant increase in filings, concern remains about the degree of reporting compliance for those who are required to file FBARs. Also in 2008, the U.S. Senate Joint Committee on Taxation (JCT) reported that three categories of U.S. persons are potentially not filing FBARs and Form 3520s as required by law: taxpayers who are unaware or confused about filing requirements, taxpayers who are concealing criminal activity and taxpayers who are structuring transactions to avoid triggering the filing requirements. Our 2004 review of applicants who came forward to declare offshore income under OVCI also suggested a high level of FBAR nonreporting, even by those individuals who reported all of their income to IRS. For instance, for each year covered by OVCI, more than half of the applicants had generally reported all of their income and paid taxes due--even on their offshore income--but had failed to disclose the existence of their foreign bank accounts as required by Treasury. Finally, financial advisors often facilitate abusive transactions by enabling taxpayers' offshore schemes. We have reported that most possible offshore tax evasion cases are discovered through IRS's investigations of promoters of offshore schemes. During our 2004 review of OVCI, we examined Web sites promoting offshore investments and found that most provided off-the-shelf offshore companies or package deals, including the ability to incorporate offshore within the next day by buying an off-the- shelf company at a cost of $1,500. These promoters provided taxpayers a way to quickly and easily move money offshore and repatriate it without reporting that money to IRS. Congress also has found promoters behind several offshore evasion schemes such as the Equity Development Group (EDG), an offshore promoter based in Dallas, that recruited clients through the Internet and helped them create offshore structures. With few resources and no employees, EDG enabled clients to move assets offshore, maintain control of them, obscure their ownership, and conceal their existence from family, courts, creditors and IRS and other government agencies. In another case, a Seattle-based securities firm, Quellos Group, LLC, designed, promoted, and implemented securities transactions to shelter over $2 billion in capital gains from U.S. taxes, relying in part on offshore secrecy to shield its workings from U.S. law enforcement. This scheme was estimated to cost the U.S. Treasury about $300 million in lost revenue. Large financial firms also have been found to have advised U.S. clients on the use of offshore structures to hide assets and evade U.S. taxes. For example, in 2008 the IRS announced that Liechtenstein Global Trust Group (LGT), a leading Liechtenstein financial institution, had assisted U.S. citizens in evading taxes. In another case, in June 2008, Bradley Birkenfeld, a former employee of Swiss bank UBS AG, pleaded guilty in federal district court to conspiring with an American billionaire real estate developer, Swiss bankers and his co-defendant, Mario Staggl, to help the developer evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein. Birkenfeld admitted that from 2001 through 2006 he routinely traveled to and had contacts within the United States to help wealthy Americans conceal their ownership of assets held offshore and evade paying taxes on the income generated from those assets. In February 2009 the Department of Justice announced that UBS entered into a deferred prosecution agreement for conspiring to defraud the U.S. government by helping U.S. citizens to conceal assets through UBS accounts held in the names of nominees and/or sham entities. In announcing the deferred prosecution agreement, the Department of Justice alleged that Swiss bankers routinely traveled to the United States to market Swiss bank secrecy to U.S. clients interested in attempting to evade U.S. income taxes. Court documents assert that, in 2004 alone, Swiss bankers allegedly traveled to the United States approximately 3,800 times to discuss their clients' Swiss bank accounts. UBS agreed to pay $780 million in fines, penalties, interest and restitution for its actions. IRS has several initiatives that target offshore tax evasion, but tax evasion and crimes involving offshore entities are difficult to detect and to prosecute. We have reported that offshore activity presents challenges related to oversight and enforcement, such as issues involved in self- reporting, the complexity of offshore financial transactions and relationships among entities, the lengthy processes involved with completing offshore examinations, the lack of jurisdictional authority to pursue information, the specificity required by information-sharing agreements, and issues with third-party financial institution reporting. As noted earlier, individual U.S. taxpayers and corporations generally are required to self-report their foreign taxable income to IRS. Self-reporting is inherently unreliable, for several reasons. Because financial activity carried out in foreign jurisdictions often is not subject to third-party reporting requirements, in many cases persons who intend to evade U.S. taxes are better able to avoid detection. For example, foreign corporations with no trade or business in the United States are not generally required to report to IRS any dividend payments they make to shareholders, even if those payments go to U.S. taxpayers. Therefore, a U.S. shareholder could fail to report the dividend payment with little chance of IRS detection. In addition, when self-reporting does occur, the completeness and accuracy of reported information is not easily verified. In addition, the complexity of offshore financial transactions can complicate IRS investigation and examination efforts. Specifically, offshore schemes can involve multiple entities and accounts established in different jurisdictions in an attempt to conceal income and the identity of the beneficial owners. For instance, we have previously reported on offshore schemes involving "tiered" structures of foreign corporations and domestic and foreign trusts in jurisdictions that allowed individuals to hide taxable income or make false deductions, such as in the case of United States v. Taylor. The defendants in United States v. Taylor and United States v. Petersen pleaded guilty in U.S. District Court to crimes related to an illegal tax evasion scheme involving offshore entities. As part of the scheme, the defendants participated in establishing a "web" of domestic and offshore entities that was used to conceal the beneficial owners of assets, and to conduct fictitious business activity that created false business losses, and thus false tax deductions, for clients. Given the characteristics of offshore evasion, IRS examinations that include offshore tax issues for an individual can take much longer than other examinations. Specifically, our past work has shown that from 2002 through 2005, IRS examinations involving offshore tax evasion took a median of 500 more calendar days to develop and examine than other examinations. The amount of time required to complete offshore examinations is lengthy for several reasons, such as technical complexity and the difficulty of obtaining information from foreign sources. For instance, many abusive offshore transactions are identified through IRS examination of promoters, and IRS officials have said that it can take years to get a client list from a promoter and, even with a client list, there is still much work that IRS needs to do before the participants of the offshore schemes can be audited. Because of the 3-year statute of limitations on assessments, the additional time needed to complete an offshore examination means that IRS sometimes has to prematurely end offshore examinations and sometimes chooses not to open them at all, despite evidence of likely noncompliance. We said that to provide IRS with additional flexibility in combating offshore tax evasion schemes, Congress should make an exception to the 3-year civil statute of limitations assessment period for taxpayers involved in offshore financial activity. IRS agreed that this would be useful. In testimony before Congress, the Commissioner of Internal Revenue has said that in cases involving offshore bank and investment accounts in bank secrecy jurisdictions, it would be helpful for Congress to extend the time for assessing a tax liability with respect to offshore issues from 3 to 6 years. Legislation was introduced in 2007, but not enacted, to increase the statute of limitations from 3 to 6 years for examinations of returns that involve offshore activity in financial secrecy jurisdictions. At a more fundamental level, jurisdictional limitations also make it difficult for IRS to identify potential noncompliance associated with offshore activity. Money is mobile and once it has moved offshore, the U.S. government generally does not have the authority to require foreign governments or foreign financial institutions to help IRS collect tax on income generated from that money. In prior work we have reported that a Deputy Commissioner of IRS's Large and Midsized Business Division said that a primary challenge related to U.S. persons' uses of offshore jurisdictions is simply that when a foreign corporation is encountered or involved, IRS has difficulty pursuing beneficial ownership any further because of a lack of jurisdiction. IRS officials told us that IRS does not have jurisdiction over foreign entities whose incomes are not effectively connected with a trade or business in the United States. Thus, if a noncompliant U.S. person established a foreign entity to carry out non- U.S. business, it would be difficult for IRS to identify that person as the beneficial owner. In addition, while the U.S. government has useful information-sharing agreements in place to facilitate the exchange of information on possible noncompliance by U.S. persons with offshore jurisdictions, agreements involving the exchange of information on request generally require IRS to know a substantial amount about the noncompliance before other nations will provide information. For example, the U.S. government uses Tax Information Exchange Agreements (TIEA) as the dedicated channel for exchange of tax information, while Mutual Legal Assistance Treaties (MLAT) remain the channel for exchanging information for offenses involving nontax criminal violations. Nevertheless, the Commissioner of Internal Revenue recently said that in some instances the process to obtain names of account holders is inefficient, and IRS must rely on other legal and investigative techniques. As we have reported previously with regard to the use of these channels with the Cayman Islands government, neither TIEAs nor MLATs allow for "fishing expeditions," or general inquiries about a large group of accounts or entities. Rather, as is standard with arrangements providing for exchange of information on request, each request must involve a particular target. For example, IRS cannot send a request for information on all corporations established in the Cayman Islands over the past year. The request must be specific enough to identify the taxpayer and the tax purpose for which the information is sought, as well as state the reasonable grounds for believing that the information is in the territory of the other party. One program IRS established to help ensure compliance when offshore transactions occur is the QI program. Under the QI program, foreign financial institutions voluntarily report to IRS income earned and taxes withheld on U.S. source income, providing some assurance that taxes on U.S. source income sent offshore are properly withheld and income is properly reported. However, significant gaps exist in the information available to IRS about the owners of offshore accounts. Perhaps most important, a low percentage of U.S. source income sent offshore flows through QIs. For tax year 2003, about 12.5 percent of $293 billion in U.S. income flowed through QIs. The rest, or about $256 billion, flowed through U.S. withholding agents. While QIs are required to verify account owners' identities, U.S. withholding agents can accept owners' self-certification of their identities at face value. Reliance on self-certification leads to a greater potential for improper withholding because of misinformation or fraud. IRS does not measure the extent to which U.S. withholding agents rely on self-certifications. In our 2007 report we recommended that IRS perform this measurement and use these data in its compliance efforts. For instance, IRS could increase oversight for U.S. withholding agents who primarily rely on self- certifications in determining whether withholding should occur. IRS has taken some steps to measure such reliance, but IRS's approach thus far has not been systemic and also does not address improving the efficiency of its compliance efforts. The previously discussed case of Swiss bank UBS provides a stark example of the QI program's vulnerabilities. In February 2009, UBS entered into a deferred prosecution agreement with Justice and agreed to pay $780 million in fines, penalties, interest and restitution for defrauding the U.S. government by helping United States taxpayers hide assets through UBS accounts held in the names of nominees and/or sham entities. UBS entered into a QI program agreement with IRS in 2001, and was required to report U.S. citizens' income to the IRS during the time that it conspired to defraud the U.S. government. We also recommended that IRS require the QI program's external auditors report on any indications of fraud or illegal acts that could significantly affect the results of their reviews of the QIs' compliance with their agreements. However, it should be noted that we can not say that having this reporting requirement in place would have forestalled UBS's efforts to defraud the United States or detected them earlier. IRS has proposed some amendments to the QI program that would somewhat enhance QI auditors' responsibilities in this area. In our 2007 report on the QI program, we also recommended that IRS determine why U.S. withholding agents and QIs report billions of dollars in funds flowing to unknown jurisdictions and unidentified recipients, and recover any withholding taxes that should have been paid. IRS has taken steps toward implementing this recommendation. We also recommended that IRS modify QI contracts to require electronic filing of forms and invest the funds necessary to perfect the data. IRS is including an application for filing information returns electronically in all QI applications and renewals but has not measured whether including the forms in the applications has had an impact on the number electronic filers. In our 2004 review of OVCI, we noted that the diverse types of individuals involved in offshore noncompliance may require multiple compliance strategies on the part of IRS. The limited transparency involved in U.S. persons' activities in offshore jurisdictions also presents several challenges to IRS and Treasury. As Commissioner of Internal Revenue Shulman recently commented, "There is general agreement in the tax administration community that there is no 'silver bullet' or one strategy that will alone solve the problems of offshore tax avoidance." Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact Michael Brostek, Director, Strategic Issues, 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 statement. Individuals making key contributions to this testimony include David Lewis, Assistant Director; S. Mike Davis; Jonda VanPelt; Elwood White; and A.J. Stephens. 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.

Much offshore financial activity by individual U.S. taxpayers is not illegal, but numerous schemes have been devised to hide the true ownership of funds held offshore and income moving between the United States and offshore jurisdictions. In recent years, GAO has reported on several aspects of offshore financial activity and the tax compliance and tax administration challenges such activity raises for the Internal Revenue Service (IRS). To assist the Congress in understanding these issues and to support Congress's consideration of possible legislative changes, GAO was asked to summarize its recent work describing individual offshore tax noncompliance, factors that enable offshore noncompliance, and the challenges that U.S. taxpayers' financial activity in offshore jurisdictions pose for IRS. This statement was primarily drawn from previously issued GAO products. Individual U.S. taxpayers engage in financial activity involving offshore jurisdictions for a variety of reasons. When they do, they are obligated to report any income earned in the course of those activities. They are also required to report when they control more than $10,000 in assets outside of the country. However, much of this required reporting depends on taxpayers knowing their reporting obligations and voluntarily complying. Some taxpayers do not comply with their income and asset reporting obligations. Limited transparency, the relative ease and low cost of establishing offshore entities, and an array of financial advisors can facilitate tax evasion. IRS's Qualified Intermediary program has helped IRS obtain information about U.S. taxpayers' offshore financial activity, but as the recent case against the large Swiss bank UBS AG underscores, the program alone is insufficient to address all offshore tax evasion. Earlier, GAO had recommended changes to improve QI reporting, make better use of reports, and enhance assurance that any fraudulent QI activity is detected. IRS examinations that include offshore tax issues can take much longer than other examinations. GAO's past work has shown that from 2002 through 2005, IRS examinations involving offshore tax evasion took a median of 500 more calendar days to develop and examine than other examinations. The amount of time required to complete offshore examinations is lengthy for several reasons, such as technical complexity and the difficulty of obtaining information from foreign sources. However, the same statute of limitations preventing IRS from assessing taxes or penalties more than 3 years after a return is filed applies to both domestic and offshore financial activity. The additional time needed to complete an offshore examination means that IRS sometimes has to prematurely end offshore examinations and sometimes chooses not to open them at all, despite evidence of likely noncompliance. In testimony before Congress, the Commissioner of Internal Revenue has said that in cases involving offshore bank and investment accounts in bank secrecy jurisdictions, it would be helpful for Congress to extend the time to assess a tax liability with respect to offshore issues from 3 to 6 years.

The federal government lacks a clear picture of the volume of discrimination and whistleblowing reprisal cases involving federal employees. The lack of a complete accounting of cases is in part a by- product of the complexity of the redress system for federal employees and the different ways in which case data are reported. The NoFEAR Act would require agencies to report the number of discrimination and whistleblower reprisal cases. Executive branch civil servants are afforded opportunities for redress of complaints of discrimination or retaliation for whistleblowing at three levels: first, within their employing agencies; next, at one of the administrative bodies with sometimes overlapping jurisdictions that investigate or adjudicate their complaints; and, finally, in the federal courts. Where discrimination is alleged, the Equal Employment Opportunity Commission (EEOC) hears complaints employees file with their agencies and reviews agencies' decisions on these complaints. In a case in which an employee alleges that discrimination was the motive for serious personnel actions, such as dismissal or suspension for more than 14 days, the employee can request a hearing before the Merit Systems Protection Board (MSPB). MSPB's decisions on such cases can then be reviewed by EEOC. For federal employees who believe that they have been subject to whistleblower reprisal, the Office of Special Counsel (OSC) will investigate their complaints and seek corrective action when a complaint is valid. When agencies fail to take corrective action, OSC or the employee can take the case to MSPB for resolution. Alternatively, an employee can file a whistleblower reprisal complaint directly with MSPB, if the personnel action taken against the person is itself appealable to MSPB. In addition, under certain environmental laws and the Energy Reorganization Act, employees can ask the Department of Labor (DOL) and the Nuclear Regulatory Commission to investigate their complaints. Employees who belong to collective bargaining units represented by unions can also file grievances over discrimination and reprisal allegations under the terms of collective bargaining agreements. In those situations, the employee must choose to seek relief either under the statutory procedure discussed above or under the negotiated grievance procedure, but not both. If an employee files a grievance alleging discrimination under the negotiated grievance procedure, the Federal Labor Relations Authority (FLRA) can review any resulting arbitrator's decision. A grievant may appeal the final decision of the agency, the arbitrator, or FLRA to EEOC. A complainant dissatisfied with the outcome of his or her whistleblower reprisal case can file an appeal to have the case reviewed by a federal appeals court. An employee with a discrimination complaint who is dissatisfied with a decision by MSPB or EEOC, however, can file a lawsuit in a federal district court and seek a de novo trial. With reporting requirements and procedures varying among the administrative agencies and the courts, data on the number of discrimination and whistleblower reprisal cases are not readily available to form a clear and reliable picture of overall case activity. However, available data do provide some insights about caseloads and trends. These data and our prior work show that most discrimination and whistleblower reprisal cases involving federal employees are handled under EEOC, MSPB, and OSC processes, with complaints filed under EEOC's process by far accounting for the largest volume of cases. In fiscal year 2000, federal employees filed 24,524 discrimination complaints against their agencies under EEOC's process. In fiscal year 2000, MSPB received 991 appeals of personnel actions that alleged discrimination. MSPB also received 414 appeals alleging whistleblower reprisal in fiscal year 2000, while OSC received 773 complaints of whistleblower reprisal. There are two caveats I need to offer about these statistics. The first is that because of jurisdictional overlap among the three agencies, the statistics cannot be added together to give a total number of discrimination and whistleblower reprisal complaints. The second caveat is that in our past work, we found some problems with the reliability and accuracy of data reported by EEOC. Notwithstanding these caveats, the available data also show that the last decade saw an overall increase in the number of cases, particularly discrimination complaints under EEOC's jurisdiction. The number of cases under EEOC's jurisdiction, which stood at 17,696 in fiscal year 1991, showed a fairly steady upward trend, peaking at 28,947 in fiscal year 1997. Although the number of new cases each year has declined since fiscal year 1997, the number of cases in fiscal year 2000--24,524--is almost 40 percent greater than in fiscal year 1991, despite a smaller federal workforce. Caseload data can be a starting point for agency managers to understand the nature and scope of issues in the workplace involving discrimination, reprisal, and other conflicts and problems, and can help in developing strategies for dealing with these issues. However, caseload data can only be a starting point because they obviously do not capture any discrimination or reprisal that is not reported. As I discussed above, most discrimination complaints are handled within the process under EEOC's jurisdiction. However, we have found in our past work that EEOC does not collect data in a way needed by decisionmakers and program managers to discern trends in workplace issues represented by discrimination complaints, understand the issues underlying these complaints, and plan corrective actions. Although EEOC has initiatives under way to deal with data shortcomings, relevant information is still lacking on such matters as (1) the statutory basis (e.g., race, sex, or disability discrimination) under which employees filed complaints and (2) the kinds of issues, such as nonselection for promotion or harassment, that were cited in the complaints. The NoFEAR Act would also require agencies to report the status or disposition of discrimination and whistleblower reprisal cases. The available data show that most allegations of discrimination and reprisal for whistleblowing are dismissed, withdrawn by the complainant, or closed without a finding of discrimination. However, many other cases are settled. Of the discrimination cases within EEOC's jurisdiction, 5,794 (21.3 percent) of the 27,176 cases were closed through a settlement. At MSPB, 279 (28.5 percent) of the 980 appeals that alleged discrimination were settled. With regard to the 440 whistleblower cases at MSPB, 93 (21 percent) were settled. While settlements are made when evidence may point to discrimination or reprisal, at other times an agency may make a business decision and settle for a variety of reasons, including that pursuing a case may be too costly, even if the agency believes it would have ultimately prevailed. Finally, in some cases, discrimination or reprisal is found. Of the 27,176 cases within the discrimination complaint process under EEOC's jurisdiction that were closed in fiscal year 2000, 325 (about 1 percent) contained a finding of discrimination. At MSPB, of the 980 cases alleging discrimination, discrimination was found in 4 (four-tenths of a percent). In 440 cases alleging whistleblower reprisal it reviewed, MSPB found that a prohibited personnel practice occurred in 2 (five-tenths of a percent) of the cases. At OSC, favorable actions were obtained in 47 of 671 (7 percent) whistleblower reprisal matters closed in fiscal year 2000. It is important to note that agencies have responded to the rise in the number of complaints and the costs associated with them by adopting alternative means of dispute resolution (ADR). Using ADR processes, such as mediation, agencies intervene in the early stages of conflicts in an attempt to resolve or settle them before positions harden, workplace relationships deteriorate, and resolution becomes more difficult and costly. A premise behind a requirement EEOC put in place in 1999 that agencies make ADR available was that the complaint system was burdened with many cases that reflected basic workplace communications problems and not necessarily discrimination. Some agencies, most notably the Postal Service, have reported reductions in discrimination complaint caseloads through the use of ADR. In fact the Postal Service, from fiscal year 1997 through fiscal year 2000, saw a 26 percent decline in the number of discrimination complaints that the agency largely attributes to its mediation program. Because ADR prevents some disputes from rising to formal complaints, a reduction in the number of formal complaints should not necessarily be looked at as a reduction in workplace conflict, but it can indicate that an agency is more effectively dealing with workplace conflict. Meaningful data along the lines I discussed earlier are useful in helping to measure an agency's success in adhering to merit system principles, treating its people in a fair and equitable way, and achieving a diverse and inclusive workforce. We encourage such assessments of agencies' workplaces and human capital systems to help them align their people policies to support organizational performance goals. In addition, data foster transparency, which in turn provides an incentive to improve performance and enhance the image of the agency in the eyes of both its employees and the public. Another possible means of promoting accountability might be to have organizations bear more fully the costs of payments to complainants and their lawyers made in resolving cases of discrimination and reprisal for whistleblowing. Currently, federal agencies do not always bear the costs of settlements or judgments in discrimination or reprisal complaints. Agencies will pay these costs when a complaint is resolved by administrative procedures, such as the discrimination complaint process. However, when a lawsuit is filed, any subsequent monetary relief is generally paid by the Judgment Fund. (One exception is the Postal Service, which is responsible for settlement and judgment costs.) The Judgment Fund provides a permanent indefinite appropriation to pay settlements and judgments against the federal government. Congress created the Judgment Fund to avoid the need for a specific congressional appropriation for settlement and judgment costs and to allow for prompter payments. The NoFEAR Act would require that agencies reimburse the Judgment Fund for payments made for discrimination and whistleblower reprisal cases. Table 1 below shows payments made by agencies for discrimination complaint cases processed under administrative procedures within EEOC's jurisdiction and payments from the Judgment Fund for employment discrimination lawsuits (these were the only readily available data). In addition to attorney fees and expenses, payments made to complainants include back pay, compensatory damages, and lump sum payments. As the table shows, agencies made payments totaling about $26 million in fiscal year 2000 for discrimination complaint settlements and judgments. At the same time, agencies were relieved of paying almost $43 million in cases because of the existence of the Judgment Fund. The availability of the Judgment Fund to pay settlement and judgment costs has brought about debate with regard to agency accountability. On one hand, it could be argued that the Judgment Fund provides a safety net to help ensure that agency operations are not disrupted in the event of a large financial settlement or judgment. It can also be argued, however, that the fund discourages accountability by being a disincentive to agencies to resolve matters promptly in the administrative processes; by not pursuing resolution, an agency could shift the cost of resolution from its budget to the Judgment Fund and escape the scrutiny that would accompany a request for a supplemental appropriation. Congress dealt with a somewhat similar situation when it enacted the Contract Disputes Act in 1978, which requires agencies to either reimburse the Judgment Fund for judgments awarded in contract claims from available appropriations or to obtain an additional appropriation for such purposes. This provision was intended to counter the incentive for an agency to avoid settling and prolong litigation in order to have the final judgment against the agency occur in court. In reconciling these viewpoints on financial accountability, Congress will need to balance accountability with the needs of the public to receive expected services. Certainly, just as it is important for agencies to be held accountable in cases where discrimination or reprisal for whistleblowing is found, so must individuals be held accountable for engaging in such misconduct. The NoFEAR Act would require agencies to report the number of employees disciplined for discrimination, retaliation, or harassment.Published statistical data can be important for agencies to send a message to their employees that individuals will be held accountable for their actions in cases involving discrimination, retaliation, or harassment. Although we have not done any formal work in this area, we know of two agencies--the Department of Agriculture and the Internal Revenue Service (IRS)--that systematically review outcomes of discrimination cases to determine if any individual should be disciplined. Since January 1998, Agriculture has been reviewing cases in which discrimination was found or in which there were settlement agreements to determine if an employee should be disciplined for discrimination or misconduct related to civil rights. An Agriculture official said that a formal policy on accountability and discipline in civil rights-related cases was currently pending approval. Since July 1998, IRS has been reviewing cases in which discrimination was found or in which there were settlement agreements to determine if the discrimination was intentional. Where an employee has been found to have discriminated against another employee of IRS (or a taxpayer or a taxpayer's representative), the IRS Restructuring and Reform Act of 1998 provides that the individual be terminated for his or her actions. Only the IRS Commissioner has the authority to mitigate termination to a lesser penalty. I would also add that besides traditional forms of discipline--such as termination, suspension, or letter of reprimand--employees can be held accountable for their behavior through an agency's performance management system. For example, an employee whose behavior does not rise to the level of discrimination but otherwise demonstrates insensitivity or poor communication skills can and should have that fact reflected in his or her performance appraisal. The NoFEAR Act provides that agencies notify employees of the rights and protections available to them under the antidiscrimination and whistleblower statutes in writing and post this information on their Internet sites. This provision reinforces existing requirements that employees be notified of rights and remedies concerning discrimination and whistleblower protection. There has been a concern that federal employees were not sufficiently aware of their protections, particularly about protections from reprisal for whistleblowing, and without sufficient knowledge of these protections, may not come forward to report misconduct or inefficiencies for fear of reprisal. We first pointed this out in a report issued in 1992. Now, almost a decade later, OSC has identified "widespread ignorance" in the federal workforce concerning OSC and the laws it enforces, even though agencies are to inform their employees of these protections. According to OSC's fiscal year 2000 Performance Report, responses to an OSC survey indicated that few federal agencies have comprehensive education programs for their employees and mangers. To help ensure economical, efficient, and effective delivery of services for the benefit of the American people, allegations of discrimination and reprisal for whistleblowing in the federal workplace must be dealt with in a fair, equitable, and timely manner. Doing so requires, first, reliable and complete reporting of data as a starting point to understand the nature and scope of issues in the workplace involving discrimination, reprisal, and other conflicts and problems, and to help develop strategies for dealing with these issues. Second, agencies and individuals must be accountable for their actions. Third, the workforce must be aware of laws prohibiting discrimination and whistleblower reprisal to deter this kind of conduct but also so that they know what course of action they can take when misconduct has occurred.

Federal employees who report waste, fraud, and abuse shouldn't have to fear discrimination and retaliation. Despite laws designed to protect whistleblowers, some have experienced or believed that they have experienced reprisals. Proposed legislation--the Notification and Federal Employee Antidiscrimination and Retaliation Act of 2001--would provide additional protections for federal employees and would provide important data to decisionmakers. First, the act would require agencies to report the number of discrimination and whistleblower reprisal cases. Because of a lack of data, the federal government currently doesn't have a clear picture of the volume of discrimination and whistleblowing reprisal cases involving federal employees. Such data could be a starting point for agency managers to understand the nature and scope of issues in the workplace involving reprisals and discrimination. Second, the act would make agencies and their leaders accountable for providing fair and equitable workplaces. In addition, individuals would be held accountable for their actions in cases in which discrimination has occurred. Finally, the act would require agencies to notify employees in writing of their rights and protections. This provision reinforces existing requirements that employees be notified of the rights and remedies concerning discrimination and whistleblower protection.

DHS has made progress in implementing its acquisition, information technology, financial, and human capital management functions, but continues to face obstacles and weaknesses in these functions that could hinder the department's transformation and implementation efforts. For example, DHS has faced challenges in implementing acquisition management controls, a consolidated financial management system, and a strategic human capital plan, among other things. As DHS continues to mature as an organization, it will be important that the department continue to work to strengthen its management functions since the effectiveness of these functions affects its ability to fulfill its homeland security and other missions. Acquisition management. While DHS has made recent progress in clarifying acquisition oversight processes, it continues to face obstacles in managing its acquisitions and ensuring proper implementation and departmentwide coordination. We previously reported that DHS faced challenges in acquisition management related to acquisition oversight, cost growth, and schedule delays. In June 2010, we reported that DHS continued to develop its acquisition oversight function and had begun to implement a revised acquisition management directive that includes more detailed guidance for programs to use when informing component and departmental decision making. We also reported that the senior-level Acquisition Review Board had begun to meet more frequently and provided programs decision memorandums with action items to improve performance. However, while the Acquisition Review Board reviewed 24 major acquisition programs in fiscal years 2008 and 2009, more than 40 major acquisition programs had not been reviewed, and programs had not consistently implemented review action items identified as part of the review by established deadlines. DHS acquisition oversight officials raised concerns about the accuracy of cost estimates for some of its major programs, making it difficult to assess the significance of the cost growth we identified. In addition, over half of the programs we reviewed awarded contracts to initiate acquisition activities without component or department approval of documents essential to planning acquisitions, setting operational requirements, and establishing acquisition program baselines. Programs also experienced other acquisition planning challenges, such as staffing shortages and lack of sustainment. For example, we reported that the U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) did not sufficiently define what capabilities and benefits would be delivered, by when, and at what cost, which contributed to development and deployment delays. In addition, we reported that three Coast Guard programs we reviewed--Maritime Patrol Aircraft, Response Boat-Medium, and Sentinel--reported placing orders for or receiving significant numbers of units prior to completing testing to demonstrate that what the programs were buying met Coast Guard needs. Our prior work has found that resolution of problems discovered during testing can sometimes require costly redesign or rework. We have made a number of recommendations to DHS to strengthen its acquisition management functions, such as (1) reinstating the Joint Requirements Council --the department's requirements review body--or establishing another departmental joint requirements oversight board to review and approve acquisition requirements and assess potential duplication of effort; (2) ensuring that budget decisions are informed by the results of investment reviews; (3) identifying and aligning sufficient management resources to implement oversight reviews throughout the investment life cycle; and (4) ensuring major investments comply with established component and departmental review policy standards. DHS generally concurred with these recommendations and reported taking action to begin to address some of them, including developing the Next Generation Periodic Reporting System to capture and track key program information, and monitoring cost and schedule performance, contract awards and program risks. Based on our work on DHS's acquisition management, we have identified specific actions and outcomes that we believe the department needs to achieve to address its acquisition management challenges. We believe that these actions and outcomes are critical to addressing the underlying root causes that have resulted in the high-risk designation. In particular, DHS should demonstrate and sustain effective execution of a knowledge-based acquisition process for new and legacy acquisition programs by, among other things, (1) validating required acquisition documents in a timely manner at each major milestone; (2) establishing and operating a Joint Requirements Council, or a similar body, to review and validate acquisition programs' requirements; (3) ensuring sufficient numbers of trained acquisition personnel at the department and component levels; and (4) establishing and demonstrating measurable progress in achieving goals that improve acquisition programs' compliance with departmental policies. Information technology management. DHS has undertaken efforts to establish information technology management controls and capabilities, but in September 2009 we reported that DHS had made uneven progress in its information technology management efforts to institutionalize a framework of interrelated management controls and capabilities. For example, DHS had continued to issue annual updates to its enterprise architecture that added previously missing scope and depth, and further improvements were planned to incorporate the level of content, referred to as segment architectures, needed to effectively introduce new systems and modify existing ones. Also, we reported that DHS had redefined its acquisition and investment management policies, practices, and structures, including establishing a system life cycle management methodology, and it had increased its acquisition workforce. Nevertheless, challenges remain relative to, for example, implementing the department's plan for strengthening its information technology human capital and fully defining key system investment and acquisition management policies and procedures for information technology. Moreover, the extent to which DHS had actually implemented these investment and acquisition management policies and practices on major information technology programs had been inconsistent. For example, our work showed that major information technology acquisition programs had not been subjected to executive-level acquisition and investment management reviews. As a result, we reported that major information technology programs aimed at delivering important mission capabilities, such as the Rescue 21 search and rescue system and the Secure Border Initiative Network (SBInet) virtual border fence, had not lived up to their capability, benefit, cost, and schedule expectations because of, for example, deficiencies in development and testing, and lack of risk management processes and key practices for developing reliable cost and schedule estimates. We have made a range of recommendations to strengthen DHS information technology management, such as establishing procedures for implementing project-specific investment management policies, and policies and procedures for portfolio-based investment management. We reported that while DHS and its components have made progress, more needs to be done before DHS can ensure that all system acquisitions are managed with the necessary rigor and discipline. Based on our work, we have identified actions and outcomes that we believe would help the department address challenges in information technology management that have contributed to our designation of DHS implementation and transformation as high risk. For example, DHS should, among other things, demonstrate measurable progress in implementing its information technology human capital plan and accomplishing defined outcomes, including ensuring that each system acquisition program office is sufficiently staffed. DHS should also establish and implement information technology investment management practices that have been independently assessed as having satisfied the capabilities associated with stage three of our Information Technology Investment Management Framework. In addition, the department should establish enhanced security of the department's internal information technology systems and networks. Financial management. DHS has made progress in addressing its financial management and internal controls weaknesses, but has not yet addressed all of them or developed a consolidated departmentwide financial management system. Since its establishment, DHS has been unable to obtain an unqualified audit opinion on its financial statements (i.e., prepare a set of financial statements that are considered reliable). For fiscal year 2009, the independent auditor issued a disclaimer on DHS's financial statements and identified eight deficiencies in DHS's internal control over financial reporting, six of which were so significant that they qualified as material weaknesses. Until these weaknesses are resolved, DHS will not be in position to provide reliable, timely, and useful financial data to support day-to-day decision making. DHS has taken steps to prepare and implement corrective action plans for its internal control weaknesses through the Internal Control Playbook, DHS's annual plan to design and implement departmentwide internal controls. In addition, in June 2007 and December 2009 we reported on DHS's progress in developing a consolidated financial management system, called the Transformation and Systems Consolidation (TASC) program, and made a number of recommendations to help DHS address challenges affecting the departmentwide financial management integration. In June 2007, we reported that DHS had made limited progress in integrating its existing financial management systems, and we made six recommendations focused on the need for DHS to define a departmentwide strategy and embrace disciplined processes necessary to properly manage the specific projects. We followed up on these recommendation in our December 2009 report and found that DHS had begun to take actions to implement four of our six 2007 recommendations but had not yet fully implemented any of them. Specifically, DHS had made progress in (1) defining its financial management strategy and plan, (2) developing a comprehensive concept of operations, (3) incorporating disciplined processes, and (4) implementing key human capital practices and plans for such a systems implementation effort. However, DHS had not yet taken the necessary actions to standardize and reengineer business processes across the department, including applicable internal controls, and to develop detailed consolidation and migration plans. While some of the details of the department's standardization of business processes and migration plans depend on the selected new financial management system, DHS would benefit from performing a gap analysis and identifying all of its affected current business processes so that DHS can analyze how closely the proposed system will meet the department's needs. In addition, we reported that DHS's reliance on contractors to define and implement the new financial management system, without the necessary oversight mechanisms to ensure that the processes were properly defined and effectively implemented, could result in system efforts plagued with serious performance and management problems. We reported that these issues placed DHS at risk for implementing a financial management system that does not meet cost, schedule, and performance goals. We recommended that DHS establish contractor oversight mechanisms to monitor the TASC program; expedite the completion of the development of the TASC financial management strategy and plan so that the department is well positioned to move forward with an integrated solution; and develop a human capital plan for the TASC program that identifies needed skills for the acquisition and implementation of the new system. DHS agreed with our recommendations and described actions it had taken and planned to take to address them, noting, for example, the importance of being vigilant in its oversight of the program. Based on our work on DHS's financial management we have identified specific actions and outcomes that we believe the department needs to address to resolve its financial management challenges. Among other things, DHS should develop and implement a corrective action plan with specific milestones and accountable officials to address the weaknesses in systems, internal control, and business processes that impede the department's ability to integrate and transform its financial management. DHS should also sustain clean opinions on its departmentwide financial statements, adhere to financial system requirements in accordance with the Federal Financial Management Improvement Act of 1996, and have independent auditors report annually on compliance with the act. In addition, DHS should establish contractor oversight mechanisms to monitor the contractor selected to implement TASC and successfully deploy TASC to the majority of DHS's components, such as the Coast Guard, the Federal Emergency Management Agency, and the Transportation Security Administration. Human capital management. DHS has issued various strategies and plans for its human capital activities and functions, such as a human capital strategic plan for fiscal years 2009-2013 that identifies four strategic goals for the department related to talent acquisition and retention; diversity; employee learning and development; and policies, programs, and practices. DHS is planning to issue an updated strategic human capital plan in the coming months. While these initiatives are promising, DHS has faced challenges in implementing its human capital functions. For example, our prior work suggests that successful organizations empower and involve their employees to gain insights about operations from a frontline perspective, increase their understanding and acceptance of organizational goals and objectives, and improve motivation and morale. DHS's scores on the 2008 Office of Personnel Management's Federal Human Capital Survey--a tool that measures employees' perceptions of whether and to what extent conditions characterizing successful organizations are present in their agency--and the Partnership for Public Service's 2010 rankings of the Best Places to Work in the Federal Government improved from prior years. However, in the 2008 survey, DHS's percentage of positive responses was 52 percent for the leadership and knowledge management index, 46 percent for the results-oriented performance culture index, 53 percent for the talent management index, and 63 percent for the job satisfaction index. In addition, in 2010, DHS was ranked 28 out of 32 agencies in the Best Places to Work ranking on overall scores for employee satisfaction and commitment. In addition, our prior work has identified several workforce barriers to achieving equal employment opportunities and the identification of foreign language needs and capabilities at DHS. In August 2009 we reported that DHS had developed a diversity council, among other initiatives, but that DHS had generally relied on workforce data and had not regularly included employee input from available sources to identify triggers to barriers to equal employment opportunities, such as promotion and separation rates. We also reported that, according to DHS, it had created planned activities to address these barriers, but modified target completion dates by up to 21 months and had not completed any planned activities due to staffing shortages. In June 2010 we reported on DHS's foreign language capabilities, noting that DHS has taken limited actions to assess its foreign language needs and existing capabilities and to identify potential shortfalls. Assessing hiring needs is crucial in achieving a range of component and departmentwide missions. As just one example, employees with documented proficiency in a variety of languages can contribute to U.S. Immigration and Customs Enforcement's intelligence and direct law enforcement operations, but staff with these capabilities are not systematically identified. We have made several recommendations to help DHS address weaknesses concerning equal employment opportunity and assessments of foreign language needs and capabilities within human capital management. For example, we recommended that DHS identify timelines and critical phases along with interim milestones as well as incorporate employee input in identifying potential barriers to equal employment opportunities. DHS concurred with our recommendations and reported taking action to address them, such as revising plans to identify steps and milestones for departmental activities to address barriers to equal employment opportunities, and developing a strategy for obtaining departmentwide employee input. We also recommended that DHS comprehensively assess its foreign language needs and capabilities and identify potential shortfalls. DHS concurred with our recommendations and reported taking actions to address them, such as developing a task force consisting of DHS components and offices that have language needs in order to identify requirements and assess the necessary skills. Based on our work on human capital management at the department, we have identified various actions and outcomes for DHS to achieve to address those human capital management challenges that have contributed to our designation of DHS implementation and transformation as high risk. The department should, among other things, develop and implement a results-oriented strategic human capital plan that identifies the department's goals, objectives, and performance measures for strategic human capital management and that is linked to the department's overall strategic plan. DHS also needs to link workforce planning efforts to strategic and program-specific planning efforts to identify current and future human capital needs, and improve DHS's scores on the Federal Employee Viewpoint Survey. In addition, DHS should develop and implement mechanisms to assess and provide opportunities for employee education and training, and develop and implement a recruiting and hiring strategy that is targeted to fill specific needs. DHS has taken actions to integrate its management functions and to strengthen its performance measures to assess progress in implementing these functions, but the department has faced challenges in these efforts. We have reported that while it is important that DHS continue to work to implement and strengthen its management functions, it is equally important that DHS address management integration and performance measurement from a comprehensive, departmentwide perspective to help ensure that the department has the structure, processes, and accountability mechanisms in place to effectively monitor the progress made to address the threats and vulnerabilities that face the nation. Management integration and performance measurement are critical to the successful implementation and transformation of the department. Management integration. DHS has put in place common policies, procedures, and systems within individual management functions, such as human capital, that help to vertically integrate its component agencies. However, DHS has placed less emphasis on integrating horizontally, and bringing together its management functions across the department through consolidated management processes and systems. In November 2009, we reported that DHS had not yet developed a strategy for management integration as required by the 9/11 Commission Act and with the characteristics we recommended in our 2005 report. Specifically, we recommended that the strategy (1) look across the initiatives within each of the management functional units, (2) clearly identify the critical links that must occur among these initiatives, (3) identify tradeoffs and set priorities, (4) set implementation goals and a time line to monitor the progress of these initiatives to ensure the necessary links occur when needed, and (5) identify potential efficiencies, and ensure that they are achieved. In the absence of a management integration strategy, DHS officials stated that documents such as management directives and strategic plans addressed aspects of a management integration strategy and could help the department to manage its integration efforts. However, we reported that without a documented management integration strategy, it was difficult for DHS, Congress, and other key stakeholders to understand and monitor the critical linkages and prioritization among these various efforts. We also reported that while DHS increased the number of performance measures for its Management Directorate, it had not yet established measures for assessing management integration across the department. We reported that without these measures DHS could not assess its progress in implementing and achieving management integration. We recommended that once a management integration strategy was developed, DHS establish performance measures for assessing management integration. DHS stated that the department was taking actions to address our recommendation. Since our November 2009 report, DHS has taken action to develop a management integration strategy. Specifically, DHS developed and provided us with an initial management integration plan in February 2010. The initial plan identified seven priority initiatives for achieving management integration: Enterprise governance. A governance model that would allow DHS to implement mechanisms for integrated management of DHS programs as parts of broader portfolios of related activities. Balanced workforce strategy. Workforce planning efforts to identify the proper balance of federal employees and private labor resources to achieve the department's mission. TASC. DHS initiative to consolidate financial, acquisition, and asset management systems, establish a single line of accounting, and standardize business processes. DHS headquarters consolidation. The collocation of the department by combining existing department and component leases and building out St. Elizabeths campus in Washington, D.C. Human resources information technology. Initiative to consolidate, replace, and modernize existing departmental and component payroll and personnel systems. Data center migration. Initiative to move DHS component agencies' data systems from the agencies' multiple existing data centers to two DHS consolidated centers. Homeland Security Presidential Directive 12 personal identification verification cards deployment. Provision of cards to DHS employees and contractors for use to access secure facilities, communications, and data. This initial management integration plan contained individual action plans for each of the seven initiatives. In March 2010, we met with DHS officials and provided oral and written feedback on the initial plan. We noted that, for example: the action plans lacked details on how the seven initiatives contribute to departmentwide management integration and links to the department's overall strategy for transformation; the performance measures contained in the plans did not identify units of measure, baseline measurements, or target metrics that would be used to measure progress; the impediments and barriers described in the plans did not align with identified risks and the strategies for addressing these impediments and barriers; and the plans did not identify planned resources for carrying out these initiatives. DHS officials told us the department is working to enhance its initial management integration plan to include a framework for strengthening the department's acquisition management. We plan to review the changes DHS is making to the initial management integration plan as part of our work for the 2011 high-risk update. Based on our work and recommendations on management integration, we have identified specific actions and outcomes for DHS that we believe will help the department address those management integration challenges that contributed to our designation of DHS implementation and transformation as high risk. Specifically, we believe that addressing these actions and outcomes within the individual management functional areas of acquisition, information technology, financial, and human capital management would help DHS to integrate those functions. For example, to successfully implement the TASC program, the Chief Financial Officer would need to work with the Chief Procurement Officer to establish effective mechanisms for overseeing the contractor selected to implement the TASC program; the Chief Information Officer to ensure that data conversions and system interfaces occur when required; and the Chief Human Capital Officer to ensure that relevant personnel at the department and component levels are trained on use of the TASC program once the system is implemented. In addition, DHS should revise its strategy for management integration to address the characteristics for such a strategy that we recommended in 2005. Performance measurement. DHS has not yet fully developed performance measures or put into place structures and processes to help ensure that the agency is managing for results. Performance measurement underpins DHS's efforts to assess progress in strengthening programs and operations and in implementing corrective actions to integrate and strengthen management functions. DHS has developed performance goals and measures for its programs and reports on these goals and measures in its Annual Performance Report. However, DHS's offices and components have not yet developed outcome-based performance measures to monitor, assess, and independently evaluate the effectiveness of their plans and performance. We have reported that the lack of outcome goals and measures hinders the department's ability to effectively assess the results of program efforts and whether the department is using its resources efficiently. Over the past 2 years, we have worked with DHS to provide feedback on the department's Government Performance and Results Act (GPRA) performance goals and measures through meetings with officials from the department and its offices and components. Our feedback has ranged from pointing out components' limited use of outcome-oriented performance measures to assess the results or effectiveness of programs to raising questions about the steps taken by DHS or its components to ensure the reliability and verification of performance data. In response to this feedback and its own internal review efforts, DHS took action to develop and revise its GPRA performance goals and measures for some areas in an effort to strengthen its ability to assess its outcomes and progress in key management and mission areas. For example, from fiscal year 2008 to 2009, DHS reported adding 58 new measures, retiring 18 measures, and making description improvements to 67 existing performance measures. From fiscal year 2009 to 2010, DHS reported adding 32 new performance measures, retiring 24 measures, and making description improvements to 37 existing performance measures. DHS is continuing to work on developing and revising its performance measures to improve its focus on assessing results and outcomes and to align its measures to the goals and objectives established by the Quadrennial Homeland Security Review. In August and September 2010, we provided feedback on the department's proposals for outcome-oriented performance measures aligned with the Quadrennial Homeland Security Review's goals and objectives. We look forward to continuing working with the department to provide feedback to help strengthen its ability to assess the outcomes of its efforts. Since we first designated the implementation and transformation of DHS as high risk in 2003, the department has made progress in its transformation efforts in relation to the five criteria we established in November 2000 for removing agencies from the high-risk list, but has not yet fully addressed its transformation, management, and mission challenges, such as implementing effective management policies and deploying capabilities to secure the border and other sectors. In January 2009, we reported that DHS had developed its Integrated Strategy for High Risk Management outlining the department's overall approach for managing its high-risk areas and the department's processes for assessing risks and proposing initiatives and corrective actions to address its risks and challenges. We also reported that DHS had developed corrective action plans to address challenges in the areas of acquisition, financial, human capital, and information technology management. The corrective action plans addressed some, but not all, of the factors we consider in determining whether agencies can be removed from our high-risk list. Specifically, the strategy and corrective action plans identified senior officials with the responsibility for managing DHS's transformation high- risk area and for implementing the corrective action plans. The strategy and plans defined some root causes for problems within management areas, identified initiatives and corrective actions to address the causes, and established milestones for completing initiatives and actions, though we noted that these elements could have been better defined to, for example, more clearly address the management challenges we have identified. The strategy also included a framework for DHS to monitor the implementation of its corrective action plans primarily through various departmentwide committees However, we reported that the strategy and corrective action plans did not contain measures to gauge the department's progress and performance in implementing corrective actions, or identify the resources needed by DHS for carrying out the corrective actions identified. The strategy and corrective actions plans consistently cited limited resources as a challenge or constraint in implementing corrective actions. Further, we reported that required elements in the strategy and corrective action plans could be strengthened or clarified, including linking initiatives and corrective actions in the corrective action plans to root causes and milestones. In addition, we reported that while DHS had developed a framework for monitoring progress, the department had just begun to implement its corrective action plans. We recommended that for DHS to successfully transform into a more effective organization, it needed to (1) revise its Integrated Strategy for High Risk Management and related corrective action plans to better define root causes, include resources required to implement corrective actions, and identify key performance measures to gauge progress; and (2) continue to identify, refine, and implement corrective actions to improve management functions and address challenges. We have identified and communicated to DHS specific actions and outcomes that we believe the department needs to address within each of its management areas and for management integration. We believe that these actions and outcomes will help DHS address our high-risk criteria by, among other things, identifying root causes for problems within each management area, developing and implementing corrective actions to address those root causes, and demonstrating measurable, sustainable progress in implementing the correction actions. Since our 2009 high-risk update, DHS has taken actions to address the high-risk designation. For example, DHS and GAO have held regular, joint meetings, including periodic meetings that also involve Office of Management and Budget officials, to discuss the department's progress in addressing the high risk designation and its overall transformation efforts. DHS and GAO have also discussed the department's planned revisions to its Integrated Strategy for High Risk Management and corrective action plans for its management areas. However, as of September 2010, DHS has not yet provided us with an updated strategy or corrective actions plans to address the high-risk designation, as promised. DHS officials told us that the department is currently revising its strategy and will provide us with the updated strategy in the coming months. We will continue to assess DHS's implementation and transformation efforts, including any updated strategy and corrective action plans, as part of our work for the 2011 high- risk update, which we plan to issue in January 2011. This concludes my prepared testimony. I would be happy to respond to any questions that members of the Subcommittee may have. For questions regarding this testimony, please contact Cathleen A. Berrick, Managing Director, Homeland Security and Justice at (202) 512-3404 or [email protected], or David C. Maurer, Director, Homeland Security and Justice at (202) 512-9627 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Other key contributors to this statement were Rebecca Gambler, Assistant Director; Minty Abraham; Labony Chakraborty; Tara Jayant; Thomas Lombardi; Emily Suarez-Harris; and Juan Tapia-Videla. Department of Homeland Security: Assessments of Selected Complex Acquisitions, GAO-10-588SP (Washington, D.C.: June 30, 2010). Department of Homeland Security: DHS Needs to Comprehensively Assess Its Foreign Language Needs and Capabilities and Identify Shortfalls, GAO-10-714 (Washington, D.C.: June 22, 2010). Department of Homeland Security: A Comprehensive Strategy Is Still Needed to Achieve Management Integration Departmentwide, GAO-10-318T (Washington, D.C.: Dec. 15, 2009). Financial Management Systems: DHS Faces Challenges to Successfully Consolidating Its Existing Disparate Systems, GAO-10-76 (Washington, D.C.: December 4, 2009). Department of Homeland Security: Actions Taken Toward Management Integration, but a Comprehensive Strategy Is Still Needed, GAO-10-131 (Washington, D.C.: November 20, 2009). Homeland Security: Despite Progress, DHS Continues to Be Challenge in Managing Its Multi-Billion Dollar Investment and Large-Scale Information Technology Systems, GAO-09-1002T (Washington, D.C.: September 15, 2009). Equal Opportunity Employment: DHS Has Opportunities to Better Identify and Address Barriers to EEO in Its Workforce, GAO-09-639 (Washington, D.C.: August 31, 2009). High-Risk Series: An Update, GAO-09-271 (Washington, D.C.: January 2009). Department of Homeland Security: Progress Made in Implementation of Management Functions, but More Work Remains, GAO-08-646T (Washington, D.C.: April 9, 2008). Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions, GAO-07-454 (Washington, D.C.: August 17, 2007). Homeland Security: Departmentwide Integrated Financial Management Systems Remain a Challenge, GAO-07-536 (Washington, D.C.: June 21, 2007). Department of Homeland Security: A Comprehensive and Sustained Approach Needed to Achieve Management Integration, GAO-05-139 (Washington, D.C.: March 16, 2005). Results-Oriented Cultures: Implementation Steps to Assist Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003). Determining Performance and Accountability Challenges and High Risks, GAO-01-159SP (Washington, D.C. November 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.

Since 2003, GAO has designated implementing and transforming the Department of Homeland Security (DHS) as high risk because DHS had to transform 22 agencies--several with significant management challenges--into one department, and failure to effectively address its mission and management risks could have serious consequences for national and economic security. This high-risk area includes challenges in management functional areas, including acquisition, information technology, financial, and human capital management; the impact of those challenges on mission implementation; and management integration. GAO has reported that DHS's transformation is a significant effort that will take years to achieve. This testimony discusses DHS's progress and actions remaining in (1) implementing its management functions; (2) integrating those functions and strengthening performance measurement; and (3) addressing GAO's high-risk designation. This testimony is based on GAO's prior reports on DHS transformation and management issues and updated information on these issues obtained from December 2009 through September 2010. DHS has made progress in implementing its management functions, but additional actions are needed to strengthen DHS's efforts in these areas. (1) DHS has revised its acquisition management oversight policies, and its senior-level Acquisition Review Board reviewed 24 major acquisition programs in fiscal years 2008 and 2009. However, more than 40 major programs had not been reviewed, and DHS does not yet have accurate cost estimates for most of its major programs. (2) DHS has undertaken efforts to establish information technology management controls and capabilities, but its progress has been uneven and major information technology programs, such as the SBInet virtual fence, have not met capability, benefit, cost, and schedule expectations. (3) DHS has developed corrective action plans to address its financial management weaknesses. However, DHS has been unable to obtain an unqualified audit opinion on its financial statements, and for fiscal year 2009, the independent auditor identified six material weaknesses in DHS's internal controls. Further, DHS has not yet implemented a consolidated departmentwide financial management system. (4) DHS has issued plans for strategic human capital management and employee development. Further, its scores on the Partnership for Public Service's 2010 rankings of Best Places to Work in the Federal Government improved from prior years, yet DHS was ranked 28 out of 32 agencies on scores for employee satisfaction and commitment. DHS has also taken action to integrate its management functions by, for example, establishing common policies within management functions. The Implementing Recommendations of the 9/11 Commission Act of 2007 required DHS to develop a strategy for management integration. In a 2005 report GAO recommended that a management integration strategy contain priorities and goals. DHS developed an initial plan in February 2010 that identified seven initiatives for achieving management integration. While a step in the right direction, among other things, the plan lacked details on how the initiatives contributed to departmentwide management integration. DHS is working to enhance its management integration plan, which GAO will review as part of the 2011 high-risk update. DHS also has not yet developed performance measures to fully assess its progress in integrating management functions. Since GAO first designated DHS's transformation as high risk, DHS has made progress in transforming into a fully functioning department. However, it has not yet fully addressed its transformation, management, and mission challenges, such as implementing effective management policies and deploying capabilities to secure the border and other sectors. In 2009 GAO reported that DHS had developed a strategy for managing its high-risk areas and corrective action plans to address its management challenges. While these documents identified some root causes and corrective actions, GAO reported that they could be improved by DHS identifying resources needed for implementing corrective actions and measures for assessing progress. This testimony contains no new recommendations. GAO has made over 100 recommendations to DHS since 2003 to strengthen its management and integration efforts. DHS has implemented many of these recommendations and is in the process of implementing others.

General and flag officers' quarters are government-provided quarters for military officers with the rank of brigadier general or rear admiral (lower half) (O-7) and above. The services have a total of 685 general and flag officer quarters, of which 372, or about 54 percent, are considered historic as table 1 below shows. The general policy in the military services is that general and flag officer housing is to be maintained in an excellent state of repair, commensurate with the rank of the occupant and the age and historic significance of the building. Accordingly, general and flag officer housing is expensive to maintain; and the age, size, and historic significance of some of these quarters tend to escalate their operations and maintenance costs as the following examples show: Army: The Commandant's home at Carlisle Barracks was built in 1932. The house is a two-story stone structure with 8,156 square feet of living space and is currently undergoing a major renovation. The residence has an average annual maintenance and repair cost of about $14,000. Navy: Tingey House, the home of the Chief of Naval Operations, is located in the historic Navy Yard, Washington, D.C. Constructed in 1803, the quarters was one of the earliest buildings erected at the Washington Navy Yard. The home is a 2 1/2-story brick structure containing 12,304 square feet of space and has an average annual maintenance and repair cost of about $27,500. Marine Corps: The Home of the Commandants--located within the Marine Corps Barracks at Eighth and I Streets S.E., Washington, D.C. --has been the home of the Marine Corps Commandants since its completion in 1806. The Marine Corps considers the quarters as much a museum as a residence. The home is a three-story structure containing approximately 15,605 square feet of space and has an average annual maintenance and repair cost of about $41,811. Air Force: Carlton House is the home of the Superintendent of the U.S. Air Force Academy and was constructed in the 1930s. The home is a two-story structure with a total of 10,925 square feet of space and has an average annual maintenance and repair cost of about $21,000. All of these homes are used extensively for official entertainment purposes and all but the Commandant's home at Carlisle Barracks are listed on the National Register of Historic Places. However, the Commandant's quarters at Carlisle Barracks is considered historic and is eligible for listing on the National Register of Historic Places. The services are to follow DOD Financial Management Regulations and service-specific guidance to prepare budget estimates for major repair projects to general and flag officer quarters. For example, the Navy and Marine Corps justify projects on the basis of mission, life-cycle economics, health and safety, environmental compliance, or quality of life. The services generally hire architectural and engineering firms to inspect and assess the property for projects expected to cost more than $50,000 to determine needed repairs and establish a project cost estimate. Using information developed during the project justification and cost-estimating process, the services are to prepare budget estimates that are submitted to Congress for approval during the annual appropriations cycle. Congress has acted to control spending associated with maintaining these homes by establishing expense thresholds and reporting and notification requirements. For example, the services must include in their annual family housing budget submitted to Congress detailed budget justification material explaining the specific maintenance and repair requirements for those homes expected to exceed an annual $35,000 threshold for maintenance and repair expenses. Section 2601, of Title 10, United States Code authorizes the service Secretaries to accept, hold, administer, and spend any gift of real or personal property made on the condition that it is used for the benefit--or in connection with the establishment, operation, or maintenance--of an organization under the jurisdiction of their departments. Monetary gifts are accepted and deposited in the Treasury in service-designated accounts. In some instances, these funds have been used to supplement appropriations for renovations to general and flag officer quarters. The Military Construction Appropriation Act for fiscal year 2000 directed that funds, appropriated under the act, were to be the exclusive source of funds for repair and maintenance of all military family housing. This excluded the use of gift funds to repair or maintain general and flag officer quarters. A year later, however, Congress expressly authorized the use of gift funds pursuant to Section 2601, of Title 10, United States Code, to help fund the construction, improvement, repair and maintenance of the historic residences at the Marine Corps Barracks at Eighth & I Streets S.E., Washington, D.C. DOD guidance provides the services with a framework for property accountability policies, procedures, and practices. The 1996 Military Housing Privatization Initiative allows private sector financing, ownership, operation, and maintenance of military family housing including, in some cases, housing occupied by general and flag officers. The goal of the initiative is to help the services remove inadequate housing from their family housing inventories and improve service- member morale. Under the program, DOD utilizes various means to encourage private developers to renovate existing housing or construct new housing on or off military installations. Service members, in turn, may use their housing allowance to pay rent and utilities to live in the privatized housing. The privatization firms use the housing allowances to pay for the maintenance and repair of the quarters. As of March 2003, the military services had privatized about 28,000 family housing units, only a small number of which were general or flag officer quarters. The services plan to privatize about 183,000 units, or 72 percent of their total family housing inventory, by fiscal year 2007 and will increasingly include general or flag officer housing. With a few exceptions, the services' reported actual costs for renovation projects for general and flag officer quarters were generally consistent with or less than the budget estimates provided to Congress. For fiscal years 1999 to 2003, of the 197 projects estimated to cost more than $100,000, 184 (about 93 percent) were under or met their budget estimates; and 13 (about 7 percent) exceeded their budget. While we did not identify any Air Force renovation projects that exceeded their budgets, we did learn of other concerns about costs associated with Air Force plans to replace and repair general officer quarters. See appendix II for further information on this issue. Table 2 shows a comparison of actual costs to budget requests for the 197 renovation projects of more than $100,000 included in our review. Of the 13 over-budget projects, 5 of the 7 Marine Corps projects--4 located at the Marine Corps Barracks at Eighth and I streets, Washington, D.C., and the other located at Kaneohe, Hawaii--exceeded their budgets by more than 10 percent. The other 2 Marine Corps projects exceed their budgets by about 9 percent, and the 6 Navy projects exceed their budgets by less than 2 percent. As seen in table 2, the majority of renovation projects stayed within their budgets. However, some projects cost less than budgeted because the scope of planned work was revised or canceled for a project. For example, the Navy identified instances where the scope of work was reduced or cancelled because a change in occupancy did not occur as scheduled and planned repair work could not be accomplished. Army housing officials cited examples where the scope of renovation projects was reduced because the contractor's final bid for lead-based paint and asbestos removal exceeded the government's estimate. The projects' scope had to be reduced or the budgets would be exceeded. Customer requests for changes and unforeseen repairs were the primary reasons for cost increases to renovation projects. To help minimize costs, housing handbooks provided to general and flag officers occupying government quarters discourage customer-requested changes based on personal preferences and entrust final approval of such changes to the discretion of the installation housing officer or the commanding officer. Although these handbooks seek to limit customer-requested changes, we found numerous approvals for customer-requested changes granted for renovations at the Marine Corps' Home of the Commandants that contributed to project costs exceeding the budget estimate. Customer driven requests, such as upgraded kitchen and bathroom renovations, or work that was not included in the original scope of work were responsible for about 45 percent of the total cost increase for the 5 Marine Corps projects that exceeded their budgets by more than 10 percent. Table 3 shows the reasons for changes in scope for the projects as well as the amount of cost increase and the percent of the total increase associated with the changes. Six Navy projects exceeded their budgets by less than 2 percent. According to the Navy, the overruns were mostly due to planned work costing more than was originally budgeted--a fairly regular occurrence since budgets are submitted nearly 18 to 24 months before the work is accomplished. However, some of the increases occurred due to such customer requests as additional interior painting and such unforeseen repairs as the need to replace an old, broken boiler heating system with a new forced-air system. Customer-requested changes for the 5 projects that exceeded their budgets by more than 10 percent occurred because the customer, usually the quarters' occupants, wanted various changes and the housing manager, the commanding officer, and at times the service headquarters acquiesced and approved the changes. For example, at the Marine Corps Barracks Home of the Commandants, where one project exceeded its budget by about 52 percent, customer-requested changes resulted in identifiable cost increases totaling about $338,000. The single largest identifiable increase was due to a customer request for a major kitchen renovation not included in the original scope of work and costing more than $197,256. Major cost drivers for the kitchen renovation included cabinets, granite counter tops, butler pantry, and flooring that the occupant requested. Other customer- requested changes included the renovation of attached guest quarters that included the construction of public, handicap-accessible restrooms and replacement of a newly installed marble tile floor. Cost increases due to customer requests for Quarters 1, 2, and 4 included requests for upgraded kitchen cabinets and counter tops, upgraded bathroom fixtures, and wall- to-wall carpeting. To help minimize costs, the services' provide handbooks to general and flag officers occupying government quarters that address the propriety of and seek to discourage customer-requested changes based on personal preferences. The installation housing officer or the commanding officer has final approval for such changes. However, we found numerous approvals for customer-requested changes granted for renovations at the Marine Corps' Home of the Commandants and other quarters at the Marine Corps Barracks that contributed to project costs exceeding the budget estimates. Navy and Army housing officials told us that controlling costs due to customer requests is directly related to a housing officer's ability to say no to requests that could be perceived as excessive and draw undue public scrutiny upon the service. For the 5 projects that exceeded their budgets by more than 10 percent, cost increases due to such unforeseen repairs as for termite damage or such undetected structural deficiencies as sagging floor supports occurred because these deficiencies or requirements were not identified during initial inspections. For example, at the Home of the Commandants, identifiable changes due to unforeseen repairs resulted in cost increases totaling about $559,416. The single largest cost increase due to unforeseen repairs was for the roof. The initial budget estimate was around $192,189. However, the architectural and engineering firm that did the initial inspection upon which the budget estimate was based did not actually inspect the roof for damage and did not perform destructive testing to look for structural deficiencies. The current roof estimate is around $582,730, an increase of more than $390,541 with about 70 percent of the total increase due to unforeseen deficiencies at the Home of the Commandants. Another unforeseen repair involved replacing a portion of the wood flooring on the first floor because of severe termite damage that was not detected until the old flooring was removed. Again, the deficiency went undetected because destructive testing was not performed. According to service officials, destructive testing is often not accomplished because the quarters' occupants do not want either the testing to interfere with their entertainment responsibilities or the inconvenience of having their homes in disrepair. Additionally, for the Marine Corps project in Kaneohe, Hawaii, unforeseen historical restoration requirements caused actual renovation costs to exceed the budget estimate by about $47,600 or nearly 25 percent. Marine Corps officials stated that the state historical preservation office wanted the interior walls restored with the same materials used when the house was originally built in 1941. The Marine Corps budget estimate did not include this requirement. The Army, Navy and Marine Corps each received private donations of cash, property, or services to furnish and renovate general and flag officer quarters. While the Army and Navy accepted gift funds to furnish quarters, the Marine Corps accepted and used gift funds to both furnish and help renovate the Home of the Commandants. Although guidance exists to ensure such gifts are properly accepted, held, and used in accordance with the donor's wishes, neither the Navy nor the Marine Corps followed these procedures for all gifts associated with furnishing the quarters of the Superintendent of the Naval Academy and the renovation of the Home of the Commandants. Section 2601, of Title 10, United States Code, provides gift acceptance authority to each service Secretary to accept, hold, administer, and spend any gift of real or personal property made on the condition that it is used for the benefit--or in connection with the establishment, operation, or maintenance--of an organization under the jurisdiction of their departments. In addition to this legislative authority, the Secretary of the Navy has issued an instruction to help implement and centralize gift acceptance authority. The Marine Corps implements the Secretary's policy and re-delegates authority to subordinate commands under its jurisdiction. The following table summarizes Navy and Marine Corps procedures for accepting gifts. Although aware of these procedures, Navy and Marine Corps officials acknowledge that in two projects, they did not list nonmonetary gifts on the property accounts and cannot fully account for those gifts made to furnish and renovate two general and flag officer quarters. According to Marine Corps officials, they did not follow the prescribed procedures for accepting and accounting for the estimated $765,500 in nonmonetary gifts (materials such as kitchen cabinets, furniture, wall coverings, draperies, and furniture upholstery) from the Friends of the Home of the Commandants. We contacted the Friends of the Home of the Commandants, which provided us with a listing of donations and their value totaling $765,500 provided to the Marine Corps to help renovate the Home of the Commandants. After some delay, the Marine Corps provided us with a list of nonmonetary gifts totaling $492,413 from the Friends of the Home of the Commandants but had no documentation to support formal acceptance of the gifts and that the gifts were recorded in property records. According to Marine Corps officials, the Friends of the Home of the Commandants provided the remaining $273,087 in nonmonetary gifts directly to the project contractor. However, the Marine Corps also did not document that these gifts were formally accepted and accounted for in property records. Furthermore, Navy and Marine Corps financial records document receipt of about $88,300 donated to the Navy General Gift Fund from the Friends of the Home of the Commandants during fiscal years 1999 through 2003. The Marine Corps, after some delay, produced receipts to account for expenditures using these gift funds to help renovate and furnish the Home of the Commandants. However, the Marine Corps property records do not include the items purchased with the gift funds. These gifts were used to supplement $2,269,000 in appropriations for renovations to the Home of the Commandants. The Navy and Army also accepted nonmonetary or monetary gifts for furnishings for flag and general officer quarters. The gifts were not used for renovations to the quarters. The Navy acknowledges receiving about $59,780 in nonmonetary gifts provided by various donors as furnishings to help decorate the home of the Superintendent of the Naval Academy. However, similar to the Marine Corps, the Navy did not properly accept and account for about $3,970 of the gifts in the property records. The Army properly accepted $50,000 in furnishings from the Army War College Foundation for the home of the Commandant of the Army War College at Carlisle Barracks. DOD and the military services could lose visibility over spending to maintain and repair an increasing number of privatized general and flag officer housing units because there is no consistent DOD-wide policy requiring review of maintenance and repair projects over certain dollar thresholds. By the end of fiscal year 2003, the services had privatized 65 of their 784 general and flag officer quarters and planned to privatize 426, or 54 percent, by the end of fiscal year 2008. DOD has no policy requiring the services to review renovation costs on these homes, such as is done for maintenance and repair projects of more than $35,000 for government- owned quarters. However, the Air Force has developed draft guidance, expected to be issued in May 2004, which will provide more visibility and accountability over spending to operate and maintain privatized general and flag officer housing. The Navy and the Marine Corps have also developed draft guidance that requires headquarters approval for all renovation projects over a certain dollar threshold. No such policy is under development in the Army. Currently, all service headquarters are required to review any renovation project exceeding $35,000 for a government-owned general or flag officer quarters. However, there is no such requirement to review renovations projects involving privatized general and flag officer quarters. Recognizing the need for direction, the Navy, Marine Corps, and Air Force are developing draft guidance and procedures that will provide more visibility over the spending to operate and maintain privatized general and flag officer housing. For example, the Air Force draft guidance applies the same project approvals for renovations to privatized general officer homes as currently exist for government-owned homes, which is all renovation projects over $35,000. Likewise, the Navy and the Marine Corps have developed draft guidance for internally reviewing annual operating budgets for privatized housing that would require approval by Navy or Marine Corps headquarters officials for costs that exceed $50,000 in one year for any house. The Army has no plans to issue additional guidance regarding costs to maintain and repair privatized housing. According to Army officials, annual operating budgets for privatized housing are reviewed by headquarters officials, which they believe will provide adequate visibility over renovations to privatized housing. We agree that reviewing annual budgets provides visibility over renovation costs but question its ability to provide oversight where renovation costs for selected residences are higher than the norm. The services' procedures to develop cost estimates for renovation to general and flag officer quarters generally produce budget estimates that are consistent with the projects' actual costs. However, Marine Corps officials approved costly customer-requested changes based on personal preferences notwithstanding guidance in handbooks discouraging the approval of such requests. The Marine Corps failed to follow established guidance and procedures and properly accept and account for gifts, especially nonmonetary gifts, used to help renovate and furnish the Home of the Commandants. Thus, they have no assurance that the nonmonetary gifts remain in their possession. Finally, DOD and the military services could lose visibility over renovations to general and flag office quarters that are privatized. While some services are taking some steps to ensure that renovation projects over certain dollar thresholds are reviewed internally, there is no consistent DOD-wide guidance. We recommend that the Secretary of Defense take the following three actions: Direct the Secretary of the Navy to (1) reemphasize the importance of limiting customer-driven changes to renovation projects for general and flag officer housing and (2) properly account for all gifts accepted and used to help renovate the Home of Commandants of the Marine Corps. Furthermore, we are recommending the Secretary of Defense direct the Under Secretary for Acquisition, Technology, and Logistics to ensure the standardization and periodic review of the expenditure levels for individual privatized units on a programmatic basis, to include general and flag officer quarters, with periodic reports to the office of the Secretary of Defense. In commenting on a draft of this report, DOD concurred with our first and second recommendations and did not concur with the third. With regard to the first two recommendations, DOD indicated that the Navy has agreed to reemphasize the importance of limiting customer-driven changes to renovation projects for general and flag officer housing, properly accounting for all gifts accepted and used to help renovate the Home of Commandants of the Marine Corps, and incorporating accountability measures into revisions of Secretary of the Navy guidance governing the general and flag officer quarters program. However, DOD did not provide a time frame for accomplishing these actions. Our draft report also contained a third recommendation to the Secretary of Defense. He was asked to direct the Under Secretary for Acquisition, Technology, and Logistics to develop departmentwide guidance that provides similar project review and approval for renovation projects to privatized general and flag officer housing as required for government- owned quarters over certain dollar thresholds. However, DOD did not agree with that recommendation expressing the view that extending the same government oversight to privatized housing is contrary to the fundamental tenets of privatization. DOD added that currently projects are monitored to protect government interests, including expenditure levels on individual units, but that the monitoring is not linked to a specific type of housing such as general and flag officer quarters. DOD indicated that although it intends to continue to rely on private sector cost-control mechanisms, it would review standardization of individual unit expenditure levels on a programmatic basis. Such action, to the extent it incorporates general and flag officer housing, meets the intent of our recommendation. Accordingly, we refined our recommendation to better reflect this intent and stay within the parameters of the privatization program. Additionally, the Principal Assistant Deputy Under Secretary commented that our report did not capture the Air Force's response to issues the DOD Inspector General raised concerning the Air Force's plans to renovate or replace general officer housing. As we note in appendix II, the Air Force disagreed with the Inspector General's findings. This disagreement appears largely based on differences between the Air Force and the Inspector General concerning individual renovation projects versus the Air Force's broader strategic plans for addressing general officer quarters collectively and upgrading the housing to today's standards, rather than undertaking only immediate repair needs. Other technical comments are incorporated in the report where appropriate. The Principal Assistant Deputy Under Secretary's comments are included in appendix III of this report. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, Army, Navy and Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Please contact me on (202) 512-8412 or Michael Kennedy, Assistant Director, on (202) 512-8333 if you or your staff have any questions. Major contributors to this report were Claudia Dickey, Jane Hunt, Richard Meeks, and Michael Zola. We performed our work at the headquarters offices responsible for general and flag officer housing at the Army, the Navy, the Marine Corps, and the Air Force. At each location, we reviewed applicable policies, procedures, and related documents and interviewed responsible officials for the family-housing and general and flag officer quarters program. We also visited and met with officials from several military installations, including Fort McPherson, Georgia, and Fort McNair, the Washington Navy Yard, the Marine Corps' Barracks at Eighth and I, and Bolling Air Force Base, all of which are located in Washington, D.C. At each of these locations we toured general and flag officer quarters that were recently renovated, were undergoing renovation, or had not been renovated. We also discussed our review with officials of Housing and Competitive Sourcing, Office of the Secretary of Defense, and with DOD's Office of the Inspector General. To determine how the actual costs of renovation projects for general and flag officer quarters compared to the service budget estimates provided to Congress, we reviewed all renovation projects of more than $100,000 for fiscal years 1999 through 2003. We obtained the budget estimate for each of these projects from the service budget submissions provided to Congress for the fiscal year. We obtained the reported actual obligations related to the cost for each renovation project from the military services. We compared this information to determine which projects were completed for less than or more than budget. We did not validate service budget and reported obligation data, but we did discuss data reliability with responsible service officials and obtained information from them on steps they have taken to ensure the data's reliability. Based on this, we believe that the data we used were sufficiently reliable for the purposes of this report. To identify the primary reasons for any cost increases and the services' procedures to control cost increases, we held discussions with responsible service family-housing, engineering, comptroller, general counsel, and command officials about those renovation projects that exceeded their service budgets. We also reviewed and analyzed documentation that supported the reasons for cost increases. To determine the services' accountability over gifts provided to help renovate general and flag officer quarters, we reviewed applicable laws and interviewed cognizant officials to identify those general and flag officer quarters with major renovations of more than $100,000 during fiscal years 1999 through 2003 that received gifts used to help with renovations. We identified one Army, one Navy, and one Marine Corps quarters that received gifts either monetary or nonmonetary during the scope of our review. The Army ($50,000 nonmonetary items, such as furniture and drapery material) and Navy ($51,952 nonmonetary items, such as rugs, and $7,830 cash) gifts were for furnishings for the quarters. The Marine Corps used gifts--monetary and nonmonetary--to help with the renovation of a general officer quarters. To determine how the services accounted for monetary and nonmonetary gifts, we reviewed DOD and service gift fund and gift acceptance regulations and guidance; interviewed cognizant service officials; and reviewed administrative, contract, funding and accounting documents. Since only the Marine Corps accepted gifts intended to help with the renovation of a general officer quarters, we focused additional attention on determining how the Marine Corps accounted for monetary and nonmonetary gifts provided to help renovate the Home of the Commandants. We compared the Marine Corps listing of gifts received with a listing of gifts provided by the Friends of the Home of the Commandants--the primary contributor of gifts for the Home of the Commandants during fiscal years 1999 through 2003. We also asked to review property records that showed the Marine Corps' receipt of these gifts. The Marine Corps was unable to provide receipts or produce property records for the nonmonetary gifts. Further, we compared the Navy Comptroller's reported balance for the Navy General Gift Fund for the Marine Corps Barracks at Eighth and I, with the Marine Corps Barracks-reported expenditures and supporting documentation. The Marine Corps could not provide documentation to support all Navy General Gift fund expenditures as reported by the Navy Comptroller. As a result, we were unable to verify the total amount of gifts, monetary and nonmonetary, received by the Marine Corps to help renovate the Home of the Commandants. However, where we could, we reconstructed the flow of gifts to the Marine Corps and reconciled individual gifts that we could identify. To assess the extent to which DOD and the services have issued guidance to provide visibility and control over costs associated with renovation projects for privatized general and flag officer quarters, we interviewed Office of the Secretary of Defense and service officials responsible for family housing and privatization. Where available, we also obtained and reviewed service draft guidance regarding review of renovations to privatized housing. While we did not identify any Air Force renovation projects that exceeded their budgets, we did learn of other concerns about costs associated with Air Force plans to replace and repair general officer quarters. The DOD Inspector General recently identified issues concerning the Air Force's plans to renovate or replace general officer quarters. The Inspector General questioned $21.3 million of the $73.7 million in Air Force General Officer Quarters Master Plan requirements because its analysis showed the assessment methodology did not always reflect existing conditions. The Air Force issued a master plan in August 2002 to identify whole house investment requirements for their general officer quarters. Part of the GOQ master plan included a prioritized operations and maintenance plan for each GOQ to manage and minimize maintenance and repair expenditures that may become necessary prior to the execution of a whole-house improvement project. For all 267 general officer quarters, the Air Force developed an individual facility profile. The profile consists of a description of the home, a detailed analysis of existing conditions and functional deficiencies, recommendations for maintenance and repair, house plan suitability recommendations to correct functional deficiencies and bring the unit up to Air Force standards, and the estimated cost to perform a whole-house improvement project. Incorporated within the profile is a condition assessment score for each of the homes major systems and subsystems and house plan suitability scores to arrive at an overall composite score for each general officer quarters. The assessments indicated that 219 or 82 percent of their 267 homes required whole house improvement projects to resolve deficiencies. Based on this information, the Air Force developed a plan to renovate 203 homes at a cost of about $52.3 million and replace 64 others at a cost of about $21.4 million, an overall plan cost of about $73.7 million. In a January 23, 2004, letter to the Air Force Deputy Chief of Staff for Installations and Logistics, the DOD Inspector General reported that the Air Force's estimate for renovating and replacing general officer quarters may be overstated by $21.3 million because the profile recommendations were not consistent with Air Force assessments of existing conditions. According to the Inspector General, some of the homes' systems such as the roof, structural components, or the house plan met standards or needed only minor maintenance and repair, but the Air Force recommended them for replacement, relocation, or reconfiguration. For example, one house at Bolling Air Force Base, Washington, D.C. had a system with a condition rating of "good," "indicating a fully serviceable condition which met standards," but the Air Force master plan included a recommendation to reconfigure rooms and interior walls in the home at a cost of $190,000. The Inspector General concluded that the Air Force's condition assessment matrix tool design might have contributed to the inconsistencies between existing conditions and maintenance and repair recommendations. The Inspector General also reported that the inconsistency of Air Force recommendations with existing condition assessments demonstrated that the Air Force did not always consider where the home was in its life cycle. Additionally, DOD Inspector General officials told us separately of their concerns about Air Force plans to replace two homes at Bolling Air Force Base, which under original Air Force plans were to be renovated. The original fiscal year 2002 project recommended renovating the homes for an estimated $345,000 per home. However, because the Air Force designated these two homes as Special Command Position quarters, and these homes have additional space requirements for an enlisted aide and for added entertainment requirements, the Air Force now estimates the renovation will cost an estimated $555,000 per home--an increase of $210,000--that is more than 70 percent of the estimated cost to replace each house. As a result, the Air Force recommended that each house be replaced rather than renovated as originally planned. Air Force officials stated that the $210,000 increase in estimated renovation costs was due to escalation from the 2002 project to the present as well as about $110,000 for costs associated with structural work to modernize and expand the kitchen, provide an enlisted aide's office area, and correct functional deficiencies in the dining room to provide a more usable space; about $30,000 for a two car garage; and the remaining approximately $70,000 to address various unforeseen environmental remediation, force protection, and basement waterproofing requirements, as well as other electrical, plumbing, floor repair, cabinets, countertops and appliances not included in the original estimate. Since the homes are eligible for the National Historic Register, the Air Force must seek approval for their plans with the District of Columbia Historic Preservation Office. According to the Air Force, it initiated contact with the office in October 2002, and is currently proceeding with the regulatory process to obtain approval for their plans. The District of Columbia Historic Preservation Office has not yet approved the Air Force's plans. The Air Force disagreed with the Inspector General findings.

Recent cost increases in renovation projects to general and flag officer quarters raised questions about the services' management of the programs. GAO was asked to determine (1) how actual costs of renovation projects for general and flag officer housing compare to service budget estimates provided to Congress and (2) the primary reasons for any increases and the services' procedures to control cost increases. Additionally, GAO is presenting observations about the services' accountability over gifts provided to help renovate some general and flag officer quarters and the extent to which Department of Defense (DOD) guidance provides visibility and control over costs associated with renovation projects for privatized general and flag officer quarters. With few exceptions, the services' reported costs for renovation projects for general and flag officer quarters were generally consistent with budget estimates provided to Congress. For fiscal years 1999 to 2003, GAO found that 184, or 93 percent, of the 197 renovation projects over $100,000 cost less than or the same as budget estimates. While the remaining 13 projects--6 Navy and 7 Marine Corps--exceeded cost estimates, 5 Marine Corps projects exceeded their budgets by more than 10 percent. Customer-requested changes and unforeseen repairs were the main reasons for cost increases to renovation projects. For 5 of the 7 projects that exceeded their budgets by over 10 percent, about 45 percent of the increased costs was for customer-driven changes, 53 percent for unforeseen repairs, and 2 percent could not be determined. Though the services have guidance to limit customer-requested changes, the Marine Corps approved many such changes that contributed to project costs exceeding budgets. Customer requests included upgraded kitchen and bathroom renovations or initially unplanned work. Unforeseen repairs, such as for termite damage or unexpected historic preservation requirements, occurred because problems were not identified in the inspections on which the estimates were based. Military services did not properly account for gifts used for general officer quarters in two instances, one involving renovation costs. In that instance, the Marine Corps did not comply with existing regulations to properly accept and account for all gifts used to renovate the Home of the Commandants. The Friends of the Home of the Commandants told GAO it provided about $765,500 in nonmonetary materials and services (e.g., furnishings and construction labor). However, the Marine Corps could list nonmonetary gifts totaling only $492,413 because it did not follow specified gift acceptance and accounting procedures. Navy General Gift Fund records show receipt of an additional $88,300 in monetary gifts from the Friends of the Home of the Commandants. The Marine Corps has receipts for monetary expenditures, but not property records for items purchased with the gift funds. The Navy and Army also accepted gifts to furnish general and flag officer homes. Of those, the Navy did not properly accept and account for about $3,970 in nonmonetary gifts. DOD and the military services could lose visibility over housing renovation costs for privatized general and flag officer homes. DOD does not require review of renovation costs for these quarters, such as costs over $35,000, as required for government-owned quarters. The Navy, Marine Corps, and Air Force are developing guidance to increase visibility and accountability over the spending for these quarters, but the draft guidance is not consistent. Although the services have privatized only 65 of their 784 general and flag officer quarters, they plan to privatize 426 or 54 percent by fiscal year 2008.

FDA's overall mission is to protect the public from selected domestic or imported foods, drugs, cosmetics, biological products, and medical devices and from products that make fraudulent or misleading claims that might threaten public health and safety. On matters relating to its import operations, FDA's Office of Regulatory Affairs provides guidance and systems support, and performs planning, budgeting, and reporting activities for 6 regional offices, 21 district offices, and about 130 resident inspection posts. Imported products can enter the United States at seaports, airports, courier hubs, and border crossings. The volume of import entries subject to FDA regulations has been increasing over the last 20 years from about 590,000 entries in 1975 to about 1.6 million entries currently, and is expected to reach 2 million entries by 2000. Products imported into the United States must be cleared first by Customs, whose responsibilities include assessing and collecting revenues from imports, enforcing customs and related laws, and assisting in the administration and enforcement of other provisions of laws and regulations on behalf of 60 federal agencies. Import brokers act as agents for importers and process the information required to bring products into the United States. Brokers can electronically transmit data on their products to Customs through an automated interface with Customs' Automated Commercial System (ACS). If Customs determines that a product requires FDA approval before being released into the domestic market, such as for regulated food and drugs, the broker is to forward entry information to FDA for review. Under FDA's manual entry and review process, brokers must submit entry documents (an FDA-701, invoice, and associated certifications) to FDA for each shipment. Using these documents, FDA inspectors at the port of entry decide whether to release the shipment for entry, examine the shipment by inspecting it there, perform paper or laboratory examination of it for possible refusal due to violations of laws and regulations, or detain it until the broker furnishes additional information. Entry documents can range from a few pages to as many as 40 pages depending on the type and volume of goods in a shipment. The time interval between when the broker submits the documents to FDA and when the broker receives a release or examination decision from FDA averages 2 days. As the volume of imports continued to grow, FDA recognized a need to automate and expedite its entry and review process. Also, FDA envisioned that an automated system would provide a method to capture and share historical data to bring uniformity to its enforcement decisions for detecting and preventing "port shopping" by importers. FDA found that because of its heavy workload or less interest in particular products at some ports, some importers tended to use the port of entry that provided them with the best opportunity for receiving FDA approval. In 1987, the FDA Commissioner formed a task force to develop a new automated system as recommended in a contractor-prepared feasibility study. This system, now known as OASIS, was intended to increase the efficiency and effectiveness of FDA's program for monitoring imported products. In general, OASIS was expected to (1) increase the productivity of investigations personnel through automated interfaces with the laboratories, brokers and/or Customs, (2) improve screening of imports by providing suggestions for actions likely to result in discovery of violations, (3) provide faster turnaround for processing of importer's entries and faster and more consistent responses, (4) provide national and district uniformity in processing of entries, and (5) maintain a base of information for generation of reports. OASIS was initially planned to be fully implemented in September 1989. We interviewed FDA and Customs officials in the Washington, D.C., area, and Seattle, Washington, to determine the operational objectives and timeframe for implementing OASIS. We also reviewed systems documentation provided by FDA, such as the system design, functional requirements, capacity analysis, risk assessment, regional contingency plan, implementation schedules, software support contracts, task orders, interagency agreement between FDA and Customs, and security and information resources management policies and procedures. We assessed FDA's efforts to design, develop, and implement OASIS against GAO's executive guide on the best practices of leading private and public organizations for strategic information management, and federal guidelines, such as the Federal Information Processing Standards Publications. In addition, we reviewed the 1994 joint self-assessment report on OASIS, the contractor's cost-benefit analysis, and the System Design Review Committee's report. To monitor the implementation of OASIS, we visited and interviewed officials in FDA district offices and ports of entry in Seattle (system pilot location); Miami, Florida; Buffalo and New York, New York; and Detroit, Michigan. We also conducted telephone interviews with FDA officials in several other district offices. Interviews with FDA import managers and inspectors at these sites provided us with observations and examples of entries processed both manually and electronically at major FDA air, sea, and border ports. We also interviewed Customs officials and import brokers at the sites visited to obtain their perspectives on how the system has improved the import process. Further, we interviewed officials at HHS, who were involved with the self-assessment and system design reviews. We also interviewed one of the prior software development contractors and the current contractor regarding their roles and responsibilities for the OASIS project. We performed our work from April 1994 through June 1995, in accordance with generally accepted government auditing standards. We requested official comments on a draft of this report from the Secretary of Health and Human Services on August 10, 1995. As of September 18, 1995, we had not received any comments to include in the final version of this report. The development of OASIS is taking considerably longer than FDA officials expected. As shown in figure 1, after 8 years and three software development contractors, FDA still does not have a fully functional automated import system. The original design, which was called the Import Support and Information System (ISIS), was for a large, nationwide, on-line, real-time, distributed FDA system. This system was modified following its 1991 pilot test and FDA's agreement with Customs to include an automated interface with Customs' ACS. As shown in figure 1, the modified system, known as OASIS, was pilot tested in Seattle, Washington, in 1992 and expanded to Portland, Oregon, and Blaine, Washington, in 1993. OASIS, as implemented in the Seattle District locations, provides FDA inspectors the ability to (1) receive import entry data electronically from import brokers through interface with ACS, (2) receive results of preliminary processing against FDA's selectivity criteria screening file, which is installed on ACS, that the shipment "May Proceed," must be "Detained" for sampling, or must be held for "FDA Review," (3) be alerted to potential problem areas with each line item of an entry, make follow-up screening decisions, and transmit these electronically to the broker through interface with ACS, (4) track actions taken and maintain historical data on all electronic import entries, and (5) eliminate many of the paper transactions among FDA, Customs, and import brokers. In addition, import brokers who interface with ACS receive preliminary and subsequent screening decisions relating to their electronic entries simultaneously with FDA. However, software design problems experienced at the pilot locations made OASIS difficult to use. Such problems included slow response times when receiving and printing electronic data, moving from computer screen to computer screen, or going in and out of other systems while processing entries. These OASIS development problems prompted FDA to assemble a team of information resources management (IRM) representatives from HHS, PHS, and within FDA to pilot a self-assessment tool to analyze risks associated with the development of OASIS. In June 1994, as a result of the exit briefing by the self-assessment team on its results and pending actions under way by FDA to replace the expiring OASIS contract, FDA's Director of the Office of Information Resources Management called for the termination of both the development and deployment of all but the front-end portion of OASIS known as the electronic entry processing system or EEPS. FDA decided to maintain and refine OASIS in the Seattle District. In its July 1994 report, the self-assessment team concluded that the OASIS project was at high risk for system failure due to the lack of senior-level management involvement, project planning, and basic development processes as well as system design flaws, an insufficient budget, and a skeleton staff lacking adequate system design and implementation expertise. In contrast to the OASIS functions described previously, EEPS allows FDA inspectors to receive the broker's entry data from ACS, but only allows inspectors and brokers to receive the preliminary admissibility messages of either "May Proceed" or "FDA Review" for the entire entry. It is not capable of processing or transmitting any follow-up line-item decisions from FDA to the brokers. EEPS was deployed to 114 ports between March 1994 and June 1995, with 103 additional ports expected to be automated by the end of 1995. According to import brokers and FDA inspectors we interviewed, even EEPS' limited capability provides them quicker notifications as to the admissibility of imported shipments and reduces the amount of paperwork required from brokers. For "May Proceed" decisions, paper entry documentation is generally eliminated. For example, during the month of June 1995, FDA reported that of 2,520 brokers who interfaced with Customs' ACS in the Seattle District and EEPS ports, 1,585, or 63 percent, used electronic filing for 178,412 FDA entries, and that 78 percent of the 1,585 electronic filers were not required to submit entry documentation for "May Proceed" entries. Table 1 below compares the traditional manual entry process to EEPS. As recommended in 1994 by the self-assessment team, HHS, PHS, and FDA formed a systems design review committee to determine if (1) the OASIS design adequately meets the user requirements, (2) FDA computer hardware, or platform, is adequate for the system, (3) real-time access is necessary, and (4) telecommunications are adequate. The committee's June 1995 report addressed the first three items. FDA's telecommunications management branch is conducting an agencywide study on the telecommunications and network capacity and capabilities needed. The results of this study are expected in February 1996. The committee's June 1995 report stated that (1) the OASIS system design contains significant deficiencies, (2) the adequacy of the agency platform cannot be determined because certain stress and system load tests have not been performed or documented, and (3) real-time access is not necessary. Although further development and deployment of the OASIS system is on hold, completion of a successful import system remains a major information resource management goal for FDA. We previously reportedon FDA's need to address systems development problems and implementation delays, and our current review identified many of the same problems reported by the self-assessment team. In addition, we found that the OASIS project lacked necessary cost and performance information and did not consider some proven best practices of leading organizations that help ensure successful systems development. These problems must be resolved if FDA is to complete its automation of import operations. Beginning in late September 1994 with the award of a new agencywide strategic information systems support contract, FDA began to address some of the systems development process problems identified but continued to lack effective senior-level management and direction, as well as a systems project management team with information technology expertise. In addition, FDA has made little progress in implementing basic systems development procedures, including conducting user acceptance testing and a risk assessment. Recent developments include the completion of a system design review which concluded that OASIS was not ready for national implementation and recommended an immediate reengineering effort. FDA top management did not adequately oversee the OASIS project and did not provide clear direction and appropriate resources needed to support the project. We found that this situation was largely due to an IRM structure that did not clearly define control and lines of accountability for the OASIS project. In addition, we found that the OASIS project was directed by managers who lacked the systems development training and expertise to successfully design, develop, deploy, and maintain an information system. The Deputy Commissioner for the Office of Management and Systems is both the chief financial officer and the senior IRM official for FDA. IRM activities on the OASIS project are the responsibility of the Office of Information Resources Management (OIRM) under the Deputy Commissioner for the Office of Management and Systems and the Office of Regulatory Affairs (ORA) under the Deputy Commissioner for the Office of Operations. As shown in figure 2, many FDA offices and divisions have some involvement with the OASIS project. The responsibilities of OIRM include (1) ensuring that the agency's 5-year strategic plan for acquisition and development of information resources is prepared and implemented, (2) ensuring that the most cost-effective approach is applied when acquiring information technology, and (3) approving acquisitions and ensuring that IRM goals and strategies are achieved. Since the OASIS project began, its planning, design, development, implementation, and contractor acquisition and interaction resided primarily within the divisions of import operations and information systems in ORA. However, ORA's requests for procurement authority for OASIS were and continue to be reviewed and approved by OIRM. The Deputy Commissioner for Management and Systems told us that since the award of the current strategic information systems contract in September 1994, the Associate Commissioner for OIRM has been charged with providing ORA with continuous technical consultation and scrutiny of all contractor task orders and deliverables prepared under ORA's direction. The OASIS project manager is the director of the strategic initiatives staff, which is part of ORA, and does not report directly to OIRM officials. In addition, some oversight has been provided at the department level. In accordance with the Paperwork Reduction Act, as amended, the HHS Secretary designated a senior official who is responsible for ensuring agency compliance with and prompt, efficient, and effective implementation of the information policies and IRM responsibilities under the Act. The designated senior official at HHS is the Assistant Secretary for Management and Budget, who has delegated certain authorities--such as for procurement--to agencies within the Public Health Service, including FDA. The HHS Deputy Assistant Secretary for IRM, who reports directly to the designated senior official, is responsible for management and operation of the department's IRM program. It is at this level that HHS has provided FDA with assistance on both the self-assessment team and system design review committee. The joint FDA/PHS/HHS self-assessment report indicated that FDA senior-level management needed to be closely involved with OASIS due to the visibility of the system and the troubled system development history. The report stated that the Commissioner or other top FDA officials did not receive regularly scheduled progress reports on the project. We found several memoranda dating back to 1989 in which OIRM raised concerns to ORA about the cost, complexity, and lack of well-defined requirements, alternatives, and planning regarding OASIS. Nonetheless, the project continued under the direction of ORA until June 1994, when the OIRM director called for the termination of further development based upon the results of the self-assessment team. It is critical that senior-level oversight of this automation effort be established to ensure that information technology is acquired, used, and managed to improve the performance of FDA's public health and safety mission, and that responsibility and accountability are improved. As discussed in GAO's May 1994 publication on the best practices of leading private and public organizations for strategic information management, these organizations have found that without senior executives recognizing the value of improving information management, meaningful change is slow and sometimes nearly impossible. As discussed above, ORA administered the day-to-day management of the OASIS project. We found, however, that ORA did not have the systems development expertise in-house to perform these functions. Our review of the experience and qualification statements of OASIS project management showed that the ORA Deputy Associate Commissioner--the senior project official, the project manager, and the project officer did not have any systems development training or experience. The OASIS project manager concurred with our finding in a February 1995 memorandum, which stated that ORA did not have employees with adequate knowledge and experience in life-cycle methodology and related skills, all of which were important to a system of OASIS' complexity. The memorandum stated that ORA planned to use its current software development and support contractor to address this deficiency in systems development and hardware acquisition expertise. During our review, the self-assessment team recommended in its July 1994 report that ORA request and accept assistance from another FDA component, PHS, or HHS to address deficiencies in staff knowledge. As stated previously, ORA receives oversight from OIRM for task order review and approval, but not day-to-day assistance from this or other sources as recommended. ORA still does not have someone with the system development expertise to oversee the OASIS project and monitor the contractor's work. A best practice that can lead to improved mission performance is to ensure that skills and knowledge of line and information management professionals are upgraded. Also useful is establishing customer/supplier relationships internally and defining roles between line managers and information management support professionals to maximize management processes. Lastly, the chance of a breakdown between the agency and contractors is great when the agency does not have information management professionals with the needed expertise to assist line management in evaluating and supervising contractor performance. We found that FDA has not been effective in controlling costs or monitoring the progress of OASIS. FDA officials informed us that they did not have a cost accounting system that would enable them to clearly identify the costs of the OASIS project. They said that some of this cost was commingled with other information systems projects. For example, despite our repeated attempts to obtain the systems life-cycle cost for OASIS from its inception through the current fiscal year, FDA did not provide us with cost data until July 1995. This information was prepared by FDA's contractor and submitted in June 1995, as part of a cost-benefit analysis requested by FDA. According to information contained in the contractor's report, the OASIS systems development costs were estimated to be $13.8 million from fiscal year 1987 through April 1995. We did not independently verify these estimates. In addition, the agency did not properly account for or match OASIS costs with outcomes to determine if OASIS would meet FDA's needs within its budget allocation. Accurate accounting of all project costs will be crucial since FDA is supportive of legislation that would allow the agency to collect user fees for imports processed through the automated system to offset the costs of developing, deploying and supporting the system. Also, the importance of an import screening system to FDA's operations and the import community warrants the maintenance of reliable cost and performance information to keep congressional appropriations and oversight committees informed of the status of any systems development effort. ORA officials we interviewed told us that they did not establish any baseline measures to assess current and expected OASIS operational and technical performance. As discussed in GAO's best practices publication, standard performance measurement practices focus on benefits, costs, and risks and, in most cases, include program outcomes, resource consumption, and elapsed time (cycle time) of specific work processes, activities, or transactions. Performance measures act as a common focus, allowing management to target problem areas, highlight successes, and generally increase the rate of performance improvement through enhanced learning. Such measures would allow top management to assess and manage the risk associated with its import automation effort, and to control the trade-offs between continued funding of existing operations and developing new performance capabilities. We found that FDA did not follow sound systems development procedures, such as those outlined in federal guidelines, when developing OASIS because its project management team lacked expertise and training in systems development. Specifically, FDA did not (1) validate its criteria for electronically screening import entries, (2) conduct user acceptance testing, (3) conduct a risk assessment or prepare a security plan to address contingencies or backup procedures to be used in the event of disasters or threats to FDA's computer facilities, equipment, and data, and (4) conduct a cost-benefit analysis. Many of these problems were brought to FDA's attention as early as 1988. The following systems development problems must be resolved if FDA is to avoid continued criticism of its attempts to complete an automated import system. No FDA validation of screening criteria. FDA had not validated the import admissibility screening criteria that reside in Customs' ACS. Validation is essential to ensure that import entries are processed accurately and that potentially unsafe products are properly identified for "FDA Review." OASIS project officials in ORA said that they did not have access to the criteria in ACS and could only validate information contained in the ACS-generated error reports. Moreover, these officials stated that they did not know if Customs corrected all the errors they identified. The joint self-assessment report also concluded that FDA did not have an adequate verification and validation process for its software and documentation. Did not conduct user acceptance testing. The self-assessment report stated that FDA did not have written acceptance criteria or test plans. For example, FDA did not conduct nor participate with Customs in user acceptance testing prior or subsequent to implementing the ACS interface. ORA's Deputy Associate Commissioner told us that it relied on and trusted Customs to ensure that the screening criteria database was functioning as intended. Security plan not developed. Until recently, FDA had not conducted a risk assessment or developed a disaster recovery plan for EEPS, as required by federal guidelines. In 1992, FDA declared OASIS a "record system" subject to the requirements of the Privacy Act of 1974. Thereafter, FDA considered OASIS a critical-sensitive system. Also, the Computer Security Act of 1987 requires agencies to establish security plans and perform vulnerability assessments for all computer systems that contain sensitive information. In February 1995, FDA issued a risk assessment of EEPS at FDA headquarters and a contingency plan to address backup procedures for the Pacific Region, which runs the regional computer facility in the Seattle District office. However, we found that the risk assessment was incomplete and did not address major portions of EEPS. In addition, the contingency plan was not viable because FDA moved the OASIS processing function from Seattle to the larger processing facility in its headquarters in Rockville, Maryland. FDA does not have a contingency plan for ORA's headquarters computer center. However, it plans to obtain a risk assessment of ORA's information systems and contents through an interagency agreement with the Department of Transportation. As of May 1995, FDA could not tell us when a risk assessment and contingency plan would be performed at FDA headquarters to address security concerns for this mission-critical system. No cost-benefit analysis conducted. At the beginning of our review, we learned that no one had performed a cost-benefit analysis for the OASIS project. This deficiency was also later reported by the self-assessment team. A cost-benefit analysis describes the development and operational costs of each alternative, and of nonrecurring (improved system operations and resource utilization) and recurring (operations and maintenance, including personnel) benefits that could be attained through the development of each proposed alternative. Such an analysis is useful to managers, users, and designers for analyzing alternative systems and will be essential to any decisions for further development of an automated import system. ORA officials told us that they did not ask for such an analysis in the past. In February 1995, the current contractor was tasked with conducting a cost-benefit analysis, which was completed in June 1995. However, FDA did not request that the contractor perform an alternatives analysis. The current effort was limited to an analysis of OASIS' historical costs from fiscal year 1987 through April 1995, which were estimated to be $13.8 million as well as projected costs from May 1995 through fiscal year 2001, which were estimated to be $26.2 million. The contractor also analyzed the costs and benefits of automation as compared to the current manual process. In June 1995, the System Design Review Committee issued its report on OASIS which concluded that the system is not ready for national implementation because of significant system deficiencies, including inconsistent user interface design and the lack of automated configuration management and version control. Consequently, the committee recommended that a reengineering effort begin immediately to design a system that would incorporate all customers' needs, take advantage of modern technology and the strategic direction in which FDA is heading, and position FDA for the future. In a July 10, 1995, meeting with FDA's Deputy Commissioner for the Office of Management and Systems, we were told that FDA will not implement OASIS nationwide and will begin a reengineering effort. In addition, FDA agreed to the recommendations of the committee as stated in a July 12, 1995, correspondence from the Deputy Commissioner to ORA officials. However, the details of the reengineering effort have not yet been documented so it is not clear who will lead this effort, what will it involve, and how long will it take. Reengineering is a formidable undertaking that requires an organization's managers and employees to change the way they think and work. For example, after senior management recognizes the need for change and commits to reengineering, it then must direct the effort. Existing business processes should be described and analyzed, and measurable improvement goals should be set. In addition, senior management must also support the reengineering effort by identifying training needs and determining whether outside expertise is necessary. New business processes should then be designed and the organizational culture, structure, roles, and responsibilities should be changed to support these new processes. Finally, new business processes should be implemented by acquiring and installing new technology or redesigning existing technology to support the new processes. FDA, though, has not yet clearly defined its reengineering effort and how it plans to link this effort to its information technology initiatives. This is critical if FDA is to achieve dramatic changes in overall performance and customer satisfaction. A thorough understanding of the factors that led to FDA's failure over the past 8 years to develop and implement an import system to meet its mission critical needs is crucial to help ensure that similar problems and obstacles are avoided in the future. As FDA plans its reengineering effort, it is presented with an opportunity to identify and correct its long-standing systems development problems. Because these problems can be attributed to a lack of top management oversight, systems expertise, and reliable cost and performance information, continued attention by FDA and HHS is vital to the success of this automation effort. It is crucial that FDA follow sound system development procedures, in conjunction with a well-defined reengineering strategy, if it is to successfully implement an import system and achieve its public health and safety mission. We recommend that the Secretary of Health and Human Services direct the Assistant Secretary for Management and Budget and the Commissioner of the Food and Drug Administration to ensure that continuous top management oversight and systems expertise are provided to FDA as it proceeds with its import automation effort; FDA develops and maintains reliable cost and performance information; FDA follows sound systems development practices, including validating systems software, conducting user acceptance testing, developing a security plan, and conducting a cost-benefit analysis that includes an assessment of alternative systems. We also recommend that the Secretary direct the Assistant Secretary and the Commissioner to clearly define how FDA plans to reengineer its import operations. At a minimum, FDA should (1) identify and analyze existing business processes and work flows, (2) obtain the necessary technical assistance and training to support its reengineering efforts, and (3) determine new information needs, application system requirements, and technology requirements necessary to support the new business processes. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 15 days from the date of this letter. We will then send copies of this report to the Secretary of Health and Human Services, the Commissioner of the Food and Drug Administration, the Director of the Office of Management and Budget, and other interested parties. Copies also will be made available to others upon request. This report was prepared under the direction of Patricia T. Taylor, Associate Director. You or your staff can reach me at (202) 512-6252, or Ms. Taylor at (202) 512-5539, if there are any questions on the report. Other major contributors are listed in appendix I. Susan T. Chin, 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. 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 the Food and Drug Administration's (FDA) progress in implementing its Operational and Administrative System for Import Support (OASIS), focusing on systems development areas that need improvement. GAO found that: (1) although some improvements have been made to import operations, FDA has not completed OASIS after 8 years and about $14 million in system development costs, mainly due to inadequate management oversight; (2) in 1994, FDA determined that OASIS was at a high risk for failure and it should suspend development until it completed a comprehensive system review; (3) FDA has taken an inadequate approach in developing OASIS, resulting in the potential for unsafe products entering the country; (4) FDA completed the comprehensive review of OASIS in June 1995 and determined that OASIS was not ready for national implementation and recommended an immediate reengineering effort; and (5) FDA success in improving OASIS depends on better planning and top management involvement in system design, development, and deployment.

While the U.S. government supports a wide variety of programs and activities for global food security, it lacks comprehensive data on funding. We found that it is difficult to readily determine the full extent of such programs and activities and to estimate precisely the total amount of funding that the U.S. government as a whole allocates to global food security. In response to our data collection instrument to the 10 agencies, 7 agencies reported providing monetary assistance for global food security programs and activities in fiscal year 2008, based on the working definition we developed for this purpose with agency input. Figure 1 summarizes the agencies' responses on the types of global food security programs and activities and table 1 summarizes the funding levels. (The agencies are listed in order from highest to lowest amount of funding provided.) USAID and USDA reported providing the broadest array of global food security programs and activities. USAID, MCC, Treasury (through its participation in multilateral development institutions), USDA, and State provide the highest levels of funding to address food insecurity in developing countries. In addition, USTDA and DOD provide some food security-related assistance. These 7 agencies reported directing at least $5 billion in fiscal year 2008 to global food security, with food aid accounting for about half of this funding. However, the actual total level of funding is likely greater. The agencies did not provide us with comprehensive funding data due to two key factors. First, a commonly accepted governmentwide operational definition of what constitutes global food security programs and activities has not been developed. An operational definition accepted by all U.S. agencies would enable them to apply it at the program level for planning and budgeting purposes. The agencies also lack reporting requirements to routinely capture data on all relevant funds. Second, some agencies' management systems are inadequate for tracking and reporting food security funding data comprehensively and consistently. Most notably, USAID and State--which both use the Foreign Assistance Coordination and Tracking System (FACTS) database for tracking foreign assistance-- failed to include a very large amount of food aid funding in that database. In its initial response to our instrument, USAID, using FACTS, reported that in fiscal year 2008 the agency's planned appropriations for global food security included about $860 million for Food for Peace Title II emergency food aid. However, we noticed a very large discrepancy between the FACTS-generated $860 million and two other sources of information on emergency food aid funding: (1) the $1.7 billion that USAID allocated to emergency food aid from the congressional appropriations for Title II food aid for fiscal year 2008, and (2) about $2 billion in emergency food aid funding reported by USAID in its International Food Assistance Report for fiscal year 2008. USAID officials reported that USAID has checks in place to ensure the accuracy of the data entered by its overseas missions and most headquarters bureaus. However, the magnitude of the discrepancy for emergency food aid, which is USAID's global food security program with the highest funding level, raises questions about the data management and verification procedures in FACTS, particularly with regard to the Food for Peace program. While the administration is making progress toward finalizing a governmentwide global food security strategy through improved interagency coordination at the headquarters level, its efforts are vulnerable to weaknesses in data and risks associated with the host country-led approach called for in the strategy under development. Two interagency processes established in April 2009--the NSC Interagency Policy Committee on Agriculture and Food Security and the GHFSI working team--are improving headquarters coordination among numerous agencies, as shown in figure 2. The strategy under development is embodied in the Consultation Document issued in September 2009, which is being expanded and as of February 2010 was expected to be released shortly, along with an implementation document and a results framework that will include a plan for monitoring and evaluation. In the fiscal year 2011 Congressional Budget Justification for GHFSI, the administration has identified a group of 20 countries for GHFSI assistance, including 12 countries in sub- Saharan Africa, 4 in Asia, and 4 in the Western Hemisphere. However, the administration's efforts are vulnerable to weaknesses in funding data, and the host country-led approach, although promising, poses some risks. Currently, no single information database compiles comprehensive data on the entire range of global food security programs and activities across the U.S. government. The lack of comprehensive data on current programs and funding levels may impair the success of the new strategy because it deprives decision makers of information on all available resources, actual costs, and a firm baseline against which to plan. Furthermore, the host country-led approach has three key vulnerabilities, as follows: First, the weak capacity of host governments raises questions regarding their ability to absorb significant increases in donor funding for agriculture and food security and to sustain donor-funded projects on their own over time. For example, multilateral development banks have reported relatively low sustainability ratings for agriculture-related projects in the past. In a 2007 review of World Bank assistance to the agricultural sector in Africa, the World Bank Independent Evaluation Group reported that only 40 percent of the bank's agriculture-related projects in sub-Saharan Africa had been sustainable. Similarly, an annual report issued by the International Fund for Agricultural Development's independent Office of Evaluation on the results and impact of the fund's operations between 2002 and 2006 rated only 45 percent of its agricultural development projects satisfactory for sustainability. Second, the shortage of expertise in agriculture and food security at relevant U.S. agencies can constrain efforts to help strengthen host government capacity, as well as review host government efforts and guide in-country activities. For example, the Chicago Council on Global Affairs noted that whereas USAID previously had a significant in-house staff capacity in agriculture, it has lost that capacity over the years and is only now beginning to restore it. The loss has been attributed to the overall declining trend in U.S. assistance for agriculture since the 1990s. In 2008 three former USAID administrators reported that "the agency now has only six engineers and 16 agriculture experts." According to USAID, a recent analysis of direct hire staff shows that the agency has since increased the number of its staff with technical expertise in agriculture and food security to 79. A USAID official told us that the agency's current workforce plan calls for adding 95 to 114 new Foreign Service officers with technical expertise in agriculture by the end of fiscal year 2012. Third, policy differences between the United States and host governments with regard to agricultural development and food security may complicate efforts to align U.S. assistance with host government strategies. For example, Malawi's strategy of providing subsidized agricultural inputs to farmers runs counter to the U.S. approach of encouraging the development of agricultural markets and linking farmers to those markets. Since 2005 and 2006, the government of Malawi has implemented a large- scale national program that distributes vouchers to about 50 percent of the country's farmers so that they can purchase agricultural inputs--such as fertilizer, seeds, and pesticides--at highly discounted prices. USAID has supported operations that use targeted vouchers to accelerate short-term relief operations following conflicts or disasters. However, according to USAID, the provision of cheaper fertilizer and seeds does not address the fundamental problem--that poor farmers cannot afford fertilizer on their own and, furthermore, without improvements in irrigation, investments in fertilizer would not pay off in drought years in a country like Malawi, where agriculture is mainly rain-fed. In the face of growing malnutrition worldwide, the international community has established ambitious goals toward halving global hunger, including significant financial commitments to increase aid for agriculture and food security. Given the size of the problem and how difficult it has historically been to address it, this effort will require a long-term, sustained commitment on the part of the international donor community, including the United States. As part of this initiative, and consistent with a prior GAO recommendation, the United States has committed to harnessing the efforts of all relevant U.S. agencies in a coordinated and integrated governmentwide approach. The administration has made important progress toward realizing this commitment, including providing high-level support across multiple government agencies. However, the administration's efforts to develop an integrated U.S. governmentwide strategy for global food security have two key vulnerabilities: (1) the lack of readily available comprehensive data across agencies and (2) the risks associated with the host country-led approach. Given the complexity and long-standing nature of these concerns, there should be no expectation of quick and easy solutions. Only long-term, sustained efforts by countries, institutions, and all relevant entities to mitigate these concerns will greatly enhance the prospects of fulfilling the international commitment to halve global hunger. In the report issued today, we recommended that the Secretary of State (1) work with the existing NSC Interagency Policy Committee to develop an operational definition of food security that is accepted by all U.S. agencies; establish a methodology for consistently reporting comprehensive data across agencies; and periodically inventory the food security-related programs and associated funding for each of these agencies; and (2) work in collaboration with relevant agency heads to delineate measures to mitigate the risks associated with the host country- led approach on the successful implementation of the forthcoming governmentwide global food security strategy. Four agencies--State, Treasury, USAID, and USDA--provided written comments on our report and generally concurred with our recommendations. With regard to our first recommendation, State and USAID agreed that developing an operational definition of food security that is accepted by all U.S. agencies would be useful. With regard to our second recommendation, the four agencies noted that the administration recognizes the risks associated with a host country-led approach and that they are taking actions to mitigate these risks. Madam Chairwoman, this concludes my statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. Should you have any questions about this testimony, please contact Thomas Melito at (202) 512-9601, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Phillip J. Thomas (Assistant Director), Joy Labez, Sada Aksartova, Carol Bray, Ming Chen, Debbie Chung, Martin De Alteriis, Brian Egger, Etana Finkler, Amanda Hinkle, and Ulyana Panchishin. 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.

Global hunger continues to worsen despite world leaders' 1996 pledge--reaffirmed in 2000 and 2009--to halve hunger by 2015. To reverse this trend, in 2009 major donor countries pledged about $22.7 billion in a 3-year commitment to agriculture and food security in developing countries, of which $3.5 billion is the U.S. share. This testimony addresses (1) the types and funding of food security programs and activities of relevant U.S. government agencies and (2) progress in developing an integrated U.S. governmentwide strategy to address global food insecurity and the strategy's potential vulnerabilities. This is based on a new GAO report being released at today's hearing (GAO-10-352). The U.S. government supports a wide variety of programs and activities for global food security, but lacks readily available comprehensive data on funding. In response to GAO's data collection instrument to 10 agencies, 7 agencies reported such funding for global food security in fiscal year 2008 based on the working definition GAO developed for this exercise with agency input. USAID and USDA reported the broadest array of programs and activities, while USAID, the Millennium Challenge Corporation, Treasury, USDA, and State reported providing the highest levels of funding for global food security. The 7 agencies together directed at least $5 billion in fiscal year 2008 to global food security, with food aid accounting for about half of that funding. However, the actual total is likely greater. GAO's estimate does not account for all U.S. government funds targeting global food insecurity because the agencies lack (1) a commonly accepted governmentwide operational definition of global food security programs and activities as well as reporting requirements to routinely capture data on all relevant funds, and (2) data management systems to track and report food security funding comprehensively and consistently. The administration is making progress toward finalizing a governmentwide global food security strategy--expected to be released shortly--but its efforts are vulnerable to data weaknesses and risks associated with the strategy's host country-led approach. The administration has established interagency coordination mechanisms at headquarters and is finalizing an implementation document and a results framework. However, the lack of comprehensive data on programs and funding levels may deprive decision makers of information on available resources and a firm baseline against which to plan. Furthermore, the host country-led approach, although promising, is vulnerable to (1) the weak capacity of host governments, which can limit their ability to sustain donor-funded efforts; (2) a shortage of expertise in agriculture and food security at U.S. agencies that could constrain efforts to help strengthen host government capacity; and (3) policy differences between host governments and donors, including the United States, may complicate efforts to align donor interventions with host government strategies.

Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss our observations on the Office of Management and Budget's (OMB) efforts to carry out its responsibilities to set policy and oversee the management of the executive branch. As you know, last month we issued a major new series of reports, entitled Performance and Accountability Series: Major Management Challenges and Program Risks, and an update of our high risk series. Collectively, the reports show that long-standing performance and management challenges hinder the federal government's efforts to achieve results. The report series also highlighted numerous improvements that agencies need to make in their performance, management, and accountability. Making these improvements will require the sustained efforts of the leadership and staff within agencies. At the same time, the report series also underscored the pivotal role that the federal government's central management agencies-- in particular, OMB--must play in guiding and overseeing agencies' efforts to address the shortcomings that we identified and to implement the changes necessary to improve performance. Today, as requested by the Subcommittee, we will cover three major points. First, we will provide an outline of OMB's wide-ranging management responsibilities and note that the question of whether to integrate or separate management and budget functions has been long debated. Second, we will discuss the effectiveness of OMB's management leadership, which, in our view, has been uneven. Finally, we will discuss the factors that appear to contribute to progress in sustaining improvements in federal management. As agreed, our statement today is based on, and updates as appropriate, the testimony we provided on these three points when we appeared before this Subcommittee last May. Our observations are made on the basis of work we are currently doing and have done at federal agencies and at OMB. framework contains as its core elements financial management improvement legislation, including the Chief Financial Officers (CFO) Act of 1990, the Government Management Reform Act of 1994, and the Federal Financial Management Improvement Act of 1996; information technology reforms, including the Paperwork Reduction Act (PRA) of 1995 and the Clinger-Cohen Act of 1996; and the Government Performance and Results Act of 1993 (the Results Act). The CFO Act mandated significant financial management reforms and established the Deputy Director for Management (DDM) position within OMB. In addition to serving as the government's key official for financial management, the DDM is to coordinate and supervise a wide range of general management functions of OMB. These functions include those relating to managerial systems, such as the systematic measurement of performance; procurement policy; regulatory affairs; and other management functions, such as organizational studies, long-range planning, program evaluation, and productivity improvement. OMB is responsible for providing guidance and oversight for various other laws and executive orders as well. For example, the Federal Acquisition Streamlining Act (FASA) requires that executive agency heads set cost, performance, and schedule goals for major acquisition programs and that OMB report to Congress on agencies' progress in meeting these goals. Executive Order 12866 directs OMB to coordinate the review of agencies' rules and regulations to ensure that they impose the least burden, are consistent between agencies, focus on results over process, and are based on sound cost/benefit analysis. OMB also has been responsible since 1967, through its Circular A-76, for carrying out executive branch policy to rely on competition between the federal workforce and the private sector for providing commercial goods and services. OMB's perennial challenge is to carry out its central management leadership responsibilities in such a way that leverages opportunities of the budget process, while at the same time ensuring that management concerns receive appropriate attention in an environment driven by budget and policy decisions. Concern that OMB and its predecessor agency, the Bureau of the Budget, lacked the support and institutional capacity necessary to sustain management improvement efforts throughout the executive branch has prompted numerous calls for changes in the past. these groups, the Ash Council, the Bureau of the Budget was reorganized in 1970 and renamed OMB, thereby signaling the intent to heighten the management focus in the agency. However, the creation of OMB did not ensure that an institutionalized capacity for governmentwide management leadership would be sustained, nor did it establish how OMB should balance its budget and management responsibilities. As a result, observers have continued to debate how to best ensure that management issues can be effectively considered within the context of--yet without being overwhelmed by--the budget process. Some observers have advocated integrating the two functions, while others have proposed the creation of dedicated offices or a separate agency to provide governmentwide management leadership. Prior OMB reorganizations, reflecting these different points of view, have alternated between seeking to more directly integrate management into the budget review process and creating separate management offices. Previous congressional and OMB attempts to elevate the status of management by creating separate management units within OMB sought to ensure that an adequate level of effort was focused on management issues. Underscoring its concern that management issues receive appropriate attention, Congress established the DDM position to provide top-level leadership to improve the management of the federal government. In 1994, OMB reorganized to integrate its budget analysis, management review, and policy development roles, in an initiative called "OMB 2000." This reorganization was the most recent of a series of attempts to bolster OMB's management capacity and influence. To carry out its responsibilities, OMB's Resource Management Offices (RMO) are responsible for examining agency budget, management, and policy issues. Linking management reforms to the budget has, at a minimum, provided the opportunity to include management issues as part of the president's yearly budget reviews--a regularly established framework for making decisions. levels and transferred their responsibilities for overseeing agencies' implementation of many governmentwide management initiatives to the RMOs. This increased OMB's reliance on RMO managers and staff to focus on management issues and coordinate their activities with the statutory offices. In fiscal year 1997, OMB obligated $56 million and employed over 500 staff. In recent years, OMB has focused increased attention on management issues, but there is much more that needs to be done. In last year's budget, the Administration took an important first step in what can be seen as an evolving results-based planning and budgeting process. The first Governmentwide Performance Plan, as required by the Results Act, was prepared as an integrated component of the President's 1999 Budget; this year's Plan, released on Monday with the President's 2000 Budget, again describes three aspects of federal government performance: fiscal, management, and program. In OMB's view, the performance of government programs is inextricably linked to the fiscal and economic environment and the management framework in which they operate. In our assessment of the Fiscal Year 1999 Governmentwide Performance Plan, we noted that the separate management performance section within the plan was a useful approach that added essential context and depth to the Plan. This year's Plan follows a structure similar to that developed last year, including (1) a discussion of the Administration's High Impact Agencies initiative, which focuses on defining service delivery commitments, developing customer and employee satisfaction measures, using interagency partnerships, and enhancing electronic access; and (2) 24 specific priority management objectives (PMO), many of which are also on GAO's high risk list. These PMOs were selected by OMB as areas in need of real change and are intended to create a clear set of priorities for the Administration's management improvement efforts. PMOs included in the Fiscal Year 2000 Governmentwide Performance Plan. However, in our assessment of the Fiscal Year 1999 Plan, we noted that there needed to be a clearer and stronger linkage between these PMOs and the underlying agency annual performance plans. Specifically, by improving the discussion of the program performance consequences of the PMOs, OMB could better ensure that agencies develop relevant goals and strategies in their performance plans and clarify agency accountability for specific results. We recommended that OMB ensure that agencies incorporate appropriate goals and strategies in their annual performance plans and describe their relevance to achieving the priority management objectives described in the governmentwide performance plan. Today, we will highlight some of the management issues that have been both of particular concern to this Subcommittee and the subject of our recent work. Like most organizations, federal agencies increasingly depend on information technology (IT) to improve their performance and meet mission goals. Federal agencies, however, face serious challenges in ensuring effective performance and management of the nearly $27 billion in planned obligations for computer technology and information systems each year. Agencies face the challenge of meeting recent legislative reform requirements to implement strong IT leadership and effective processes for improved management of information technology investments. Of primary concern are agencies' abilities to identify and correct date coding problems with mission-critical systems to meet the Year 2000 deadline. Safeguarding critical government systems and sensitive information from unauthorized access is also crucial. As the policy and oversight arm of the executive branch, OMB is responsible for guiding and overseeing agency efforts to meet these challenges and enforcing accountability through the executive branch budget formulation and execution process. OMB, is charged with ensuring that no system critical to the federal government's mission experiences disruption because of the Year 2000 problem. As the Council has concentrated its efforts on international, private-sector, and state and local government issues, OMB has played a key role in tightening requirements on agency reporting of Year 2000 progress. OMB now requires that, beyond the original 24 major departments and agencies, 9 additional agencies report quarterly on their progress, and that all agencies report on their status. Further, OMB places each of the 24 major agencies into one of three tiers after receiving quarterly progress reports, based on OMB's judgment as to whether evidence of the agency's reported progress is or is not sufficient. Additionally, OMB has clarified instructions on agencies preparing business continuity and contingency plans. Many congressional committees have played a central role in addressing the Year 2000 challenge by holding agencies accountable for demonstrating progress and by heightening public appreciation of the problem. The Congress also passed important Year 2000 legislation. However, serious risks remain. Our reviews of federal Year 2000 programs have found uneven progress; some major agencies are significantly behind schedule and are at high risk that they will not correct all of their mission- critical systems in time. In summary, it is essential that OMB provide leadership in ensuring that priorities continue to be set, rigorous testing be completed, and thorough business continuity and contingency plans be prepared to successfully meet the Year 2000 challenge. Continuing computer security weaknesses also put critical federal operations and assets at great risk. In September 1998, we reported that recent audits have identified significant information security weaknesses at virtually every major agency. others of the importance of information security. This has led to significant actions, including a Presidential directive requiring each major department and agency to develop a plan for protecting critical infrastructures. A series of Senate hearings also highlighted these risks and the need for greater action. OMB, the Chief Information Officer (CIO) Council, and the National Security Council are working collaboratively on a plan to (1) assess agencies' security postures, (2) implement best practices, and (3) establish a process of continued maintenance. In addition, on January 22, President Clinton announced major new initiatives to strengthen our nation's defenses against attacks to our critical infrastructure, computer systems, and networks. Implementing these initiatives effectively will require a more concerted effort at individual agencies and at the governmentwide level. Agencies need to do a better job of establishing comprehensive computer security programs that address systemic problems as well as individual audit findings in this area. Moreover, we found that most agencies have not addressed enhancing information security in their fiscal year 1999 performance plans. In addition to individual agency actions, more effective governmentwide oversight is important to (1) ensure that agency executives understand the risks, (2) monitor agency performance, and (3) resolve issues affecting multiple agencies. As these efforts progress, it is important that OMB play a key role in ensuring that a comprehensive federal strategy emerges. part of the fiscal year 1999 budget cycle review. In addition, working with the CIO Council, OMB recently revised its guidance to agencies on preparing and submitting their annual IT budget requests. The new format for agency budget exhibits provides greater clarity about types of IT spending and the mission area of the agency that these investments support. Finally, OMB has indicated its intention to revise governmentwide guidance dealing with strategic information management planning and security. Nevertheless, broad IT management reforms are still in their early stages in most federal agencies. As our reviews demonstrate, agencies continue to be challenged by (1) weaknesses in IT investment selection and control processes; (2) slow progress in designing and implementing IT architectures; (3) inadequate software development, cost estimation, and acquisition practices; and (4) the demand for effective CIO leadership and organizations. Improvements in these areas will be difficult to achieve without effective agency leadership support, highly qualified and experienced CIOs, and effective OMB leadership and oversight. With the Deputy Director for Management serving as its co-chair, OMB must continue to work effectively with the federal CIO Council to focus management attention on putting in place disciplined information technology management processes that can lead to improvements in the delivery of high quality, cost-effective results. The development of the "Raines' Rules"--requiring agencies to satisfy a set of investment management criteria before funding major systems investments--can potentially serve to further underscore the link between information technology management and spending decisions. These criteria were incorporated into OMB guidance to agencies for the fiscal year 2000 budget process. from OMB's efforts. For instance, 11 agencies received unqualified audit opinions on their fiscal year 1997 financial statements--up from 6 in fiscal year 1996. At the same time, there are major obstacles to overcome. The most serious challenges are framed by the results of our first-ever audit of the government's consolidated financial statements, for fiscal year 1997; deficiencies in the statements prevented us from being able to form an opinion on their reliability. These deficiencies are the result of widespread material internal control and financial systems weaknesses that significantly impair the federal government's ability to adequately safeguard assets, ensure proper recording of transactions, and ensure compliance with laws and regulations. Financial management has been designated one of OMB's priority management objectives, with a goal of producing performance and cost information in a timely, informative, and accurate way, consistent with federal accounting standards. To help accomplish this goal, a May 26, 1998, presidential memorandum required agency heads to develop plans for resolving the problems that have been identified. Further, House Resolution 447, passed on June 9, 1998, underscored congressional expectations for timely resolutions of the problems. Considerable effort is now being exerted several agencies have made good progress towards achieving financial management reform goals. With a concerted effort, the federal government as a whole can continue to make progress toward generating reliable financial information on a regular basis. While annual audited financial statements are essential to identifying any serious problems that might exist and providing an annual public scorecard on accountability, an unqualified audit opinion, while certainly important, is not an end in itself. The CFO Act is focused on providing on a systematic basis, accurate, timely, and relevant financial information needed for management decisionmaking and accountability. For some agencies, the preparation of financial statements requires considerable reliance on ad hoc programming and analysis of data produced by inadequate financial management systems. Thus, the overarching challenge in generating timely, reliable data throughout the year is overhauling financial and related management information systems. Program (JFMIP), which issues financial systems requirements to be followed by all CFO Act agencies. Together with the CFO Council, OMB has established eight priorities as discussed in OMB's Federal Financial Management Status Report and the Five-Year Plan (June 1998). They are: (1) obtaining unqualified opinions on financial statements and issuing accounting standards, (2) improving financial management systems, (3) implementing the Results Act, (4) developing human resources and CFO organizations, (5) improving management of receivables, (6) ensuring management accountability and control, (7) modernizing payments and business methods, and (8) improving administration of federal assistance programs. Finally, OMB is currently piloting accountability reports that provide a single overview of federal agencies' performance, as authorized by the 1994 Government Management Reform Act. By seeking to consolidate and integrate the separate reporting requirements of the Results Act, the CFO Act, and other specified acts, the accountability reports are to show the degree to which an agency met its goals, at what cost, and whether the agency was well-run. If effectively implemented, accountability reports that include information on the full cost and results of carrying out federal activities could greatly aid decisionmaking for our national government. OMB has a vital role in leading and overseeing agencies' efforts to instill a more performance-based approach to decisionmaking, management, and accountability. OMB has shown a clear commitment, articulated in its fiscal year 1999 annual performance plan and the fiscal year 1999 governmentwide plan, to implement the Results Act. recommended that OMB work with Congress and the agencies to identify specific program areas that can be used as best practices. We believe that this would help to demonstrate the use and benefits of performance-based management and how concrete information about program results can contribute directly to congressional and executive branch decisionmaking. OMB's efforts to improve capital decision-making are another example of where OMB's leadership efforts are yielding some results. OMB and GAO have worked together in this area, with OMB developing a Capital Programming Guide that provides agencies with the key elements for producing effective plans and investments. OMB's Guide drew on GAO's work on best practices used by leading private sector and state and local governments, which was subsequently published. Consistent with these best practices, OMB has required agencies to submit 5-year capital spending plans and justifications--thus encouraging a longer-term consideration of agency capital needs and alternatives for addressing them. OMB's Guide provides a basic reference on principles and techniques, including appropriate strategies for analyzing benefits and costs, preparing budget justifications, and managing capital assets once they are in place. In addition, OMB has worked closely with the President's Commission to Study Capital Budgeting, which is expected to issue its report and recommendations soon. As federal agencies implement the performance-based management agenda established by the Congress in the 1990s, the government's human capital policies and practices will increasingly become prominent issues. Leading performance-based organizations understand that effectively managing their human capital is essential to achieving results. Organizational success hinges on having the right employees on board and on providing them with the training, tools, structures, incentives, and accountability to work effectively. Thus, human capital planning must be an integral part of any organization's strategic and program planning and human capital itself should be thought of not as a cost to be minimized but as a strategic asset to be enhanced. The challenge--and opportunity-- confronting federal agencies as they seek to become more performance- based is to ensure that their human capital policies and practices are aligned with their program goals and strategies. An important opportunity exists for OMB to take a leadership role in impressing upon the agencies the importance of adopting a strategic approach to human capital planning--traditionally a weak link in federal agency management. Although the Office of Personnel Management's role in informing the agencies about effective strategic human capital planning is potentially significant, the Results Act provides the statutory impetus for OMB to bring its considerable influence to bear. The Act requires agencies to describe in their strategic plans and annual performance plans the human resources they will need to meet their performance goals and objectives. OMB Circular A-11 states that annual plans may include goals and indicators involving the workforce or the workplace environment, such as employee skills and training, workforce diversity, retention, downsizing, and streamlining. Nevertheless, in examining the first round of agency strategic plans and annual performance plans, we found that few of these documents emphasized human capital or the pivotal role it must play in helping agencies achieve results. Through active participation in the development of agency strategic and annual performance plans and by holding agencies accountable for their attention to human capital considerations, OMB could bring considerable energy and discipline to the federal government's efforts to build, maintain, and marshal the human capital needed to achieve results. same resources in other areas that pose higher risks could yield significantly greater payoffs. OMB's OFPP has worked to implement FASA and the Clinger-Cohen Act. OFPP has also been working to streamline the procurement process, promote efficiency, and encourage a more results-oriented approach to planning and monitoring contracts. OFPP is spearheading a multi-agency effort to revise parts of the Federal Acquisition Regulation (FAR). For example, a major revision to Part 15 of the FAR should contribute greatly to a more flexible, simplified, and efficient process for selecting contractors in competitively negotiated acquisitions. OFPP also developed best practices guides to help agencies draft statements of work, solicitations, and quality assurance plans, as well as to aid in awarding and administering performance-based service contracts. OFPP issued a best practices guide for multiple award task and delivery order contracting to encourage agencies to take advantage of new authorities under FASA. In addition, OMB has encouraged agencies to buy commercial products, conduct electronic commerce, and to consolidate their ordering to take advantage of the buying power of the federal government. OMB's Circular A-76 sets forth federal policy for determining whether commercial activities associated with conducting the government's business will be performed by federal employees or private contractors. The A-76 process calls for agencies to contract for commercial services once they have determined on the basis of cost studies that it would be cost effective to contract out these services. Agencies' efforts to undertake cost studies--with the important exception of the Department of Defense--have declined significantly in recent years. In June 1998, we testified that OMB had undertaken only limited efforts to monitor or enforce compliance with its A-76 guidance or evaluate the success of this process. Since then, Congress passed the Federal Activities Inventory Reform (FAIR) Act that, among other things, provides a statutory basis for some requirements of Circular A-76. Like Circular A- 76, FAIR requires federal agencies to develop a list of all commercial services that are possible candidates for performance by the private sector. OMB is reviewing agencies' efforts to develop commercial activities lists and is developing supplemental guidance to Circular A-76 to assist agencies in complying with FAIR. Finally, OMB's oversight role across the government can provide the basis for analyzing crosscutting program design, implementation, and organizational issues. We have pointed to the need to integrate the consideration of the various governmental tools used to achieve federal goals, such as loans, grants, tax expenditures, and regulations. Specifically, we recommended that OMB review tax expenditures with related spending programs during their budget reviews. In addition, our work has provided numerous examples of mission fragmentation and program overlap within federal missions as shown in table 1. performance into budget functions--a well-known and long used budget classification structure that focuses on federal missions, or "areas of national need." We found in reviewing the Fiscal Year 1999 Plan that in several parts of the Plan, descriptions of program performance were presented in a sequential, agency-by-agency format that missed opportunities to address well-known areas of fragmentation and overlap. Organization-based presentations are appropriate to emphasize agency accountability but tend to "stovepipe" performance discussions and inadequately describe crosscutting governmentwide performance goals. More broadly, we concluded that while the use of the budget functions offers a reasonable and logical approach, it does not always provide mutually exclusive descriptions of governmentwide missions and that a more cohesive picture of federal performance was needed. A more cohesive picture of federal missions would be presented if discussions were broadened beyond functional lines where necessary to capture the full range of government players and activities aimed at advancing broad federal goals. Beyond questions of how best to analyze and describe governmentwide missions and performance, OMB's efforts to ensure crosscutting programs are properly coordinated may be hampered if efforts to resolve problems of program overlap and fragmentation involve organizational changes. OMB lacks a centralized unit charged with raising and assessing government-organization issues. OMB has not had such a focal point since 1982 when it eliminated its Organization and Special Projects Division. Mr. Chairman, the record of OMB's stewardship of management initiatives that we have highlighted today suggests that creating and sustaining attention to management improvement is a key to addressing the federal government's longstanding problems. In the past, management issues often remained subordinated to budget concerns and timeframes, and the leverage the budget could offer to advance management efforts was not directly used to address management issues. The experiences to-date suggest that certain factors are associated with the successful implementation of management initiatives. Building and sustaining these factors appears to be pivotal regardless of the specific organizational arrangements used to implement the management initiatives. First, top management support and commitment within both OMB and the White House is often critical to providing a focus on governmentwide management issues throughout both the budget process and the executive agencies themselves. As our study of OMB 2000 pointed out, management and performance measurement issues gained considerable attention in the budget formulation process initially because of the clear commitment of OMB's leadership. However, top leadership's focus can change over time, which can undermine the follow-through needed to move an initiative from policy development to successful implementation. Thus, institutional focal points can have important roles in sustaining these initiatives over time by serving as continuing "champions" to maintain attention to management initiatives and help ensure follow-through. Second, a strong linkage with the budget formulation process can be a key factor in gaining serious attention for management initiatives throughout government. Regardless of the location of the leadership, management initiatives need to be reflected in and supported by the budget and, in fact, no single organizational arrangement by itself guarantees this will happen. Many management policies require budgetary resources for their effective implementation, whether it is financial management reform or information systems investment. Furthermore, initiatives such as the Results Act seek to improve decision-making by explicitly calling for performance plans to be integrated with budget requests. We have found that previous management reforms, such as the Planning-Programming-Budgeting- System and Management By Objectives, suffered when they were not integrated with routine budget presentations and account structures. Third, effective collaboration with the agencies--through such approaches as task forces and interagency councils--has emerged as an important central leadership strategy in both developing policies that are sensitive to implementation concerns and gaining consensus and consistent follow- through within the executive branch. In effect, agency collaboration serves to institutionalize many management policies initiated by either Congress or OMB. In our 1989 report on OMB, we found that OMB's work with interagency councils was successful in fostering communication across the executive branch, building commitment to reform efforts, tapping talents that exist within agencies, keeping management issues in the forefront, and initiating important improvement projects. Finally, support from the Congress has proven to be critical in sustaining interest in management initiatives over time. Congress has, in effect, served as the institutional champion for many of these initiatives, providing a consistent focus for oversight and reinforcement of important policies. For example, Congress'--and in particular this Subcommittee's-- attention to the Year 2000 problem, information management, and financial management, has served to elevate these problems on the administration's management agenda. Separate from the policy decisions concerning how best to organize and focus attention on governmentwide federal management issues, there are some intermediate steps that OMB could take to clarify its responsibilities and improve federal management. For example, OMB could more clearly describe the management results it is trying to achieve, and how it can be held accountable for these results, in its strategic and annual performance plans. Many of OMB's strategic and annual goals were not as results- oriented as they could be. Continued improvement in OMB's plans would provide congressional decisionmakers with better information to use in determining the extent to which OMB is addressing its statutory management and budgetary responsibilities, as well as in assessing OMB's contributions toward achieving desired results. In our 1995 review of OMB 2000, we recommended that OMB review the impact of its reorganization as part of its planned broader assessment of its role in formulating and implementing management policies for the government. OMB has not formally assessed the effectiveness, for example, of the different approaches taken by its statutory offices to promote the integration of management and budget issues. We believe it is important that OMB understand how its organization affects its capacity to provide sustained management leadership. Mr. Chairman, this concludes our statement. We would be pleased to answer any questions that you or other Members of the Subcommittee have at this time. (410419/935297)

Pursuant to a congressional request, GAO discussed its observations on the Office of Management and Budget's (OMB) efforts to carry out its responsibilities to set policy and oversee the management of the executive branch, focusing on: (1) OMB's wide-ranging management responsibilities and the question of whether to integrate or separate management and budget functions; (2) the effectiveness of OMB's management leadership; and (3) the factors that appear to contribute to progress in sustaining improvements in federal management. GAO noted that: (1) OMB is the lead agency for overseeing a statutory framework of financial, information resources, and performance planning and measurement reforms designed to instill a performance-based approach to federal management, decisionmaking, and accountability; (2) the Chief Financial Officers Act of 1990 mandated significant financial management reforms and established the Deputy Director for Management (DDM) position within OMB; (3) the DDM is to serve as the government's key official for financial management and coordinate and supervise a wide range of general management functions; (4) OMB is responsible for providing guidance and oversight for various other laws and executive orders as well; (5) OMB's perennial challenge is to carry out its central management leadership responsibilities in such a way that leverages opportunities of the budget process, while at the same time ensuring that management concerns receive appropriate attention in an environment driven by budget and policy decisions; (6) prior OMB reorganizations have alternated between seeking to more directly integrate management into the budget review process and creating separate management offices; (7) previous congressional and OMB attempts to elevate the status of management by creating separate management units within OMB sought to ensure that an adequate level of effort was focused on management issues; (8) OMB has focused increased attention on management issues, but there is much more that needs to be done; (9) OMB should ensure that agencies incorporate appropriate goals and strategies in their annual performance plans and describe their relevance to achieving the priority management objectives described in the governmentwide performance plan; (10) the record of OMB's stewardship of management initiatives suggests that creating and sustaining attention to management improvement is a key to addressing the federal government's longstanding problems; (11) in the past, management issues often remained subordinated to budget concerns and timeframes, and the leverage the budget could offer to advance management efforts was not directly used to address management issues; and (12) continued improvement in OMB's strategic plans would provide congressional decisionmakers with better information to use in determining the extent to which OMB is addressing its statutory management and budgetary responsibilities, as well as in assessing OMB's contributions toward achieving desired results.

The Air Force's Air Mobility Command (AMC) has 104 C-5, 199 C-141, and 16 C-17 strategic airlift aircraft in its fleet. It also has 54 KC-10 and 448 KC-135 tanker aircraft, which can carry cargo. The C-5 aircraft, the largest airlifter, can carry 73 troops and 36 standard cargo pallets or outsize cargo, such as tanks and helicopters. The Air Force received its C-5A models from 1969 to 1973 and its C-5B models from 1986 to 1989. The C-5B model incorporates over 100 reliability and maintainability changes from the previous model and has substantially higher mission capable rates. The C-5 has been used more than planned since Operation Desert Storm in response to various contingencies as well as shortages of C-141 aircraft and delays in C-17 deliveries. AMC developed a plan to guide the modernization of the C-5 aircraft into the next century and help ensure that the C-5 remains a viable mobility asset. AMC officials believe this modernization effort is important to address concerns regarding the aging aircraft and improve the aircraft's reliability and maintainability. In addition to being a major command of the Air Force, AMC is a component of the U.S. Transportation Command, a unified command that provides air, land, and sea transportation for DOD. As a component, AMC is responsible for providing global airlift services and air refueling operations. AMC developed a mission capability rate goal for the C-5 fleet of 75 percent, which means that C-5s must be able to perform one of their major missions 75 percent of the time. Mission capability is a standard used on all military aircraft that allows for easier comparisons among aircraft. Although Air Force planners count on increasing aircraft mission availability in wartime by adding more maintenance personnel and deferring some maintenance inspections, little can be done to increase the spare parts initially available for each plane. Peacetime mission capability rates, especially as they are affected by adequate spare parts availability, are therefore good predictors of likely wartime aircraft mission capability. AMC currently estimates that C-5 aircraft can attain a 14.6 million ton miles per day airlift capability, which would represent almost one-half of the Air Force's total military aircraft airlift capacity. Mission capable rates for AMC C-5 aircraft averaged just under 68 percent from July 1994 to June 1995. These rates have been declining since Operation Desert Storm, when AMC achieved mission capable rates of 75 percent or higher. In addition, the C-5 mission capable rates were considerably below comparable airlift and tanker aircraft during the same period, as shown in table 1.1. For example, AMC C-5 mission capable rates averaged over 5 percentage points below those of the troubled C-141 aircraft, which is gradually being retired. Factors accounting for the relatively poorer C-5 mission capable rates included inadequate spare parts support, higher complexity associated with a large aircraft, and the generally poorer reliability characteristics of the older C-5A model aircraft. C-5 aircraft are classified as not mission capable when they are either undergoing maintenance or lack spare parts. Between 25 and 50 percent of all not mission capable problems in recent years have been due to a lack of spare parts, as shown in figure 1.1. AMC has established a goal that the total not mission capable supply (TNMCS) rate should not exceed 7 percent for its operational C-5 fleet. Although the TNMCS rate has shown some improvement in the last few years, it still remains considerably above AMC's goal, as shown in figure 1.2. Air Force officials said that the C-5 has historically not received enough spare parts primarily because spare parts procurement was budgeted and allocated based on the number of programmed flying hours. Also, the Air Force funds C-5 spares based on a projected 12.6-percent TNMCS rate. Since the C-5 has been exceeding the number of planned flying hours each year, fleetwide TNMCS rates have been even higher than 12.6 percent; in fiscal year 1994, for example, the rate was about 16.5 percent. Air Force personnel are sometimes able to work around spare parts shortages by taking parts from one aircraft and using them for another (referred to as cannibalization). According to a recent C-5 Program Management Review, cannibalization tends to decrease the life expectancy of aircraft systems and consumes vast amounts of labor that could better be employed elsewhere. AMC's goal is one cannibalization action a month per aircraft. Figure 1.3 shows that AMC C-5 aircraft cannibalization actions have remained at a level well above the AMC standard for several years. To address the spare parts problem, the Air Force changed its calculation method for fiscal year 1994 to recognize that the C-5 has been flying more than its number of programmed hours. Also, for fiscal year 1994, the Air Force allowed some high-priority weapon systems, such as the C-5, to receive more spare parts funding than lower priority systems. These changes may have partly accounted for the improved TNMCS rate during fiscal year 1995. However, neither change had helped improve the cannibalization rate. For fiscal year 1996, the Air Force has proposed raising C-5 spares funding to a level designed to achieve a 7.5-percent TNMCS rate rather than the current 12.6-percent goal. Air Force officials expect raising the spares support level will add about $4.6 million to annual C-5 spares costs. The C-5's mission capability rates could increase if the Air Force were to conduct a readiness evaluation similar to the operational readiness assessment conducted for B-1B bomber aircraft. That assessment, conducted by the Secretary of the Air Force at the direction of the 1994 National Defense Authorization Act, was to determine if the B-1B could sustain a 75-percent readiness rate, about 18 percentage points higher than it was achieving at that time. The Air Force Operational Test and Evaluation Center (AFOTEC) was enlisted as an independent agent to direct the test and report on the assessment activities. An AFOTEC official estimated the total costs of conducting the assessment was about $2.2 million. During the B-1B operational assessment, AFOTEC used the results from a test wing to project that the B-1B fleet could achieve mission capable rates of 75 percent by better managing spare parts repair cycles and making better use of existing spares with few new assets. AFOTEC also found that these changes would increase annual program funding by $11 million to $12 million over and above funds already committed for various improvements, initiatives, and spare parts. AFOTEC's findings were evaluated by the DOD Operational Test and Evaluation Agency as well as by us. Both evaluations supported AFOTEC's conclusions. After the assessment was completed, the test wing's mission capable rate rose to 84 percent, and the entire fleet mission capable rate rose to 66 percent. According to the DOD Operational Test and Evaluation Agency, the primary reason the mission capable rate increased was better spares support--that is, more spares available at the test location and faster turnaround at the intermediate or depot levels. Leadership attention and the significance of the test were important motivating factors, but the mission capable rate could not have been raised without spare parts improvements. Maintenance downtime was reduced when spares were immediately available, and more spares lessened the chance that parts would have to be cannibalized. One of the major factors accounting for better B-1B spare parts support was the use of the Distribution and Repair in Variable Environments (DRIVE) model. DRIVE manages repair requirements by prioritizing repairs based on their effect on mission capable rates. Current systems, including the one used for the C-5, prioritize repairs based only on the amount of time the part has been in the repair process. In addition, a 1992 Rand report advocated using the DRIVE model to emphasize the effect of repairs on mission capability rather than relying on more traditional indicators.The Air Force mandated use of the DRIVE system at its depots in January 1994, but the system has not yet been implemented by the San Antonio Air Logistics Center, the C-5 depot. Although the C-5 and B-1B are different aircraft with different missions, we believe a C-5 readiness evaluation could yield similar results to those experienced during the B-1B evaluation. For example, both aircraft have had historically low mission capable rates and poor spare parts support. Also, before the B-1B test, Air Force officials did not think the mission capable rate for the B-1B could be raised nearly as high as the evaluation later demonstrated. However, the officials are now projecting a fleetwide increase in B-1B mission capable rates of 15 percentage points. Air Force airlift officials have stated that improvements to the spares process would have little impact on C-5 mission capability. However, we think improvements similar to the B-1B spare parts process changes could be applied to the C-5 spares process as well. Officials from the C-5 manufacturer stated that improving the C-5 spares process by analyzing parts that most affect mission capable rates, similar to the DRIVE model philosophy, and improving the spare parts pipeline could result in a 40-percent reduction in TNMCS rates. That reduction would increase the mission capable rate fleetwide by about 6.6 percentage points. An increase of this magnitude would give DOD an additional 1.3 million ton miles a day of cargo-carrying capability--the equivalent of 10 C-17 aircraft. AMC officials identified several difficulties in reducing TNMCS rates for the C-5 aircraft by 40 percent. Officials noted that the practical requirement to maintain an aircraft at each of the two active bases for cannibalization constitutes a significant portion of the TNMCS rate. They further noted that aircraft undergoing refurbishment or unit inspections also contribute to the TNMCS rate. Notwithstanding this position, we note that if AMC achieved its 7-percent TNMCS goal, it would have accomplished about a 40-percent reduction in the TNMCS rate--which C-5 manufacturer officials projected. AMC established a C-5 modernization plan to increase mission capability rates and reduce personnel requirements and life-cycle costs. According to AMC officials, modification initiatives are generally prioritized based on potential reliability and maintainability improvements to the aircraft as well as cost. The resulting priorities are later modified and updated by various reviewing officials. AMC's top 10 proposed modifications, at the time of our review, and our estimate of their impact on mission capability, are shown in table 1.2. Many of these modifications will not be funded until at least the year 2000 and completed several years after that. Even though we were able to calculate potential mission capable rate increases for each of the top priority modifications, AMC has not analyzed how much the modifications would contribute to increasing mission capability. Until AMC does that analysis, decisionmakers cannot consider the impact that the proposed improvements could have on mission capability or total airlift capability. Also, if AMC considered mission capability increases as a key factor in prioritizing planned C-5 modifications, the current order of priorities would most likely change. However, we recognize that AMC might have to consider other factors, such as safety considerations, when it prioritizes modifications. We identified the 10th-priority modification--hydraulic valve replacement--as being relatively low in cost but having the most potential for increasing aircraft mission capability. Failures associated with the C-5's hydraulic system are one of the leading causes of reliability problems. The hydraulic valve replacement is designed to eliminate surges when opening selector valves on the landing gear, cargo doors, and ramps. Because this modification was only recently identified as one of the top 10 priorities, it has not been scheduled for funding. However, AMC estimated that the modification could be funded as early as fiscal year 1997. The C-5 manufacturer estimates that failures in hydraulic system plumbing, mounting fixtures, and components should decrease by two-thirds to three-fourths when the hydraulic valve modification is completed. More importantly, the 1.1-percentage point potential increase in C-5 mission capability resulting from the modification would provide DOD with an additional 0.18 million ton miles per day of cargo-carrying capability--equating to 1.4 C-17 aircraft. In comparison, the two top priority modifications--autopilot replacement and engine turbine improvement--would likely only increase mission capability a little at a relatively large cost. Other high-priority efforts, such as floor corrosion prevention and courier compartment flooring, are improvements that would not result in any potential increase in aircraft mission capability. DOD has not been providing adequate funding to meet the original schedule for proposed C-5 improvements. For example, two major upgrades to improve the C-5's reliability, the malfunction detection analysis and recording system and the main landing gear actuator, were first identified in fiscal year 1985 and scheduled to be completed by fiscal year 1994. However, funding delays have stretched these modifications by 4 years to fiscal year 1998. According to our 1992 report, one of the major factors contributing to the C-141's recent severe problems was inadequate funding to implement necessary modifications. AMC stated in its 1995 Air Mobility Master Plan that not completing scheduled improvements would degrade capability and increase operating costs. We recommend that the Secretary of Defense direct the Secretary of the Air Force to (1) conduct a readiness evaluation to determine how C-5 peacetime mission capability can be improved and the costs of such improvements and (2) assess the impact of proposed aircraft modifications on C-5 mission capability and then reprioritize the proposals according to the results of the assessment. We also recommend that the Secretary direct the Commander in Chief, U.S. Transportation Command, to include in strategic mobility planning the potential increase in airlift cargo capability made possible by a higher C-5 mission capable rate. DOD partially concurred with our report (see app. I). DOD stated that it has initiated some actions that would satisfy the intent of our recommendation that the Air Force conduct a readiness evaluation. These actions include conducting a 1994 logistics demonstration project to improve and streamline the C-5 management structure and policies for handling spare parts and repairing components, as well as incorporating lessons learned from the B-1B operational readiness assessment to better manage the C-5 program. Although these actions are good first steps, DOD must ensure that they are fully implemented. In particular, DOD needs to use the DRIVE model, which was successfully demonstrated during the B-1B assessment, to allocate C-5 spare parts and prioritize their repair. DOD agreed with our recommendation that the Air Force assess the impact of proposed aircraft modifications on mission capability and reprioritize the modifications accordingly. DOD noted that the San Antonio Air Logistics Center was developing a computer model that will be able to quantify the effects of proposed aircraft reliability improvements on mission capability. DOD expects this model, scheduled for completion in July 1996, to help improve the method for prioritizing C-5 modifications. DOD did not agree with our recommendation that the Transportation Command's strategic mobility planning include the potential increase in C-5 cargo capability resulting from a higher mission capable rate. DOD stated that the potential cargo capability increase would not translate directly into increases in cargo delivered to a theater of conflict because of the limited airfield infrastructure (including ramp space, refueling facilities, and material handling equipment). Although potential increases in cargo capability identified in our report may not translate directly into cargo delivered to the theater under some scenarios, the potential capability still exists under more unconstrained scenarios with many available airfields or fields with areas large enough to accommodate substantial numbers of C-5 aircraft. To maximize potential C-5 cargo deliveries, DOD should consider using C-5 aircraft in the more unconstrained scenarios. DOD bases many of its conclusions about a more capable C-5 aircraft on studies of buying additional quantities of a new C-5D aircraft, which has not yet been developed. These conclusions could be substantially different if DOD looked at current quantities of more capable existing C-5A and C-5B aircraft. Therefore, we continue to believe DOD should consider the implications of more capable existing C-5 aircraft in its modeling efforts and decisions on the mix of future aircraft. We conducted our review at AMC, Scott Air Force Base, Illinois; 436th Airlift Wing, Dover Air Force Base, Delaware; C-5 System Program Director's Office, San Antonio Air Logistics Center, Kelly Air Force Base, Texas; Lockheed Aeronautical Systems Company, Marietta, Georgia; and Air Force Headquarters, Washington, D.C. We interviewed various officials at these locations and reviewed pertinent regulations, guidance, and reports pertaining to the subject areas. We also interviewed officials regarding the B-1B readiness assessment and DRIVE model at the Air Force Operational Test and Evaluation Center, Kirtland Air Force Base, New Mexico; Air Combat Command Headquarters, Langley Air Force Base, Virginia; and Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio. To calculate potential aircraft availability and mission capability increases, we relied on Air Force and C-5 manufacturer estimates of increases in mission capable hours attributable to the proposed changes. We added the mission capable hours attributable to those improvements to the 1994 total fleet mission capable hours and calculated a revised mission capable rate. We used the revised mission capable rate to calculate a new aircraft utilization rate, which we used to recalculate a C-5 million ton mile per day cargo contribution. We divided increases in the C-5 cargo contribution by the currently estimated AMC million ton mile per day contribution of a C-17 to determine the equivalent number of C-17s. We conducted our review from August 1994 to August 1995 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Ranking Minority Member of your Subcommittee and the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, House Committee on National Security, and Senate and House Committees on Appropriations; the Secretaries of Defense, the Army, the Air Force, and the Navy; the Commandant of the Marine Corps; the Commander in Chief, U.S. Transportation Command; and the Director, Office of Management and Budget. If you or your staff have any questions concerning this report, please contact me at (202) 512-5140. The major contributors to this report are listed in appendix II. The following is our comment on the Department of Defense's (DOD) letter dated October 23, 1995. 1. DOD stated that it could not substantiate the additional 1.3 million ton miles per day of capability that we reported the C-5 aircraft could provide. Our calculation was based on the 40-percent improvement in total not mission capable supply (TNMCS) rate projected by the C-5 manufacturer. We discussed how we calculated utilization rates and million ton mile contributions in the Scope and Methodology section. We used standard Air Mobility Command (AMC) formulas in those calculations. In addition, as noted in the report, if AMC met its own 7-percent goal for TNMCS, it could achieve the 40-percent TNMCS reduction projected by the C-5 manufacturer. Gregory Symons Claudia Saul Norman Trowbridge 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 reliability and mission capability of C-5 aircraft and the Department of Defense's (DOD) plan for modifying C-5 aircraft. GAO found that: (1) DOD is relying on C-5 aircraft to deliver about half of the wartime cargo carried by military aircraft, but C-5 mission-capable rates have fallen short of the Air Force's goal and those of other aircraft, because of a lack of spare parts and the complexity and poor reliability of the C-5; (2) the Air Force could improve the C-5 mission capable rate by conducting a readiness evaluation similar to the one it completed for B-1B aircraft and by giving a higher priority to certain C-5 modernization initiatives; (3) the Air Force has not prioritized proposed C-5 modifications and decisionmakers have not fully assessed the impact that these proposed improvements would have on overall aircraft mission capability; and (4) if peacetime C-5 mission capable rates were raised to the Air Force's goal, DOD could better meet its airlift requirements.

The Overseas Presence Advisory Panel was formed to consider the future of our nation's overseas representation, to appraise its condition, and to develop practical recommendations on how best to organize and manage our overseas posts. Last November, the Panel reported that the condition of U.S. posts and missions abroad is unacceptable. For example, the Panel found that facilities overseas are deteriorating; human resource management practices are outdated and inefficient; and there is no interagency mechanism to coordinate overseas activities or manage their size and shape. A key finding was that our embassies and missions are equipped with antiquated, grossly inefficient, and incompatible information technology systems. According to the Panel, inefficient information systems have left the department "out of the loop," that is, other agencies, organizations, and even foreign governments are bypassing its cumbersome communications connections. The Panel recommended that all agencies with an overseas presence provide staff with a common network featuring Internet access, e-mail, a secure unclassified Internet website, and shared applications permitting unclassified communications among all agencies and around the globe. The Panel further recommended that agencies initiate planning for a similar common platform for classified information. In response, the President asked the Secretary of State to lead a cabinet- level committee to implement the Panel's recommendations. This is now known as the Overseas Presence Committee and is chaired by State's Undersecretary for Management. Three interagency subcommittees have been established to report to this committee, including the Rightsizing Subcommittee, the Overseas Facilities Subcommittee, and the Interagency Technology Subcommittee. The area that you asked us to focus on, Mr. Chairman, involves the Information Technology Subcommittee, chaired by State's CIO and consisting of CIOs from the eight other major agencies with overseas presence, including the U.S. Agency for International Development, the Peace Corps, and the Departments of Defense, Justice, Transportation, Treasury, Agriculture, and Commerce.Two working groups report to this subcommittee: (1) the Interagency Technology Working Group, which is responsible for defining operational requirements, selecting specific enabling strategies, identifying required funding, and establishing standards for the common platform and (2) the Knowledge Management Working Group, which is charged with making the right information available to the right people. Knowledge management is a very important component of the Panel's recommendations. The Panel's intent is that our overseas agencies be able to not only communicate with each other and back to their respective headquarters, but also to obtain and share the information and knowledge that already exists among agencies and around the world, but is currently fragmented and not readily accessible. State is in the process of developing a structured project plan for the lifecycle of its common platform initiative. In doing so, State intends to define user and system requirements; identify risks and assess technical feasibility; identify the major work elements that will be accomplished over the life of the project; analyze costs and benefits; establish project goals, performance measures, and resources; assign responsibilities; and establish milestones. It expects to complete this plan by September 30, 2000. Given the risks, complexities, and potential costs involved in the common platform initiative, it is critical that State carefully scope the effort, anticipate and plan for risks, and establish realistic goals and milestones. Experience with similar undertakings has shown that poor project planning can cause agencies to pursue overly ambitious schedules, encounter cost overruns, and/or find themselves ill-prepared to manage risks. To date, State has developed high-level preliminary project milestones and decided to pilot a prototype common system, from April through September 2001, at two posts, Mexico City, Mexico and New Delhi, India. It has also decided to follow a methodology for managing the project called Managing State Projects, which provides a structured process for planning, applying, and controlling funds, personnel, and physical resources to yield maximum benefits during a project life cycle. The methodology focuses on a number of key factors critical to ensuring the success of any large, complex information technology effort, including (1) clearly defining what users need, (2) determining what the system will ultimately cost, and (3) defining how management will monitor and oversee progress, and ensure that the project stays on track. State is already in the process of taking the first step--defining requirements for the overseas common technology platform. System requirements include such things as system functions, communication protocols, interfaces, regulatory requirements, security requirements, and performance characteristics. State officials responsible for managing the development of the common platform effort told us that they have developed high-level preliminary requirements and are in the process of further defining user requirements. Given the range and number of agencies and employees involved in foreign affairs, this task will need to be carefully managed. Requirements will have to be agreed upon by, and have the same meaning for, each of the participating overseas agencies, and they will need to be fully documented and sufficiently detailed so they can be used to determine what systems will be acquired and what standards will be used. Cost estimates--the second step-cannot be finalized until user requirements are defined. As such, there is not yet firm, supported cost data on how much the new system will cost. The Panel estimated that the ultimate cost of a common solution for both classified and unclassified information will be over $300 million. The President's FY2001 budget includes $17 million in support of the recommendation for a common information technology platform for overseas offices. State officials characterized the $17 million as a "down payment" on the total anticipated investment. If these funds are appropriated, the department intends to use them on its pilot project. State is now developing preliminary cost estimates for the pilot; however, State officials told us that these estimates will be rough given that detailed user requirements have not yet been fully defined and target systems, hardware, and networks have not yet been identified. State officials also plan to address the third step-instilling the management oversight and accountability needed to properly guide the common platform initiative. The methodology provides a formal approval process with "control gates" to ensure that user needs are satisfied by the proposed project, timetables are met, the risks are acceptable, and costs are controlled. If effectively implemented and adhered to, these control gates can provide management with the opportunity to review and formally approve progress at key decision points. State expects to define the approval process in its overall project plan. As State is in the early stages of project planning, it faces considerable challenges in modernizing overseas information technology systems. First, State will need to obtain agreement among its various bureaus and the agencies in the foreign affairs community on such issues as requirements, resources, responsibilities, policies, and acquisition decisions. This will be a delicate task as these agencies have different needs, levels of funding, and ongoing agency-unique systems development. Second, State needs to complete its detailed information technology architecture-or blueprint-to guide and effectively control its own information technology acquisitions. It currently has a high-level architecture and anticipates completing the detailed layers of the architecture by next year. Third, the security of the common system must be fully addressed before its deployment to ensure that sensitive data is not stolen, modified, or lost. Obtaining the interagency cooperation and funding necessary to achieve the Panel's recommendations will be a major challenge. Each of the more than 40 agencies involved in foreign affairs has its own unique requirements, priorities, and resource constraints and many are accustomed to developing, acquiring, and maintaining their own systems. Yet State will need to overcome these cultural barriers and secure agreement on a range of issues such as which systems, hardware, and networks to acquire, how much can be spent on these assets, and who should be responsible for managing and maintaining them. In recognizing this dilemma, the Panel highlighted the need for Presidential initiative and support, the Secretary of State's leadership, and ongoing congressional oversight and support. Addressing cultural and organizational barriers to standardization and cooperation will not be easy. First, it is likely that many agencies may want to continue operating their own technology, especially if these systems were recently acquired or upgraded. Second, no one agency by itself has the authority or ability to dictate a solution or to ensure the implementation of a mutually developed solution. Third, although negotiations are ongoing, details are still being worked out as to who will manage and administer the new collaborative network. The department will also need to obtain cooperation among its various bureaus. Information management activities at State have historically been carried out on a decentralized basis and without the benefit of continuing centralized management attention. Consequently, systems development efforts have not always been synchronized and the systems themselves not interoperable. State acknowledges that many of its systems can be described as "stovepiped" and "islands of automation," terms which describe their fragmentation and independence. In recognition of this problem, the department is working to establish a shared computing environment but progress has been slow. State officials recognize that they will need to reach out to bureaus and to other agencies with overseas presence to achieve consensus on specific, detailed user requirements, acquisition decisions, standards, policies, and responsibilities and that this will be a difficult endeavor. They have told us that they have begun to explore ongoing common platform initiatives with other agencies and that they will address this challenge as they develop their overall project plan. Even though State is leading the common platform initiative which involves more than 40 other agencies, it does not have a detailed information technology architecture. However, State does have a high- level architecture issued last year in place and is now working to complete supporting architectural layers. An architecture is essential to guiding and constraining information technology acquisition and development efforts. In doing so, an effective architecture will limit redundancy and incompatibility among information technology systems, enable agencies to protect sensitive data and systems, and help ensure that new information technology optimally supports mission needs. System architectures are essentially "construction plans" or blueprints that systematically detail the full breadth and depth of an organization's mission-based mode of operations in logical and technical terms. In defining architectures, agencies should systematically and thoroughly analyze and define their target operating environment--including business functions, information needs and flows across functions, and systems characteristics required to optimally support these information needs and flows. In addition, they should provide for physical and administrative controls to ensure that hardware platforms and software are not compromised. The importance of thoroughly and systematically identifying and analyzing information needs and placing them in a technical architecture cannot be overemphasized. The Congress recognized the importance of technical architectures when it enacted the Clinger-Cohen Act, which requires chief information officers to develop, maintain, and facilitate integrated system architectures.Additionally, OMB has issued guidancethat, among other things, requires agency information systems investments to be consistent with federal, agency, and bureau architectures. Moreover, our reviews of other agencies have consistently shown that without a target architecture, agencies risk buying and building systems that are duplicative, incompatible, and unnecessarily costly to maintain and interface. In April, 1999, State published a high-level information technology framework. State officials told us that documents will be produced later this year which further define the security, information applications, and technical infrastructure for the department. But, at present, State lacks the detailed framework needed to ensure that it does not build and buy systems that are duplicative, incompatible, vulnerable to security breaches, and/or are unnecessarily costly to maintain and interface. Specifically, State has not detailed its current logical and technical environment, its target environment, or specified a sequencing plan for getting from the current to the target environment. State officials told us they are working to develop these necessary architectural layers. Such a framework is critically needed to ensure that the common platform is in concurrence with State's own target environment. If State proceeds with the common platform initiative before defining its own target architecture, it may well find that the initiative itself with its resulting decisions on standards, protocols, systems, and networks may end up driving the department's architecture. Moreover, each foreign affairs agency overseas has its own networks and systems, based on different protocols, systems, and security measures. By not having a defined and enforceable architecture, State may well perpetuate the current stovepiped, redundant, and disparate computing environment. State acknowledges that there is risk in proceeding with modernization initiatives in parallel with developing a complete information technology architecture, and it intends to begin addressing this risk as it proceeds with its pilot projects. As envisioned by the Panel, a common platform could provide overseas agency staff with collaborative applications and Internet access. The Panel recognized that security risks would be increased with this greater connectivity and indicated that solutions, such as the use of industry best practices and security software, would be required to mitigate these risks. In view of these added risks, I would like to discuss specific concerns we raised in a previous review of State's computer security practices. State has generally made good progress in addressing these concerns; however, issues remain which must be paid attention to in order to ensure the integrity of the proposed platform. Two years ago we reportedthat the State Department's unclassified information systems and the information contained within them were vulnerable to access, change, disclosure, disruption, or even denial of service by unauthorized individuals. During penetration testing of State's systems at that time, we were able to access sensitive information and could have performed system administration actions in which we could have deleted or modified data, added new data, shut down servers, and monitored network traffic. The results of our tests showed that individuals or organizations seeking to damage State operations, commit terrorism, or obtain financial gain could possibly exploit the department's information security weaknesses. For example, by accessing State's systems, an individual could obtain sensitive information on State's administrative processes and key business processes, such as diplomatic negotiations and agreements. Our successful penetrations of State's computer resources went largely undetected during our testing, underscoring the Department's serious vulnerabilities. Our penetration testing two years ago was successful primarily because State lacked an overall management framework and program for effectively overseeing and addressing information security risks. In particular, State lacked a central focal point for overseeing and coordinating security activities; it was not performing routine risk assessments to protect sensitive information; its information security policies were incomplete; it lacked key controls for monitoring and evaluating the effectiveness of its security programs; and it had not established a robust incident response capability. We also found that security awareness among State employees was problematic. For example, we were able to gain access to networks by guessing user passwords, bypassing physical security at one facility, and searching unattended areas for user account information and active terminal sessions. As such, we recommended that State take a number of actions based on private sector best practices that have been shown to greatly improve organizations' ability to protect their information and computer resources. In response, State has taken a number of positive steps to address our recommendations and made real progress in strengthening its overall security program. For example, the department consolidated its previously fragmented security responsibilities and made the Chief Information Officer responsible for all aspects of the department's comprehensive computer security program; clarified in writing computer security roles and responsibilities for the Information Resources Management and Diplomatic Security offices; and enhanced its ability to detect and respond to computer security incidents by establishing a Computer Incident Response Team. In addition, the department revised its Foreign Affairs Manual to require the use of risk management by project managers and resolved the specific physical and computer security weaknesses we identified during our testing. However, State's implementation of recommendations that are integral to successful implementation of the common platform initiative is incomplete. For example, State's automated intrusion detection program does not yet cover all domestic and overseas posts. As a result, State does not have a comprehensive overview of attempted or successful attacks on its worldwide systems. Lack of such a process limits State's ability to accurately detect intrusions, deal with them in a timely manner, and effectively share information about intrusions across the department. State lacks a mechanism for tracking and ensuring that the hundreds of recommendations made by auditors and internal vulnerability studies over the last 3 years are addressed. Again, this limits the department's ability to ensure that all relevant findings are addressed and resolved. State officials told us that action is underway to develop a tracking system. Lastly, even though State has formally consolidated computer security responsibilities under its CIO, its Bureau of Diplomatic Security will still be responsible for carrying out important computer security related tasks such as establishing policy, conducting security evaluations at diplomatic posts, and conducting training. As stressed in our report, fragmented responsibilities in the past have resulted in no one office being fully accountable for information technology security problems and disagreements over strategy and tactics for improvements. This new process can work, but it will be essential for the department to ensure that the Chief Information Officer effectively coordinates these responsibilities. Consistent with our recommendations, State performed four computer security evaluations of its unclassified and sensitive but unclassified networks over the past three years. In response to your request, Mr. Chairman, we reviewed these evaluations and found that State's networks remain highly vulnerable to exploitation and unauthorized access. Because three of the four evaluation reports are classified, we are constrained in this forum from discussing specific vulnerabilities. However, each of the reports found problems indicating continuing computer security problems at the department. Collectively, the reports indicate a continuing need for the department to assess whether controls are in place and operating as intended to reduce risks to sensitive information assets. Recent media reports highlighting State problems with physical security also emphasize the need for continued vigilance in this area. At the time of our work for this Committee, State was unable to provide much information about security features for the common platform because its design is still underway. However, based on the fact that State's networks remain vulnerable to individuals or organizations seeking to damage State operations, we emphasize the importance of effectively addressing the significant challenge that additional external connectivity brings to securing the foreign affairs community's planned information network. Mr. Chairman, in summary, maintaining an effective presence overseas absolutely requires up-to-date information and communications technology. Officials overseas must have easy access to all agencies sharing the overseas platform and the fastest possible access to all information that might help them do their jobs. State is taking steps to address this need but it faces significant hurdles in doing so. Not only must it secure agreements among a wide range of disparate users and agencies, it must do so while undertaking equally challenging efforts to develop a detailed technical architecture and address continuing computer security issues. As a result, as it completes it project plan over the next few months, it is critical that State Carefully scope the initiative, identify and mitigate risks, analyze costs and benefits, and establish realistic goals and milestones. Instill the management and oversight accountability needed to properly guide the effort and secure agreement on who will manage and maintain the systems once they are implemented. Anticipate the steps needed to overcome cultural obstacles and employ a truly collaborative approach that can effectively facilitate agreement on requirements, priorities, resources, policies, and acquisition decisions. Place high priority on developing a detailed systems architecture for the department that will help ensure that information technology acquired is compatible and aligned with needs across all business areas. Vigorously pursue efforts to strengthen long-standing computer security weaknesses and ensure that new policies, responsibilities, and procedures being implemented are on par with best practices. Mr. Chairman and Members of the Committee, this concludes my statement. I will be happy to answer any questions you or Members of the Committee may have. For questions regarding this testimony, please contact Jack L. Brock, Jr. at (202) 512-6240. Individuals making key contributions to this testimony included Cristina Chaplain, Kirk Daubenspeck, John de Ferrari, Patrick Dugan, Diana Glod, Edward Kennedy, Hai Tran, and William Wadsworth. (511968)

Pursuant to a congressional request, GAO discussed the Department of State's efforts to improve the foreign affairs community's information technology infrastructure, focusing on: (1) State's efforts to implement the Overseas Presence Advisory Panel's recommendations; and (2) the challenges and risks it will face as it proceeds. GAO noted that: (1) the Overseas Presence Advisory Panel was formed to consider the future of the nation's overseas representation, to appraise its condition, and to develop practical recommendations on how best to organize and manage overseas posts; (2) the Panel recommended that all agencies with an overseas presence provide staff with a common network featuring Internet access, electronic mail, a secure unclassified Internet website, and shared applications permitting unclassified communications among all agencies and around the globe; (3) the Panel further recommended that agencies initiate planning for a similar common platform for classified information; (4) in developing its common platform initiative, State intends to: (a) define user and system requirements; (b) identify risks and assess technical feasibility; (c) identify the major work elements that will be accomplished over the life of the project; (d) analyze costs and benefits; (e) establish project goals, performance measures, and resources; (f) assign responsibilities; and (g) establish milestones; (5) the Panel estimated that the ultimate cost of a common solution for both classified and unclassified information will be over $300 million; (6) the President's fiscal year 2001 budget includes $17 million in support of the recommendation for a common information technology platform for overseas offices; (7) as State is in the early stages of project planning, it faces considerable challenges in modernizing overseas information technology systems; (8) State will need to obtain agreement among its various bureaus and the agencies in the foreign affairs community on such issues as requirements, resources, responsibilities, policies, and acquisition decisions; (9) this will be a delicate task as these agencies have different needs, levels of funding, and ongoing agency-unique systems development; (10) State needs to complete its detailed information technology architecture to guide and effectively control its own information technology acquisitions; (11) the security of the common system must be fully addressed before its deployment to ensure that sensitivity data is not stolen, modified, or lost; and (12) the Panel recognized that security risks would be increased with greater connectivity and indicated that solutions, such as the use of industry best practices and security software, would be required to mitigate these risks.

DOD offers medical services to 8.3 million eligible people through the MHSS--1.7 million active duty members and another 6.6 million non-active duty members, such as dependents of active duty personnel and military retirees and their dependents. The bulk of the health care is provided at more than 600 military hospitals and clinics worldwide; through CHAMPUS; and, to a comparatively minor extent, at USTFs. The USTF managed care program involves the formation of provider networks to deliver a full spectrum of inpatient and outpatient care and preventive services; beneficiary enrollment; and a monthly capitated reimbursement system. DOD's capitation payment rates cover all the medical care a member would need in a year. Subject to annual appropriations, USTFs are permitted to enroll any person eligible for MHSS benefits except for active duty members, who receive their care at military hospitals and clinics. But unlike those under CHAMPUS, USTF members do not lose their participation rights when they reach age 65 and become eligible for Medicare. At the beginning of fiscal year 1996, the USTFs had 124,012 members, including about 27,000 Medicare-eligibles, and an appropriated funding level of $339 million (see table 1). By September 1997, DOD plans to complete its implementation of TRICARE--a nationwide managed care program. TRICARE is aimed at improving access to high-quality care while containing costs. TRICARE involves coordinating and managing beneficiary care on a regional basis using all available military hospitals and clinics supplemented by competitively contracted civilian services. TRICARE offers beneficiaries three plans: (1) TRICARE Standard, a fee-for-service arrangement to replace the present CHAMPUS program; (2) TRICARE Extra, a preferred provider plan; and (3) TRICARE Prime, an HMO that provides comprehensive medical care to beneficiaries through an integrated network of military and contracted civilian providers. (App. I compares the cost-sharing provisions of the three TRICARE plans.) As required by P.L. 104-106, DOD is to develop a plan to integrate the USTFs into TRICARE. We will soon report on several issues regarding the USTFs' integration into TRICARE, including whether the USTFs should retain their special, noncompetitive relationship with DOD. The managed care support contractors under TRICARE compete on a cost-effectiveness basis rather than through a noncompetitive negotiation of rates as is done with the USTFs. Our analysis of the potential effects on the USTFs of adopting the TRICARE cost shares showed that less than 10 percent of the members will disenroll, causing less than a 2-percent increase in operating costs. But DOD's reimbursement approach takes into account and otherwise adjusts the USTFs' capitation payments for higher costs that may result from changes in the population's age and gender. It also allows for negotiated adjustments in reimbursement rates for the effects of benefit and cost-sharing revisions, which may result in adverse selection. In contrast, the USTFs estimated that the new cost shares will cause about a 40-percent USTF disenrollment rate and cost increases of about 11 percent. However, the USTFs' estimates are overstated because of weaknesses in their survey and health claims data, and the absence of out-of-pocket cost differences among the key plans that are significant enough to cause disenrollment of more than 10 percent. The USTFs' estimates of the effects of the new cost shares were based largely on the results of a telephone survey of USTF households and an analysis of health claims data. In February 1996, the USTFs conducted a survey of 2,100 member households (300 from each USTF) to determine whether, with the new cost shares, members would disenroll and choose TRICARE Standard. Retirees under age 65 and their households were surveyed because only this group--not the Medicare-eligible or active duty dependent members--will be subject to the new enrollment fee. Also, USTF health claims data for the surveyed households covering the 12 months ending September 30, 1995, were analyzed to determine the costs for members who said they would remain and those who would disenroll. Our review of the USTFs' survey approach and data analysis raised several concerns about the reliability of their estimates. First, the survey questions focused solely on the households' out-of-pocket cost increases and did not probe respondents' views about the quality of or access to care at the USTF versus other options available to them. (See app. III for the questionnaires used in the USTF survey.) Since households may base their health plan decisions on factors other than out-of-pocket costs, such as access and quality, questions on these other factors would have added needed perspective to the survey responses. Second, the wording of several questions could have misled respondents and produced incorrect responses. For example, one question asked: "If you have to choose between CHAMPUS [or TRICARE Standard, TRICARE Extra, or TRICARE Prime at the Pacific Medical USTF] and the USTF with higher copays and enrollment fees for your household in the future, which would you select?" The question's phrasing could have led respondents to believe that with the new cost shares the USTFs will have higher copayments than the other choices. This is not the case. Furthermore, survey choices were categorized as "would stay," "would leave and choose TRICARE Standard," "neither, or would choose different plan," and "don't know." To reduce the number of "don't know" responses, interviewers were instructed to probe respondents and try to force them to make a decision. One probe was "We're not asking you to make a firm commitment right now, but we are interested in knowing which one you would be most likely to choose on the basis of the information I just read to you." Because interviewers tried to force respondents to change "don't know" answers, the responses in these cases may not reliably predict the respondent's answer. Finally, the average length of time individuals took to respond to the survey was about 4 minutes. This short period probably did not allow most individuals to weigh and respond thoughtfully about the medical plan they would choose. When analyzing cost differences among respondents, the USTF actuaries combined the "don't know" responses with the group who responded they would disenroll. This caused an overstatement of the number of respondents the USTFs estimated will leave. Also, in analyzing potential cost differences, the USTF actuaries did not verify the claims data the USTFs reported. In addition, four of the USTFs provided incomplete data for the surveyed households. They provided less than 12 months of claims data and/or omitted such services as outpatient prescription drugs and care provided under subcontract with non-USTF providers. For Bayley Seton and Johns Hopkins, 172 and 106, respectively, of the 300 surveyed households for each facility were dropped because no claims data were available for these households. Furthermore, the USTF report stated that the USTFs had to perform some adjustments to produce theoretical billed charges. In effect, a percentage of the claims costs the USTFs provided is incomplete, or estimated; thus, such data cannot be validated and are of questionable use for estimating the potential cost effects of adverse selection. According to actuarial research, any time a health plan increases a member's out-of-pocket costs relative to competing plan choices, some adverse selection can occur. But for the USTFs to experience the 40-percent disenrollment rate they estimated, the cost differences would have to be significantly higher than what would exist between the USTFs' new cost shares and TRICARE Standard. As table 2 shows, the USTF households that face the greatest out-of-pocket increase--$460--relative to TRICARE Standard are those incurring no medical expenditures. Most USTF households, or those incurring some medical expenditures, will have even lower relative cost differences. According to actuarial experience, such relative cost difference levels will not result in major enrollment shifts. Moreover, a Congressional Research Service study of the 1987 FEHBP open season found that out-of-pocket cost differences among plans had to be at least $1,000--$2,000 in 1996 dollars--to result in more than a 10-percent plan disenrollment rate. But as table 2 shows, no USTF household will reach an out-of-pocket cost difference that high when compared with TRICARE Standard. The disenrollment rate that will likely result from the USTFs' adopting the new cost shares will be less than 10 percent. But to be actuarially conservative, we allowed for a 20-percent outcome and reestimated the USTFs' disenrollment and cost increases. Table 3 shows the comparative results of these adjustments. As shown, the 20-percent disenrollment estimate reduces the USTFs' estimated 11-percent cost increase to 4 percent. Reductions in the USTFs' estimated cost increases are greater for the USTFs that may experience the most adverse selection, such as Pacific Medical. (App. IV provides a breakdown on the effects for each USTF.) Also, although active duty and Medicare-eligible family members are not subject to the new enrollment fee, the USTFs estimated that some of these family members will also disenroll. The USTFs estimated up to 5-percent cost increases for each group as a result of adverse selection. We found, however, that there would be negligible or no adverse selection of such members and thus no cost increase would occur with the new cost shares. Family members of active duty personnel would incur the same out-of-pocket costs at the USTFs as elsewhere in the TRICARE system and thus would not have a relative cost difference incentive to disenroll.Medicare-eligible family members would incur the same costs but have better benefits and better access to care at the USTFs than in TRICARE. We believe, moreover, that individuals from these two categories would replace those retirees under age 65 and their dependents who disenroll because of adverse selection. In estimating an 11-percent cost increase resulting from the new cost shares, the USTFs assumed that each affected member would have the same claims costs in the year after adverse selection occurred as they had in the year before. Also, they concluded that members with the most costly claims would be most likely to stay with the USTF, and new enrollees would have the same claims costs as those respondents who said they would stay. According to actuarial research, however, individuals that incur a large claim in one year will not necessarily do so the following year. This is because large claims may be for one-time high-cost events. A recent study of year-to-year health care expenditures for a large manufacturing firm showed that most large claims incurred in a given year are from individuals incurring much lower claims the prior year. Conversely, most of the future large claims will come from individuals with low claims in the current year. According to the USTFs' estimates of adverse selection, members with the least costly claims will be most likely to disenroll. Also, in any given year, a small number of enrollees will have large claims. If enrollees could predict such claims--and some can--when faced with choosing between competing plans, they would join the plan most cost-beneficial to them (the USTFs, in this case). According to actuarial research, however, many such claims cannot be predicted, so many of the USTF members with high claims in the year after adverse selection would have had no reason to have selected the USTF plan before adverse selection occurred. To illustrate the sensitivity of the USTF analysis to the inclusion of all high-cost claims, we recomputed the USTFs' cost estimates by removing the two largest claimants from each facility. The largest claimants' costs ranged from about $49,000 to $337,000. The comparative results are shown in table 4. As shown, removing such high claims costs from the USTFs' estimating base reduces their 11-percent cost increase estimate to 4 percent.Coincidentally, this is the same effect produced by reducing their estimated disenrollment rate from 40 percent to our conservatively applied 20 percent rate. Because less than 1 percent of the surveyed households had high claims that accounted for almost 20 percent of the total claims costs, including or removing such claimants from the estimating base significantly affects the estimating outcome. Moreover, on the basis of the actuarial assumption that individuals who have large cost claims in one year are likely to have lower claims the following year, the USTFs' 11-percent cost increase estimate appears to be unnecessarily high. Finally, actuarial studies focusing on adverse selection and ways to predict the effects of beneficiary choice have concluded that future-year costs resulting from adverse selection cannot be accurately predicted by any set of known characteristics and circumstances from past years. According to actuarial research, the most reliable way to gauge the effects of adverse selection is to examine actual experience under the benefit change in question. Our adjustments to the USTFs' estimated 11-percent cost increase covering the adverse selection for retirees and their dependents under 65 years old resulted in a reduced estimate of 4 percent. Using the 4-percent cost increase, we estimated that the weighted average cost effect of adverse selection for the USTFs in 1996 would be less than 2 percent of their 1996 reimbursement level, or about $5.5 million dollars. This estimated increase, however, will likely have no lasting negative financial impact on USTFs because DOD's current reimbursement approach automatically adjusts USTF payments to account for changes in members' age and gender. For example, our analysis of the survey data available for Johns Hopkins beneficiaries who had a claims history shows that the facility may gain financially from adverse selction. The Johns Hopkins data indicate that respondents who said they would stay there are, on average, 1.7 years older than all respondents. Because USTF capitation rates generally increase as the members age, some of the older remaining members would cause substantial payment increases as they move to higher capitation bands. For example, DOD pays the Johns Hopkins USTF $885 more per year for a 55-year-old male than a 54-year-old male. For females, the difference between 55- and 54-year-olds is $483 per year (see DOD's capitation bands by age and gender category in app. V). Thus, if its remaining members' average age increases by 1.7 years, we estimate that capitation payments would automatically rise by 4.9 percent. The higher revenue would exceed the USTFs' 4-percent estimate of Johns Hopkins' cost increase resulting from adverse selection. = 2.38). As a result, the capitation increase resulting from a 1.7-year age increase would be 4.9 percent (1.7 years x 2.9 percent per year). USTF, and the process for periodically adjusting them is set forth in their participation agreements with DOD. The TRICARE cost shares are appropriate for the risks to be borne by the USTFs. The cost shares would create some problems for a managed care plan unable to adjust its capitation. But any initial USTF loss would be covered through automatic capitation adjustments based on members' age and gender, and later losses could be offset by future negotiated capitation adjustments. As a result, the TRICARE cost shares will not create a financial burden on the USTFs. Furthermore, the TRICARE cost sharing is similar to HMO plans in the FEHBP. However, the new $230 to $460 USTF enrollment fees are lower than the employee shares of the typical private sector HMO and signficantly less than those in the FEHBP (see table 5). The USTFs believe that adoption of the new cost shares will result in their enrolling an older, perhaps less healthy beneficiary population than is enrolled under TRICARE. This in their opinion will increase USTF costs. The USTF and DOD beneficiary populations are already dissimilar. The USTFs serve proportionately more retirees and their dependents. At issue, therefore, is to what degree this dissimilarity is likely to change as a result of the USTFs' new cost shares. In 1994, the USTF population consisted of a larger proportion of retirees and dependents under age 65 than the DOD populations in the USTF regions. This disparity grew during the 1996 USTF enrollment period, as shown in table 6. Thus, the USTF population, already dissimilar to the DOD population, is becoming more so. But with the new USTF cost shares, the USTF population will actually move closer to the general DOD population as the healthy retirees under age 65 seek less costly medical coverage. Further, those who disenroll will likely be replaced by new enrollees who are dependents of active duty personnel or Medicare-eligible retirees and their families over age 64. But no matter how dissimilar the populations are, DOD's reimbursement approach will account for USTF population changes and offset any resulting negative financial effect. The establishment of uniform benefits and cost sharing for DOD beneficiaries is a key component of the TRICARE program and something that we and others have long advocated. Such uniformity would, in our view, eliminate inequities and confusion that now exist among beneficiaries of military health plans. While adopting the TRICARE cost shares may cause some minor adverse selection for the USTFs, our analysis indicates that there will be no lasting negative financial effect on USTF operations. Further, the new cost shares, which are similar to HMOs, are appropriate for the risks to be borne by the USTFs and will likely make the USTF population more similar to DOD's general beneficiary population. More importantly, should there be a financial impact, DOD's current USTF capitation methodology takes into account and allows for adjusted reimbursement levels for such higher costs that result from changes in the enrollee cost shares and population characteristics. We received comments on a draft of the report from DOD's Principal Deputy Assistant Secretary for Health Affairs and other DOD officials, and on the USTFs' behalf from officials of the Seattle and Texas facilities. DOD officials stated that they agreed with the report's analysis and findings. They pointed out, however, that the draft report's language discussing DOD's reimbursement approach should clearly set forth that the capitation rates make automatic age and gender adjustments and also allow for negotiated rate adjustments to cover the possible adverse selection effects of benefit/cost-sharing revisions. We clarified the report's language on this matter and incorporated the officials' other suggested technical report changes as appropriate. USTF officials also took issue with the report's discussion of factors for which the capitation rates automatically adjust. They stated that there is no provision in their participation agreements with DOD that allows for negotiated capitation rate adjustments for possible adverse selection due to cost-sharing changes. The officials stated that, while the agreements allow for negotiated rate changes due to benefit revisions, the USTFs do not consider the new cost shares to be benefit changes--although they stated they have not consulted DOD on the matter. We believe that because the new cost shares represent a change in the health care package offered to USTF beneficiaries and materially affect the actuarial value or cost of the package, the new cost shares constitute a benefit change. Also, as pointed out, DOD considers the effects of such changes to be subject to negotiated capitation rate adjustments. USTF officials stated that, contrary to our assertion that the USTFs' survey should have included questions on quality and access along with the questions on higher cost shares, such additional questions were not relevant. They stated that their annual member surveys repeatedly show high member satisfaction with the USTFs, tending to affirm their historic 2-percent disenrollment rate. Adding questions on quality and access would have, in our view, added perspective for more fully understanding why survey respondents gave the answers they did. Moreover, the high levels of member satisfaction referred to by the USTF officials tend to raise further questions as to whether members would disenroll at the USTFs' estimated 40 percent rate. The USTF officials stated that our removing the two highest claimants per USTF from their database and reestimating the potential cost increase is incorrect. They stated that there will be high claims in each year--or new enrollees with high claims--so that removing the two highest claimants would not reflect the USTFs' actual costs. Also, the officials stated that while it is true that a member with high claims in one year will not necessarily have such claims the next year because the member may have died, the costs should be included in the estimating base to have a true picture of the total costs. We disagree. The USTFs' cost-effect estimates assume that all claims, including the high claims, for all members whether they said they would stay or leave will be the same in the year after the choice as before the choice. According to actuarial research, however, many of the high claims in one year will not be for the same individuals as in the prior year, which, for example, as the USTFs point out, would occur if the member died. To illustrate the major impact that a few respondents with high claims costs had on the USTFs' estimated cost increases, we removed the two largest claimants in each USTF. We agree that the USTFs will have some high claims each year. But the level of cost increase the USTFs estimated as a result of adverse selection will depend on the same members (with the highest claims in the year before the choice) staying and having the same high claims in the year after the choice. The USTFs' assumption is actuarially questionable and greatly overstates the adverse selection effect. Even if we had included the two highest claimants per USTF in our illustration, but distributed them randomly among those who stay and those who leave, the net adverse selection effect would have only been approximately 4 percent. USTF officials also said we were incorrect in basing the estimated cost increase due to adverse selection on their total reimbursement. They said it should be based only on reimbursement for the segment of the USTF members most affected by adverse selection--the retirees and their dependents under age 65. We disagree. One purpose of our evaluation was to determine if the new cost shares would be inappropriate for fully at-risk managed care facilities. To do so, it is necessary to consider the financial impact of adverse selection on the facilities' total income--in this case, DOD's total capitation payments for all USTF members. Also, since the active duty dependents and retirees and their dependents aged 65 and over will not pay any enrollment fee, the impact of adverse selection on these two groups would be negligible. Thus, in our view it is appropriate to compare the potential adverse selection cost increase for the retirees and dependents under age 65 ($5.5 million) to the total income of the USTF facilities ($323.5 million) in determining the 1.7-percent increase in financial risk to the facilities. Finally, the USTF officials stated that their members cannot be compared to FEHBP or private plan enrollees; that their members are used to and believe they are entitled to free care such that the enrollment fees would be strongly resisted; and that our use of a 20-percent disenrollment rate is not substantiated nor valid. We disagree. Fewer than 10 percent of the USTFs' members would disenroll, but to be actuarially conservative, we used a 20-percent rate to estimate the cost shares' effects. We based our approach on actuarial research and experience with a wide range of private and public health plans. As the report states, there is very little disenrollment as a result of relative increases in out-of-pocket differences of $460 or less per family. While plans do vary widely in structure and demographics, the relative effect of changes in out-of-pocket costs on choice is similar, and one set of plans can safely be used to predict the results in another set. Also, neither the USTF officials nor their report cited any evidence or studies that showed that disenrollment had been higher than 10 percent for similar out-of-pocket changes in any other plan. We will send copies of this report to the Secretaries of Defense, Health and Human Services, Transportation, and Commerce; and the USTFs. We will make copies available to others upon request. If you have any questions about this report, please call me on (202) 512-7111. Other major contributors are listed in appendix VI. Retirees and retiree family members$230(S), $460(F) $11/day, $25 min. $11/day, $25 min. $11/day, $25 min. $20/day, $25 min. $20/day, $25 min. Catastrophic limits (single or family) Retirees and retiree family members$150(S), $150(S), $150(S), $300(F) $300(F) $50(S), $100(F) $150(S), $300(F) $300(F) $10.50/day, $25 min. $250/day or 25% $10.50/day, $25 min. $10.50/day, $25 min. The greater of $25/admission or $20/day 15%, no deductible 20%, no deductible (S) = single; (F) = family. Active duty family members, ranks E5 and above $230(S), $230(S), $460(F) $460(F) $11/day, $25 min. $11/day, $25 min. $11/day, $25 min. $11/day, $25 min. $20/day, $25 min. $20/day, $25 min. This appendix contains estimates of the cost impact on each USTF resulting from adverse selection (1) with and without the two largest claimants of each facility in the computation and (2) using disenrollment rates of 20 percent and 40 percent. The cost impact with and without the two largest claimants is derived by subtracting the cost for total respondents' monthly claims from the monthly claims cost of the respondents who stay and dividing this increase by the total respondents' monthly claims costs. For example, as shown in table IV.1, the cost for total respondents' monthly claims (including all claimants) is $257. The monthly claims cost of the respondents who stay is $279. Subtracting $257 from $279 yields a cost increase of $22, which is about 8 percent of $257. The cost impact of using different disenrollment rates is derived by subtracting the total respondents' monthly claims costs from those of the respondents who stay and dividing this increase by the total respondents' costs. For example, as shown in table IV.2, the cost for the total respondents' monthly claims is $257. For a 20-percent disenrollment rate, the monthly claims cost of the respondents who stay is $265. Subtracting $257 from $265 yields a cost increase of $8, which is about 3 percent of $257. Daniel M. Brier, Assistant Director, (202) 512-6803 Carolyn R. Kirby, Senior Evaluator, (202) 512-9843 Jean N. Chase, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a legislative requirement, GAO reviewed the potential effects of the Department of Defense's (DOD) new health care benefit and cost-sharing package, which is part of its TRICARE managed health care program, on the Uniformed Services Treatment Facilities (USTF). GAO found that: (1) the new cost-sharing arrangement might leave USTF at risk for higher costs by causing some healthy members to disenroll, an outcome known as adverse selection; (2) adverse selection probably will not have long-term negative financial effects on USTF, because less than 10 percent of current USTF members are expected to disenroll, and USTF costs would not increase by more than 2 percent; (3) DOD capitation payments will automatically adjust for higher USTF costs caused by changes in enrollment, and USTF may negotiate payment adjustments for the effects of the benefit and cost-sharing revisions; (4) USTF estimated that cost-sharing would cause about 40 percent of their members to disenroll and increase costs by about 11 percent; (5) the USTF estimates are unreliable because of data and methodological weaknesses; (6) the USTF estimates included data for large claims which are unpredictable and dramatically affect cost estimates; (7) the difference in members' out-of-pocket costs between USTF and TRICARE Standard is not expected to be great enough to cause more than an estimated 10-percent USTF disenrollment; and (8) USTF already serve proportionally more retirees and their dependents who are under age 65 than exist in the general DOD population, but cost-sharing may reduce the proportion of younger retirees and their dependents in the USTF population.

This section includes information on the types of levee structures and potential levee failures, major levee-related programs of the Corps and FEMA, and selected legislation related to levee safety. The Water Resources Reform and Development Act of 2014 defines a levee as a manmade barrier (e.g., as an embankment, floodwall, or other structure), the primary purpose of which is to provide hurricane, storm, or flood protection relating to seasonal high water, storm surges, precipitation, or other weather events; such a barrier is normally subject to water loading for only a few days or weeks during a calendar year. According to a Corps document, levees are usually earthen embankments or concrete floodwalls, which have been designed and constructed to contain, control, or divert the flow of water so as to reduce the risk of temporary flooding. An American Society of Civil Engineers public information document describes earthen levees as being constructed from compacted soil that is typically covered with various surface materials, such as grass, gravel, stone, asphalt, or concrete, to help prevent erosion. The document further states that a floodwall is a vertical levee structure usually erected in urban areas where there is insufficient land for an earthen levee. Levees can either function passively or can require active operations depending on their components. Some levees have gates and pumps, for example, and may require personnel to operate these devices in times of floods. Levees typically require regular maintenance and periodic upgrades to retain their level of protection. Maintenance can include such actions as removing debris and unwanted vegetation from the levees, areas adjacent to floodwalls, and channels; controlling damage caused by animals (e.g., filling burrows); painting or greasing structural components, such as metal gates; and repairing concrete damage, particularly in northern climates with severe freeze-thaw cycles. Figure 1 depicts an earthen levee and a floodwall as well as their respective components. According to FEMA documents, levees are designed to provide a specific level of protection. However, they can be overtopped or fail; they can also decay over time (see fig. 2). The Corps and FEMA combined have three primary levee-related programs: the Corps' Levee Safety Program, the Corps' Flood Risk Management program, and FEMA's National Flood Insurance Program. According to Corps documents, the Corps' Levee Safety Program, established in 2007, works to better understand, manage, and reduce the flood risks associated with levees through various activities. For example, the Corps maintains a national inventory of levees and makes the information available in the National Levee Database. In addition, the Corps inspects and assesses the performance of about 2,500 levees, comprising about 15,000 miles, nationwide to determine associated risks. On the basis of information from its assessments, the Corps makes recommendations about future federal investments and to prioritize maintenance, repairs, and other actions on levees. The Corps' Flood Risk Management Program, established in 2006, is intended to work across multiple Corps' programs to reduce and manage flood risk, according to the Corps' website. The program promotes the appropriate use of levees and floodwalls or alternative actions to reduce flood risk, such as land acquisition and flood proofing. The Corps also communicates levee-related concerns to stakeholders and works with stakeholders to develop solutions to reduce flood risk. The Corps accomplishes this outreach and communication through its flood risk management program as well as through other programs such as the Silver Jackets program, which, according to the Corps' website, is intended to bring together multiple federal, state, and sometimes local agencies and tribes to learn from one another and help reduce the risk of flooding and other natural disasters and enhance response and recovery efforts. FEMA's primary levee-related program is the National Flood Insurance Program, which was first authorized in the National Flood Insurance Act of 1968 to, among other things, addresses the increasing cost of federal disaster assistance by providing flood insurance to property owners in flood-prone areas, where such insurance was either not available or prohibitively expensive. This act also authorized subsidies to encourage community and property owner participation. To participate in the program, communities must adopt and agree to enforce floodplain management regulations to reduce the risk of future flood damage. An integral part of the program is the accreditation of any levees near the communities. In exchange for meeting program requirements, federally backed flood insurance is offered to residents in those communities. The Water Resources Development Act of 2007 directed the Corps to create and maintain a National Levee Database that includes a national inventory of levees, with information on the location and condition of all federal levees and, to the extent such information is provided to the Corps, nonfederal levees among other things. It also established the National Committee on Levee Safety to develop recommendations for a national levee safety program. The committee, which was composed of 23 diverse professionals from federal, state, and local or regional governments as well as the private sector and Indian tribes, operated from 2007 to 2011. In 2009, it submitted a draft report to Congress that included 20 recommendations for actions to establish a national levee- safety program, in addition to a strategic plan for implementing the program. The Moving Ahead for Progress in the 21st Century Act, enacted in 2012, called for the Corps and FEMA to align agency processes to allow interchangeable use of information collected for the Corps' Inspection of Completed Works Program and FEMA's National Flood Insurance Program. In 2013, a joint Corps and FEMA taskforce determined that under certain circumstances, Corps risk assessments of levees conducted under the agency's Levee Safety Program could satisfy aspects of levee accreditation under FEMA's National Flood Insurance Program. The effort culminated in a memorandum of understanding signed by the Corps and FEMA in which the Corps agrees to, among other things, provide FEMA with risk assessment results and FEMA agrees to accept and consider the Corps results, when possible. The Water Resources Reform and Development Act of 2014 amends portions of the Water Resources and Development Act of 2007 and also requires the Corps and FEMA to take the lead in implementing certain key national levee-safety-related activities. More specifically, it established new reporting responsibilities for the National Committee on Levee Safety, required continued development of a national levee inventory, and required implementation of a multifaceted levee safety initiative under which the agencies are to accomplish the following tasks: Develop voluntary national levee-safety guidelines: The voluntary national levee-safety guidelines are intended to be comprehensive standards that are available for use by all federal, state, and local agencies as well as tribes. Under the act, the voluntary guidelines are also expected to address activities and practices by states, local governments, tribes, and private entities to safely build, regulate, operate, and maintain a wide range of levee types, canal structures, and related facilities. The guidelines are also expected to address federal activities--including levee inspection, levee rehabilitation, local floodplain management, and public education and training--that facilitate state efforts to develop and implement effective state programs for levee safety. Adopt a hazard potential classification system: A hazard-potential classification system, as described by the National Committee on Levee Safety in its 2009 draft report, would be a first step in identifying and prioritizing hazards in leveed areas and is to be based solely on the potential consequences associated with a levee's failure, as opposed to the likelihood or probability of a levee failure. The act provides for such a system to be considered in the development of the voluntary national levee-safety guidelines; under the act, the system is also expected to be consistent with the Corps' levee-safety action- classification tool, which ranks levees based on their likelihood of flooding and the associated consequences. According to Corps officials, the tool is currently being used on levees within the Corps' Levee Safety program. Provide technical assistance and materials: The agencies are to provide technical assistance and training to help promote levee safety and assist states, communities, and levee owners in (1) developing levee safety programs; (2) identifying and reducing flood risks associated with levees; and (3) identifying local actions that may be carried out to reduce flood risks in leveed areas. Provide public education and promote awareness: To improve public understanding of the role of levees, the agencies are to carry out public education and awareness efforts about the risks associated with living in leveed areas. Education and awareness efforts are to be directed particularly toward individuals living in leveed areas. These efforts must also promote consistency in how information about levee- related risks is communicated at the state and local level and shared among federal agencies. Develop guidelines and provide assistance for a national state and tribal levee-safety program: This national program, as described by the National Committee on Levee Safety in its 2009 draft report, would assist states and tribes in developing and maintaining the institutional capacity, expertise, and framework to quickly initiate and maintain their own levee-safety program activities and requirements. The guidelines are to identify the minimum components necessary for an individual state or tribe to participate in the program. The national program provides assistance to help establish state and tribal programs that would meet these requirements. The act also requires that state and tribal levee-safety programs will have to adopt the voluntary national levee-safety guidelines to be eligible for assistance. Develop guidelines and provide assistance for a levee rehabilitation assistance program: This program is to provide assistance to states, local governments, and tribes related to addressing flood mitigation activities that result in an overall reduction of flood risk. The Corps, in consultation with FEMA, is to develop guidelines for floodplain management plans that program participants are required to prepare to reduce the impacts of future floods in areas with levees. Assistance provided under the program may be used for any rehabilitation activity to maximize risk reduction associated with levees that are (1) under a participating state or tribal levee-safety program and (2) not federally operated and maintained. To be eligible, applicants are expected to comply with all applicable federal floodplain management and flood insurance programs, have a floodplain management plan, have a hazard mitigation plan that includes all levee risks, and act in accordance with the voluntary national levee safety guidelines. In addition, among other things, the act called for several reports to be prepared. Specifically, the Corps is to submit to Congress and make publicly available a biennial report that describes the state of levees in the United States and the effectiveness of the levee safety initiative, as well as any recommendations for legislation and other congressional actions necessary to ensure national levee safety. The Corps and FEMA are also required to submit a report that included recommendations on the advisability and feasibility of, and potential approaches for, establishing a joint national dam and levee safety program, and the Corps is required to submit a report that includes recommendations that identify and address any legal liabilities associated with levee engineering projects. The Corps and FEMA have made little progress in implementing key national levee-safety-related activities under the Water Resources Reform and Development Act of 2014 primarily because of resource constraints, according to officials from both agencies. The Corps has been working on its development of a national levee inventory, but the Corps and FEMA have not begun work on other key national levee- safety-related activities required by the act and do not have a current plan for doing so (see table 1). Concerning the national levee inventory, a summary document that the Corps developed for us states that the Corps is incorporating levee data that FEMA has provided from the National Flood Insurance Program and is working to incorporate levee data voluntarily provided by state and local agencies. The Corps' actions are an extension of earlier work on the database, which it was directed to establish and maintain under the Water Resources and Development Act of 2007. Corps officials said that improving the inventory will be an ongoing process. The Corps had allocated $5 million for the inventory in fiscal year 2016, and the Corps' fiscal year 2017 Operations and Maintenance budget justification lists an allocation of an additional $5 million to further expand the inventory. The agencies have taken no action on the remaining key national levee- safety-related activities for which they were responsible and have missed several statutory deadlines for developing guidelines and reports. For example, the agencies took no action on developing the guidelines for the preparation of floodplain management plans under the levee rehabilitation assistance program, which were due on December 7, 2014; the voluntary national levee-safety guidelines, due June 10, 2015; or a report, due June 10, 2015, that was to include, among other things, recommendations for legislation and other congressional actions necessary to ensure national levee safety. Additionally, according to agency officials we interviewed, the agencies have no current plan for implementing the remaining activities. Without a plan, including milestones for accomplishing these activities using existing resources or requesting additional resources as needed, the agencies are unlikely to make further progress on implementing the remaining activities required by the act. Corps officials we interviewed said that they have continued to make progress on other activities that will complement activities required by the Water Resources Reform and Development Act of 2014 and that are within the scope of their existing Levee Safety Program and Flood Risk Management Program. Similarly, FEMA officials stated that they also are working to provide general public education and promote awareness about the risks associated with living behind levees through their existing National Flood Insurance Program. In a slide presentation that the Corps prepared for us, dated October 2015, the Corps identified resource constraints as a primary reason why the Corps has not been able to carry out certain key national levee- safety-related activities under the Water Resources Reform and Development Act of 2014. Specifically, the Corps' presentation indicated that new appropriations would be needed to (1) provide technical assistance and training; (2) develop guidelines and provide financial assistance for a state and tribal levee-safety program; and (3) develop guidelines and provide financial assistance for a levee rehabilitation assistance program. Corps officials we interviewed stated that the remaining national levee-safety-related activities required in the act could be funded using existing appropriations, but these activities would have to compete with existing Corps projects in the Corps civil works program. We reviewed a 2016 Corps budget document and determined that, except for the national inventory of levees, the Corps did not specifically allocate funds for national levee-safety-related activities required in the act. FEMA officials we interviewed stated that the agency would need additional appropriations to carry out the agency's main responsibility under the act--providing assistance for a state and tribal levee safety program--and told us that the agency had not received any funding directed toward national activities required by the act. They also said that even if these activities were funded, the agency would need additional staffing resources--specifically, in its 10 regional offices--to carry out requirements under the act. As of this report, FEMA has one staff person who is available part-time to implement the national levee-safety-related activities required by the act. As noted above, the Corps' 2017 budget includes $5 million for the national levee inventory; however, it does not specify funds for implementing the other national levee-safety-related activities in the Water Resources Reform and Development Act of 2014. Corps headquarters officials told us that not implementing the act's national levee-safety-related activities could result in several potential impacts, including that the disaster relief burden for the federal government may increase, safety risks and loss of life may increase, and risk education in communities with levees may not be carried out. Since the devastation of Hurricane Katrina in 2005, Congress has enacted legislation, including the Water Resources Reform and Development Act of 2014 that provided the Corps and FEMA with lead responsibility for undertaking certain national levee-safety-related activities, including some that would increase the capacity of nonfederal stakeholders to promote levee safety. The Corps is working on one of the key national levee-safety-related activities required by the act, namely expanding a national inventory of levees. However, the Corps and FEMA have not taken action to implement the other activities, required by the act, citing resource constraints. Further, Corps officials have identified potential impacts--including safety and financial risks--of not carrying out these activities, but the agencies do not have a plan for implementing these activities. Without a plan, including milestones for accomplishing the activities using existing resources or requesting additional resources as needed, the agencies are unlikely to make further progress implementing the activities under the act. To help ensure that the Corps and FEMA carry out the national levee- safety-related activities required in the Water Resources Reform and Development Act of 2014, we recommend that the Secretary of Defense direct the Secretary of the Army to direct the Chief of Engineers and Commanding General of the U.S. Army Corps of Engineers and that the Secretary of Homeland Security direct the FEMA Administrator to develop a plan, with milestones, for implementing these activities, using existing resources or requesting additional resources as needed. This plan could be posted on the Corps' website and monitored for progress. We provided a draft of this report for review and comment to the Departments of Defense and Homeland Security. In their written comments, reproduced in appendixes I and II, respectively, both agencies generally concurred with our recommendation. The Department of Defense stated that the agencies are drafting an implementation plan and suggested that we focus our recommendation on finalization of this plan. However, the agencies did not provide a copy of the draft plan or a date when it would be finalized, so we believe that the current focus of the recommendation is appropriate. The Department of Defense further stated that, to date, no funding has been allocated to the Corps specifically to implement provisions under the Water Resources Reform and Development Act of 2014, except for the levee inventory activities, as we have acknowledged in our report. In addition, the Department of Defense suggested that the recommendation be revised to include posting the plan on the Corps' website and monitoring the plan for progress. We have modified our recommendation to incorporate this suggestion, which we believe would help inform nonfederal stakeholders who own, maintain, or operate the majority of levees. The Department of Homeland Security said that FEMA will continue to work with the Corps to develop and implement a plan to carry out key national safety-related activities required in the act. Both agencies also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Homeland Security, 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 III. In addition to the individual named above, key contributors to this report included Vondalee R. Hunt (Assistant Director), Kevin Bray, Patricia Donahue, John Johnson, Armetha Liles, Cynthia Norris, and Kyle Stetler .

Levees, which are man-made structures such as earthen embankments or concrete floodwalls, play a vital role in reducing the risk of flooding. Their failure can contribute to loss of lives or property, as shown by the devastation of Hurricane Katrina in 2005. It is estimated that there are over 100,000 miles of levees across the United States, many of which are owned or operated by nonfederal entities. The Corps and FEMA are the two principal federal agencies with authorities related to levee safety. The Water Resources Reform and Development Act of 2014 requires the Corps and FEMA to take the lead on certain national levee-safety-related activities including developing a national levee inventory, which Congress authorized in 2007. The act also includes a provision for GAO to report on related issues. This report examines the Corps' and FEMA's progress in carrying out key national activities related to levee safety required in the act. GAO reviewed pertinent federal laws and executive orders as well as budget, planning, and policy documents from the Corps and FEMA; compared agency activities with federal internal control standards; and interviewed Corps and FEMA headquarters officials. The U.S. Army Corps of Engineers (Corps) and the Federal Emergency Management Agency (FEMA) have made little progress in implementing key national levee-safety-related activities required in the Water Resources Reform and Development Act of 2014. More specifically, the Corps has been working to develop a national levee inventory, but the agencies have taken no action on the remaining key national levee-safety-related activities for which they are responsible under the act, as shown in the table below. Agency officials identified resource constraints as a primary reason for their lack of progress in implementing such activities, and Corps officials said that not implementing these activities could potentially result in safety risks and federal financial risks for disaster relief, among other impacts. However, the agencies have no plan for implementing the remaining activities required by the act. Without a plan that includes milestones for accomplishing these activities using existing resources or requesting additional resources as needed, the agencies are unlikely to make progress implementing the activities under the act. GAO recommends that the Corps and FEMA develop a plan that includes milestones for implementing the required national levee-safety-related activities using existing resources or requesting additional resources as needed. The agencies generally concurred with GAO's recommendation.

Since its establishment by the Treaty of Rome in 1957, the EU has tried to create a single market among its Member States to facilitate the free movement of goods, services, capital, and people. As part of this effort, the Commission has attempted to consolidate and harmonize many of the pharmaceutical regulations that have existed among the Member States. Specifically, the Commission established two methods, called the multistate and concertation procedures, allowing pharmaceutical products to be marketed in all the Member States if approved by one Member State. The Commission believed that these methods would promote public health, by making drugs available to patients in a more timely manner, and advance industry interests, by stimulating investment in European research and development activities. However, these initial efforts were not successful because the Commission did not require Member States to accept drug approval decisions made by the Commission or other Member States. In 1975, the Commission established a multistate procedure to allow a pharmaceutical company to market a product in all Member States if just one of them approved the product application--a procedure referred to as "mutual recognition." The Commission also created the Committee for Proprietary Medicinal Products (CPMP) to coordinate the Member States' assessments of pharmaceutical products and arbitrate disputes among the Member States regarding the marketing of pharmaceutical products. However, the multistate procedure was unsuccessful in obtaining mutual recognition of drug approval decisions because at least one Member State raised an objection to every multistate application. Moreover, the CPMP opinions were not legally binding and, as a result, did not resolve disputes among the Member States. In 1987, the Commission established another process--the concertation procedure--designed to foster a single market. Under this procedure, the CPMP reviewed all biotechnology and other high-technology pharmaceutical products for approval across the EU. The EU decided to centralize the review process for biotechnology and other high-technology products because many of the Member States did not have the scientific expertise needed to review such products. However, only 5 of 30 product applications reviewed under the concertation procedure and approved by the CPMP were authorized for marketing by all the Member States. Thus, neither the multistate nor concertation procedure achieved the goal of free circulation of pharmaceuticals across all EU Member States because these procedures did not compel the Member States to accept a majority opinion of the CPMP. While the Member States professed allegiance to the principles of mutual recognition, their national regulatory authorities continued to review product applications and render their own opinions before allowing the products to be marketed in their country. Because the CPMP opinions were not binding, Member States issued different decisions on drug approvals, which prevented pharmaceutical companies from obtaining EU-wide approval for their products. Under the new EU drug approval process, pharmaceutical companies may use either a centralized or a decentralized procedure to obtain approval to market their pharmaceutical products in more than one Member State using one application. These procedures modify the former multistate and concertation procedures by (1) defining specific review steps and establishing time limits for review processes and (2) requiring Member States to accept as binding, decisions that are issued by the Commission. In addition, the CPMP, which was formally an advisory arm of the Commission, now serves as one of the EMEA's scientific committees. The CPMP, composed of two representatives from each Member State, renders opinions about the safety, efficacy, and quality of human pharmaceutical products that are binding on all the Member States. Although the new EU drug approval process changes the method for obtaining a marketing authorization, it does not affect drug pricing and reimbursement policies, which remain the responsibility of each Member State. Thus, in order to actually market a pharmaceutical product approved under the new process, manufacturers must still negotiate a product's price with individual Member States. Pharmaceutical companies are now required to use the centralized procedure for biotechnology products and have the option to use it for other innovative products. Under the centralized procedure, Commission approval of a new drug application allows a pharmaceutical company to market its pharmaceutical product in all 15 Member States without having to obtain separate approvals from each Member State. As shown in figure 1, once the EMEA ensures that the application is complete, the CPMP selects two of its members--known as rapporteurs--to perform independent scientific evaluations of the safety, efficacy, and quality of an application. The rapporteurs can draw on two sources of EU-wide scientific expertise in forming their review teams--experts from the national marketing authorities of Member States and any of the 1,200 outside experts located at universities and institutes throughout Europe. Once the rapporteurs have completed their respective evaluations, they present the results to the CPMP, which then renders an opinion. The CPMP must render its opinion within 210 days after the application was submitted. If a CPMP opinion is favorable, it is transmitted to the applicant, all Member States, and the Commission. The Commission uses the CPMP's opinion to prepare a draft decision. If the Member States raise important new scientific or technical questions, the Commission may refer the case back to the CPMP for further consideration. At this point in the approval process, Member States may object to the decision only if they believe the product poses a significant risk to public health in their country. If no objections are raised by the Member States, the Commission's draft decision is submitted to its Standing Committee on Medicinal Products for Human Use. The Standing Committee either agrees with the Commission's decision or, if there is no qualified majority, refers the decision to the Council of Ministers for consideration. Upon request, the EMEA will inform any concerned parties about the final decision, and the public is notified when a marketing authorization is granted through publication in the Official Journal of the European Communities. If, on the other hand, the CPMP renders an unfavorable opinion, the applicant may appeal the decision to the EMEA. During the appeal process, the CPMP may obtain the views of additional experts who were not involved in the first consideration of the application. The CPMP's final opinion is processed in essentially the same manner as a favorable opinion; that is, the final decision is made by the Commission or Council of Ministers. The centralized procedure is expected to take between 298 and 448 days depending on whether the applicant appeals an unfavorable CPMP opinion, the Member States raise important new scientific or technical questions, or the Standing Committee cannot reach consensus on a Commission draft decision and refers the matter to the Council of Ministers. According to an EMEA official, as of December 1995, almost 1 year after the EMEA had become operational, pharmaceutical companies had filed or intended to file 30 new applications under the centralized procedure, and 20 had started the evaluation process. In addition, the EMEA had received 18 applications submitted under the former concertation process. The CPMP has given positive opinions on 8 of these 18 applications, and the Commission has granted EU marketing authorizations for three of those opinions. For optional innovative products, pharmaceutical companies can either use the EMEA's centralized procedure or follow a decentralized procedure to obtain mutual recognition of a new drug by the EU Member States. Under the decentralized procedure (see fig. 2) an applicant can go directly to a national marketing authority to obtain permission to market its product in that Member State and then seek to have other Member States accept the marketing approval of the first Member State. Once an application has been submitted, a Member State's national marketing authority has 210 days to decide whether or not to grant an authorization to market the product in the Member State. If a Member State grants a marketing authorization, the applicant may seek to have one or more other Member State(s) where the applicant wishes to market its product recognize the authorization of the first Member State. Within 90 days of receiving the application, the other Member State(s) must decide whether to recognize the approval. If the other Member State(s) recognize the marketing authorization of the first Member State, an applicant may market its product in each Member State. If the other Member State(s) raise objections to mutual recognition that cannot be resolved within 90 days, the case is referred to the CPMP for arbitration. Once the CPMP gets involved in the process, the steps are the same as those followed for the centralized procedure. CPMP opinions under the decentralized procedure, once accepted by the Commission, are binding on all the Member States. The decentralized approval procedure is expected to take between 300 and 686 days depending on whether other Member States object to the marketing authorization granted by the first Member State, objections lead to a formal arbitration by the CPMP, the applicant appeals an unfavorable opinion, the Member States raise important new scientific or technical questions, or the Standing Committee cannot reach consensus on a Commission draft decision and refers the matter to the Council of Ministers. According to an EMEA official, as of December 1995, the EMEA had not been involved in any arbitration proceedings relating to disputes among the Member States under the decentralized procedure. Pharmaceutical industry officials acknowledge that filing NDAs under the centralized procedure will allow a company to market its product(s) in all Member States within a relatively short period of time at approximately 60 percent of the cost of obtaining 15 individual marketing authorizations. However, some officials said they are hesitant to use the centralized procedure in the short term to obtain approval for nonbiotechnology pharmaceutical products for several reasons. First, under the centralized procedure, a company has less influence over which rapporteurs will review its application than it does under the decentralized procedure. While a company can request particular rapporteurs, the CPMP will ultimately make the selection. According to industry officials, firms want their preferred rapporteurs because of the significant time and resources they have invested in establishing relationships with certain national marketing authorities, particularly in countries with large pharmaceutical markets. Under the centralized procedure, drug sponsors are concerned that the EMEA may assign an innovative product to a less experienced rapporteur who cannot adequately review or convincingly support the product before the full CPMP. Regulatory and industry officials believe that this concern will be somewhat mitigated by the new procedures' use of two rapporteurs. They expect that using two rapporteurs, rather than the one used under earlier procedures, will improve the quality of the drug approval process in several ways. First, by working independently, the two rapporteurs--and the teams they assemble--should uncover most concerns that might be raised at a meeting of the full CPMP. Second, being a rapporteur for an NDA carries great prestige, and the CPMP and Member States will place pressure on the review teams to prepare a thorough evaluation. Third, rapporteurs will have access to the scientific expertise available across the EU. Moreover, according to an EMEA official, the CPMP does consider drug sponsor preferences in its selection of rapporteurs. In 1995, the CPMP was able to give drug sponsors one of their rapporteur choices in every case. However, the CPMP recognizes that this may not always be possible in the future. Under the centralized procedure, in 1995, representatives from all of the Member States except Greece were chosen as rapporteurs or corapporteurs for at least two applications. The United Kingdom was selected as a rapporteur or corapporteur most often (nine times) with members from France and Germany involved in eight and seven applications, respectively. A second concern voiced by industry and regulatory officials is that the new procedures will function as intended only if members of the CPMP and the Standing Committee, who are appointed by their Member States on the basis of their scientific or regulatory expertise, are able to look beyond their national identity to represent EU-wide interests. The members of these committees have to accept an EU-based approval process and EU-based decisions in order for the new procedures to successfully expedite the drug approval process. According to a senior EMEA official, the EMEA is doing all that it can to encourage the CPMP members to act in the best interests of the EU, regardless of their national identities. However, the EMEA official acknowledged that it will take time before the members feel comfortable with one another and the new procedures. Finally, pharmaceutical industry officials told us that, in the short term, industry will monitor progress with the centralized procedure and may delay using it for nonbiotechnology product approvals until the EMEA can establish a track record for drug approvals. Industry likes the multiple approval options for pharmaceutical products because they create competition among the national marketing authorities and the EMEA, encouraging them to be more efficient. Further, these options allow firms to pursue different marketing strategies for their various pharmaceutical products. During the EMEA's first year of operation, however, there were indications that industry was using the centralized procedure for optional nonbiotechnology products. According to EMEA status reports, two-thirds of the 30 new centralized applications that industry filed or intended to file could have been filed using the decentralized procedure. Nevertheless, industry officials contend that future prospects for using the centralized procedure are dependent on the EMEA's success in expediting the drug approval process. The EMEA was created by the Commission in 1993 to administer the new centralized approval procedure, which is mandatory for biotechnology and optional for other high-technology and innovative pharmaceutical products. The EMEA also arbitrates disputes under the new decentralized procedure in order to achieve mutual recognition of Member State approvals for most other medicines. The EMEA is funded by the Commission and industry application fees and has a small permanent staff and two scientific committees that draw upon EU-wide scientific expertise. The EMEA provides administrative, technical, and scientific support for both drug approval decisions under the centralized procedure and disputed decisions under the decentralized procedure. Under the centralized procedure, the EMEA is responsible for coordinating the evaluation of the safety, efficacy, and quality of human pharmaceutical products that will be marketed throughout the EU. Through its scientific committee, the CPMP, the EMEA also evaluates assessment reports, summaries of product characteristics, labels, and package inserts for pharmaceutical products. Finally, the EMEA provides advice to drug sponsors on issues relating to the conduct of tests and trials necessary to demonstrate the safety, efficacy, and quality of pharmaceutical products. In 1995, the CPMP received 20 requests for scientific advice from pharmaceutical companies. According to EMEA and industry officials, this interaction between the industry and the EMEA is beneficial to the European pharmaceutical industry because it increases the industry's interaction with the European reviewers of its product applications. In addition to coordinating the assessment of new drug applications and resolving Member State disputes, the EMEA is responsible for monitoring adverse drug reactions, an activity known as pharmacovigilance. The EMEA also ensures that the public receives timely and accurate information about the safe and effective use of these products. While national pharmacovigilance systems have existed for some time in the EU, the requirements and structure of those systems have varied considerably. According to a recent report, these differences have made compliance with all the regulatory requirements difficult for multinational pharmaceutical companies, thereby endangering patients who may not have received standard safety information about a particular product. The new EU regulations are intended to strengthen and coordinate existing pharmacovigilance systems. As part of the new system, the EMEA is responsible for creating a data-processing network for the rapid transmission of information among the national marketing authorities in the event of a pharmacovigilance alert. The EMEA is also responsible for formulating, as necessary, opinions on measures to ensure the safe and effective use of such pharmaceutical products. The EMEA also performs several other functions. It coordinates Commission and Member States' responsibilities for verifying industry compliance with good manufacturing, laboratory, and clinical practices. It also provides technical assistance for maintaining a database on pharmaceutical products for public use and assists the Commission and Member States in providing information about pharmaceutical products to the public. In addition, the EMEA is in the process of developing ways to electronically transmit data between its administrative arm, the secretariat, and the national marketing authorities to track the flow of information during the review process. The EMEA also translates all documents into the 11 languages used in the Member States. Finally, the EMEA promotes technical cooperation among the Commission, Member States, international organizations, and other countries regarding the evaluation of pharmaceutical products. The EMEA is composed of a Management Board, two scientific committees, and a permanent secretariat. The Management Board is the EMEA's governing body and is responsible for budgetary and resource matters. It consists of two representatives each from the European Commission, the European Parliament, and the Member States, for a total of 34 members. The scientific committees, the CPMP and the CVMP, each consist of 30 members--two from each Member State--who are primarily responsible for acting as rapporteurs to coordinate the review of NDAs. The rapporteurs have access to the staffs of national marketing authorities in other Member States, as well as to any of the 1,200 outside experts on the EMEA's European experts list. By the end of 1995, the permanent secretariat consisted of about 67 staff but was expected to grow to 250 staff by the year 2000. The secretariat is charged with providing general administrative and logistical support to the scientific committees, as well as administering the day-to-day activities of the EMEA. The permanent secretariat consists of four units: the Administration and Logistical Unit, which is responsible for personnel, administration, budget, accounting, and organization of and interpretation for conferences and meetings; the Human Medicines Evaluation Unit, whose two sections support the centralized and decentralized procedures for approval of pharmaceutical products for human use; the Veterinary Medicines Evaluation Unit, which supports centralized and decentralized procedures for approval of pharmaceutical products for veterinary use and monitors the maximum residue levels in foodstuffs of animal origin; and the Technical Coordination Unit, which is responsible for inspection, pharmacovigilance, and technical documentation activities. Initially, the EMEA was expected to be financed equally by industry application fees and Commission funds. However, the EMEA reported that about one-third of its funding for 1995 actually came from industry fees, while about two-thirds came from the Commission. The EMEA's budget for 1995 was approximately $17 million. The application fee for authorizing a pharmaceutical product for human use under the centralized procedure ranges from about $165,200 to approximately $236,000, depending on how many different product strengths and forms, such as tablet or liquid, are being considered. The EMEA receives half of the fees to support its operations, and the other half are split between the two review teams formed by the designated rapporteurs. Other fees, which are detailed in Commission regulations, are charged to process application variations, extensions, and renewals; inspect manufacturers' facilities; and arbitrate Member State disputes. According to industry and regulatory officials, the Member States differ in how they would like to see the EMEA funded. Some of the Member States, particularly the United Kingdom, would like the EMEA to be fully financed by industry fees. Other Member States have resisted a total fee-based financing scheme because they view industry support of a public health agency as a conflict of interest. Consequently, they want the Commission to maintain oversight responsibility of the EMEA through its funding mechanism. The Member States and Commission agree that the EMEA's financing should be reviewed in about 3 years, with the objective of increasing the proportion of the budget financed by the industry. However, according to a senior Commission official, the Commission is likely to retain its oversight control by funding at least 20 percent of the EMEA budget in the future. We obtained comments on a draft of this report from the EMEA, FDA, representatives of the European-based pharmaceutical industry, and experts in international drug regulatory policies. In general, they found the report to be accurate and complete and provided specific technical comments, which we incorporated into the report where appropriate. This report was prepared by John C. Hansen, Assistant Director; Thomas J. Laetz; and Mary W. Freeman. Please call Mr. Hansen at (202) 512-7105 if you or your staff have any questions about this report. The central regulatory body in the EU that (1) drafts legislation in the form of directives and regulations designed to foster a single market in Europe and (2) enforces EU rules. The Commission also prepares draft decisions, on the basis of CPMP opinions, on the licensing of pharmaceutical products. Committee within the EMEA, composed of two representatives from each Member State, that renders scientific opinions about the safety, efficacy, and quality of new pharmaceutical products. The CPMP also has a role in pharmacovigilance issues, developing guidelines, giving scientific advice to companies developing pharmaceutical products, and providing quality information to health professionals and patients. European Council composed of representatives from all the Member States. The Council analyzes Commission proposals and enacts EU-wide legislation. Central agency within the EU that supports the CPMP in its scientific evaluations of pharmaceutical products. The EMEA also verifies compliance with EU good clinical practices and good manufacturing practices and provides technical support to the Member States' national marketing authorities. Formerly known as the European Community, the EU was established by treaty to create a single market. The EU currently consists of 15 countries commonly referred to as Member States. The 15 Member States are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. The regulatory authority in each Member State that is responsible for the approval of new human and veterinary pharmaceutical products in that Member State. National marketing authorities also inspect manufacturing facilities, monitor quality control, and perform pharmacovigilance activities. The size and structure of each national marketing authority vary among Member States. The process of collecting information on adverse drug reactions at the pre- and postmarketing stages, scientifically evaluating these adverse drug reaction reports, and making the regulatory decisions that result from this analysis. A CPMP member selected to lead the scientific evaluation of a new drug application and discuss its merits and shortcomings before the CPMP. Committee within the Commission, comprising representatives from all 15 Member States, that is responsible for approving draft licensing decisions for pharmaceutical products on the basis of the Commission's draft decisions. The EU's version of the full prescribing information for a product that is supplied to physicians separately from the product. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO reviewed: (1) the new European Union (EU) procedures for approving new drug applications (NDA); and (2) why the European Medicines Evaluation Agency (EMEA) was established, how it operates, and how it is financed. GAO found that: (1) because member states did not always accept EU or other members' drug approvals, the EU Commission of European Communities makes decisions on drug approvals and dispute resolutions that are binding on all members; (2) EU has also established new approval procedures for biotechnology, other high-technology, and innovative products; (3) regulating drug prices and reimbursement policies remains the responsibility of member states; (4) the centralized approval procedure for biotechnology and some innovative products is expected to take between 298 and 448 days; (5) the decentralized procedure allows manufacturers to seek approval from member states and appeal denied approvals; (6) the decentralized procedure is expected to take between 300 and 686 days; (7) industry officials are concerned about drug evaluators' qualifications and whether EU-wide interests will be upheld over national interests; (8) EMEA is responsible for the timeliness and coordination of new drug approvals, administrative duties, ensuring that drugs meet the highest standards of safety, efficacy, and quality, and maintaining information on the drugs and their adverse reactions; (9) the Commission and industry application fees fund EMEA, which has a small permanent staff and 2 scientific evaluation committees that draw on EU-wide scientific expertise; and (10) EMEA also provides advice to companies on their trial procedures and other matters.

VBA provides benefits to about 2.7 million veterans and about 579,000 surviving spouses, children, and parents. Some of these benefits and services include disability compensation and pension, education, loan guaranty, and insurance. VBA employs about 5,000 examiners, and they represent about 40 percent of the agency's entire workforce. Most examiners are located at 57 regional offices and are responsible for reviewing and processing veterans' disability claims. Typically, they begin service at GS-5 or GS-7, grades that have starting salaries for 2003 of about $23,400 to $29,000. Examiners can be promoted to GS-10. Between 1998 and 2001, VBA hired about 2,000 new examiners (see figure 1). According to VBA officials, this was the first time VBA had the authority to hire significant numbers of examiners. These examiners were hired in anticipation of a large number of future retirements. For example, in 2000, VBA was expecting the retirement of 1,100 experienced examiners in the next 5 years. In addition, the hiring of these new examiners coincided with a growth in the backlog of claims awaiting decisions. Between 1998 and 2001, the backlog increased by 74 percent from about 241,000 to about 420,000. VBA has since implemented an initiative to reduce this backlog. According to VBA, it takes 2 to 3 years for a newly hired examiner to become fully productive. After being hired, new examiners receive a combination of formal training in a central location and on-the-job training in one of VBA's regional offices. Once on the job, these workers perform a variety of critical tasks, including compiling medical evidence, assessing the extent of the disability, determining the level of benefit, handling payment, and considering appeals. Workforce planning is a key component to maintaining a workforce that can carry out the tasks critical to an agency's mission. Strategic workforce planning focuses on developing and implementing long-term strategies-- clearly linked to an agency's mission and programmatic goals--for acquiring, developing, and retaining employees. Collecting data on attrition rates and the reasons for attrition are one part of conducting workforce planning. Other types of data that can be used in workforce planning include size and composition of the workforce, skills inventory, projected retirement rates and eligibility, and feedback from exit interviews. This data can be analyzed to identify gaps between an agency's current and future workforce needs, which can in turn become the basis for developing strategies to build a workforce that accommodates future needs. In fiscal year 2000, the attrition rate for new examiners at VBA was about 15 percent, more than twice as high as the 6 percent rate for all employees who left that year. About 15 percent of the new examiners hired in fiscal year 2000 left the agency within 1 year of being hired. VBA calculates attrition by counting employees who leave the agency and comparing that number to either total employees or a sub-group of total employees. The methods VBA uses to calculate attrition are consistent with those used by OPM and other federal agencies. Attrition rates for new VBA examiners were generally higher than those for all VBA examiners and other employees. As shown in table 1, in fiscal years 2000 and 2001, overall attrition rates for VBA examiners and other VBA employees ranged from about 4 percent to about 6 percent. However, among all new examiners hired in fiscal year 2000, about 15 percent left the agency within 12 months, as shown in figure 2. These attrition rates reflect all types of attrition--including resignation, retirement, and termination. However, for new hires, attrition consists predominantly of resignations. According to human capital experts, in general, new employees tend to leave at higher rates than all other employees. This has been the experience for federal agencies historically and, according to our analysis of OPM's data, is generally the case governmentwide. Attrition rates for all federal employees, both new hires and senior staff, were about 7 percent in fiscal year 2000. However, for all new federal employees--those hired in fiscal year 1998, 1999, and 2000--as many as 17 percent left within 12 months of being hired. VBA officials acknowledge that, in certain regional offices, attrition has been high for newly hired examiners. For example, VBA found attrition rates of 38 percent to 49 percent for new examiners hired over a 3-year period at four regional offices--Baltimore (38 percent), Chicago (39 percent), Newark (41 percent), New York (49 percent). By contrast, some offices--such as Phoenix, Arizona; Louisville, Kentucky; Huntington, West Virginia; and Wichita, Kansas--experienced no attrition among new examiners hired during this period. The two basic methods VBA uses to calculate attrition are consistent with methods used by OPM and other federal agencies. Both methods, the "annual calculation" and the "cohort calculation," compare employees who leave the agency to either total employees or a sub-group of total employees. They provide different ways of looking at attrition trends. The annual calculation indicates broad attrition patterns from year to year. In contrast, the cohort calculation tracks attrition over a period of time for a specific group, and the timeframe and group can vary to suit the needs of the analysis. Using this method, VBA reported attrition rates similar to those found by GAO. The following are the two methods VBA uses: Annual calculation. This method calculates attrition by dividing all employees who left in a given year by an average of employees working at the agency at the beginning of the year and at the end of the year. These attrition rates represent employees at all federal agencies except VA. Cohort calculation. This method calculates attrition by tracking a specified group or "cohort" of employees. The cohort can be defined as all those hired (new hires only) during a specific timeframe. These new hires are tracked for selected intervals (3 months, 6 months, etc.). This method can be adapted by defining the cohort differently (for example, to track attrition among a subgroup of new hires) and by using different timeframes for the tracking (e.g., 12 months, 18 months, etc.). This calculation differs from the annual calculation in that it does not take an average of the total workforce. VBA used this method to determine the attrition rate of certain newly hired examiners for a presentation in 2001 and for additional, more comprehensive calculations in 2002. VBA plans to use this method to calculate attrition rate for new examiners at least annually starting in 2003. According to OPM officials, the annual method is a generally accepted method used to calculate attrition by federal agencies. OPM officials also recognized the value of the cohort method for calculations that require specific time frames or groups of employees, and added that tracking the attrition of new employees is an important practice. OPM does not mandate the use of a particular method for the calculation of attrition, but officials stated that any method used should be clearly explained. While VBA has descriptive data on how employees separate from the agency (whether through resignation, termination, retirement, or transfer), it does not have adequate analytic data on the reasons why employees, particularly new employees, leave the agency. VBA collects some data on the reasons for attrition in exit interviews. However, these data are not systematically collected in a consistent manner and not compiled or analyzed. Furthermore, VBA has not performed the types of analysis on its data that would help the agency determine whether it can reduce its attrition rate. VBA is taking steps to ensure that attrition data will be available to guide its workforce planning. While VBA systematically collects descriptive data on how employees leave the agency, the data on the reasons employees leave is not systematically collected or analyzed. As at other federal agencies, when employees leave VBA, a standard federal "Form 52" is filled out. This form records whether the employee is leaving due to a resignation, termination, retirement, or transfer. Because this information appears on the form in discrete fields, VBA human resources staff can easily enter it into the agency's computer system to aggregate information on the types of separations. The Form 52 also includes a blank space for narrative comments on the reasons for leaving. This space is primarily intended to be used in the case of resignation and its use is optional on the part of the employee. However, according to VBA officials, this area is frequently left blank. When this area is filled out, it is up to a human resources employee to decide how to label an employee's reason for leaving in the computer system. Several "quit codes" exist to help in this labeling process. For example, reasons for leaving can be coded as relating to pay and benefits, supervisory relationship, opportunity for advancement, or personal reasons, including family responsibilities, illness, or household relocation. All forms are sent to one of four human resource centers to be entered into the agency's computer system. Human resources employees in these centers are instructed to code the reasons for leaving to the best of their ability. However, these staff members cannot clarify reasons when the information is blank or ambiguous because they do not have access to either the separated employee or the regional human resources staff who actually processed the employee's separation. Therefore, VBA officials do not consider the Form 52 to be a complete or reliable source of information on the reasons employees resign from VBA. While VBA conducts exit interviews to collect information on the reasons employees resign, it does not have a standard process for these interviews, nor are they conducted consistently for all separating employees, according to VBA officials. Exit interviews with separating employees are conducted at regional offices. However, no standard process exists for such interviews, according to the results of an internal VA assessment. VBA officials state that the downsizing of human resources staff in regional offices is at least partly responsible for the inconsistency with which exit interviews are conducted. In addition, the data from the interviews that are conducted are not forwarded to national headquarters to be aggregated and analyzed. Despite VBA's inconsistent use of exit interviews, VA policy recognizes the importance of exit interviews for determining the reasons an employee leaves. Some offices and staff members within VBA have made special efforts to compile or collect information on the reasons examiners leave the agency by producing special studies or reports. These include the following: High-Performing Young Promotable Employees (HYPE). In September 2002, a group of employees, representing six regional offices, prepared a report based on 72 exit interviews conducted at seven regional offices. The exit interviews had been conducted over 3 fiscal years: 1999, 2000, and 2001. Loss of New Hires in Veterans Service Centers. At the request of the head of VBA, the newly organized Office of Performance Analysis and Integrity (OPAI) issued a report in September 2002 that examined new hire attrition rates for regional offices individually. The report also looked at reasons for leaving, based on interviews with the directors of two regional offices. Review of attrition data at certain regional offices. At least two regional offices have investigated the reasons for attrition on their own initiative. For example, in October 2002, senior management at the Newark regional office compiled information on the attrition of examiners over a 3-year period and the reasons given for why these examiners left. This study was prompted by concern about high attrition rates at the Newark office. Portland did a similar review in September 2001. These special efforts had several common findings. For example, three reported that inadequate opportunity for training was one of the reasons examiners left VBA. Two reported workload as a reason for leaving. Two also identified instances in which examiners resigned as a result of pending termination for poor performance or conduct. Reports associated with these efforts touched on other reasons for resignation, including inadequate opportunity for full utilization of skills, insufficient pay, and various personal reasons. The other source of information on reasons examiners left VBA was anecdotal information provided by regional and other senior human resources officials. For example, senior human resources officials stated that reasons for leaving included factors such as inadequate work space and computer equipment as well as insufficient pay. In addition, these officials reported that some newly hired examiners left when they discovered that the job tasks were not what they had expected. According to a VBA official, certain regional offices are aware of the types of employers with whom they are competing. For example, some regional offices report losing employees to a range of employers in both the public sector, including other federal agencies (such as SSA and DOL), and the private sector, including firms in the information technology sector. VBA has begun to address some of the findings from these special studies or reports. For example, the HYPE report included several recommendations. The report recommended that the agency develop a comprehensive strategic plan that addresses attrition and retention; the report also recommended that the agency improve and centralize its exit interview process. Both of these recommendations are in the process of being implemented at VBA. In addition, according to a VBA official, certain regional offices have taken steps to offer job candidates opportunities to observe the work place before being hired. This effort was undertaken partly in response to information about employees' expectations of their duties and work environment. VBA has not performed the types of analysis on its data that would help the agency determine whether it could reduce attrition or identify the extent to which an attrition problem may exist. To better understand its own attrition, an agency can take advantage of a range of analyses. These include the following: Comparisons. To understand the degree to which its attrition is a problem, an agency can compare its own attrition to the attrition of other federal agencies, especially to the attrition of agencies with employees who do similar work. While one of VBA's special reports did some broad comparisons of VBA's attrition to the attrition at other federal agencies, VBA has not compared, as we have done, the attrition of newly hired examiners to the attrition of employees in other parts of the federal government with comparable job series. Attrition modeling. To understand the degree to which attrition is a problem, an agency can estimate the attrition rates it expects in the future, providing a baseline against which to measure the actual attrition it experiences. This allows officials to determine if attrition rates are higher or lower than expected. While VBA has projected retirement rates for planning purposes, according to VBA officials, there was no formal or informal process to estimate the expected attrition rates of the examiners who joined the agency since 1998. In 2002, VA projected future attrition trends for examiners in a restructuring plan submitted to the Office of Management and Budget, and officials expect to compare these projections to actual attrition rates for examiners in the future. Cost analysis. To understand the degree to which attrition is a problem, an agency can estimate the cost of recruiting and training new employees who leave and their replacements. While VBA's human resources office conducted a partial estimate of attrition costs in 2001, this estimate did not include all associated costs (including one of the most important and potentially expensive, the investment lost when a trained employee leaves). Labor market analysis. To understand the degree to which its attrition is a problem, an agency can evaluate labor market conditions in locations where it operates. Such an evaluation can provide context for understanding if an attrition rate is higher than might be expected in those locations. Using general labor market data, VBA has identified several locations where it faces significant competition from other employers, both public and private. This information could be used to better understand its attrition rate in those locations in the future. However, this information is not based on the actual employment plans of separating employees, and VBA does not routinely collect or document this information. According to a VBA official, collecting data on where VBA's separating employees find employment after VBA would be useful for developing a more accurate understanding of the employers with whom VBA is competing. VBA is taking steps to ensure that attrition data will be available to guide workforce planning. First, VBA intends to develop a workforce plan, following a workforce policy approved by VA in January 2003. In a related document, VA stated its expectation that, in the current economy, attrition among examiners may stabilize. Continued monitoring of attrition rates and improved data on reasons for attrition would allow VBA to test that assumption. Second, VBA has recently designated an official to head strategic planning efforts. While these efforts will include human capital issues, and according to VBA officials, will address attrition, VBA's human resources office is expected to assume primary responsibility for human capital issues and to coordinate with the strategic planning office. Obtaining better attrition data and conducting adequate analysis of attrition and the reasons for attrition could help VBA target future recruitment efforts and minimize attrition. For example, VA's new automated exit survey, which VA officials expect to be available in spring 2003, has the potential to aid VBA in its attrition data gathering and analysis. Separating employees will be able to answer a series of questions about the reasons they decided to leave the agency. The survey will provide confidentiality for the employee, potentially allowing for more accurate responses. It will also facilitate electronic analysis that could be broken down by type of job and region. VBA's ability to effectively serve veterans hinges on maintaining a sufficient workforce through effective workforce planning. While attrition data are just one part of workforce planning, the data are important because they can be used to anticipate the number of employees and the types of skills that need to be replaced. The agency currently lacks useful information on the reasons new employees leave and adequate analysis of its staff attrition. In addition, some offices experience much higher or lower rates. Continuing monitoring of attrition data by region may point to regions that need special attention. Sustained attention to both the reasons for attrition and attrition rates, particularly for new employees, is needed so VBA can conduct effective workforce planning. Understanding the reasons for attrition could help the agency minimize the investment in training lost when a new employee leaves. Furthermore, the new workforce planning efforts under way at VBA offer an opportunity to improve data collection on the reasons for attrition and attrition rates. For future contacts regarding this statement, please call Cynthia A. Bascetta at (202) 512-7101. Others who made key contributions to this statement are Irene Chu, Ronald Ito, Grant Mallie, Christopher Morehouse, Corinna Nicolaou, and Gregory Wilmoth.

By the year 2006, the Veterans Benefits Administration (VBA) projects it will lose a significant portion of its mission-critical workforce to retirement. Since fiscal year 1998, VBA has hired over 2,000 new employees to begin to fill this expected gap. GAO was asked to review, with particular attention for new employees, (1) the attrition rate at VBA and the soundness of its methods for calculating attrition and (2) whether VBA has adequate data to effectively analyze the reasons for attrition. To answer these questions, we obtained and analyzed attrition data from VBA's Office of Human Resources, calculated attrition rates for VBA and other federal agencies using a government-wide database on federal employment, and interviewed VBA officials about their efforts to measure attrition and determine why new employees leave. About 15 percent of new examiners hired in fiscal year 2000 left VBA within 12 months of their hiring date, more than double the 6 percent rate of all VBA employees who left in fiscal year 2000. In general, new hire attrition tends to exceed the rate for all other employees, and VBA's 15 percent rate is similar to the attrition rate for all new federal employees hired between fiscal years 1998 and 2000, when as many as 17 percent left within 12 months of being hired. VBA does not have adequate data on the reasons why employees, particularly new employees, choose to leave the agency. VBA has descriptive data on how employees leave the agency (whether through resignation, retirement, or transfer), but VBA does not have comprehensive data on the reasons employees resign. While VBA collects some data on the reasons for attrition in exit interviews, these data are limited because exit interviews are not conducted consistently, and the data from these interviews are not compiled and analyzed. Without such data, VBA cannot determine ways to address the reasons employees are leaving. Furthermore, VBA has not performed analysis to determine whether it can reduce its staff attrition. Improved collection and analysis of attrition data, including data on the reasons for attrition, could help the agency minimize the lost investment in training, particularly when new employees resign. A forthcoming report will explore options for improving VBA's collection and analysis of attrition data.

About a decade ago we implemented a campus recruitment program to increase GAO's visibility on campuses and help us attract highly-qualified and diverse candidates. The key elements of this program are (1) ongoing relationships with many colleges and universities and (2) the use of senior executives and other staff to develop and maintain those relationships. We supplement this program through additional activities designed to help others learn about GAO. We have established ongoing relationships with many colleges and universities across the country. While we advertise all of our new positions publicly, currently we have relationships with about 70 colleges and universities, including private and public colleges and universities, Historically Black Colleges and Universities, Hispanic-serving institutions, and other minority-serving institutions. These targeted schools have academic programs relevant to our skill needs (e.g., public policy, accounting, business or computer science) and that prepare students well for success at GAO. Our relationship-building over the years has been based primarily on visiting many of these schools to participate in on- campus events. We use senior executives and other staff from across the agency to develop and maintain these relationships. Serving as "recruiters," these executives and staff help faculty, career placement officials, and students at the colleges and universities we visit understand the work we do and the skills required for that work. Senior executives, who serve as Campus Executives, have specific schools for which they are responsible. Other staff--often alumni of those schools--support the executives by setting up and participating in campus events, such as information sessions, class presentations, or career fairs. Our staff often seek opportunities to communicate about our mission and their experiences at GAO to interested parties, as they view recruitment opportunities as part of their institutional stewardship responsibility. In addition to our targeted campus outreach, we conduct a variety of activities to help potential candidates and officials from colleges and universities learn about GAO or the type of work we do. For example, our analyst staff often works with students enrolled in masters' programs in public policy or administration on projects in which GAO acts as a "client." Groups of students are assigned an issue or evaluation topic, then advised by our staff as they proceed with their research, which culminates in a report to us as the client. These projects provide students "real world" experience in conducting public policy analysis. We also address classes or groups of students and host visits from groups to hear about our work and GAO's impact. Since 2001, we have held a yearly Educators' Advisory Panel, which includes deans and professors from schools we visit as well as selected others. Through this panel, we have obtained advice and provided feedback about ways schools can refine and strengthen their curricula to make their graduates more successful. Finally, we conduct outreach to professional organizations and groups. We attend and/or make presentations at various conferences or invite representatives of these groups to address GAO staff. The groups we have networked with in the past include those whose members have relevant backgrounds (e.g., the American Economic Association), as well as other groups with members that traditionally have been underrepresented in the federal workforce, including the American Association of Hispanic CPAs, the National Association of Black Accountants, or the Federal Asian Pacific American Council. Our approach has been extremely effective in developing strong partnerships with many colleges and universities and professional organizations. Our brand recognition has grown tremendously on campuses and in the public policy arena. This, among other reasons, has contributed to our receiving thousands of high-quality applicants each year for our advertised positions. As part of overall efforts to focus more attention on our strategic human capital management, we have taken proactive steps to improve our recruitment program. Specifically, we (1) established stronger linkages between our recruitment efforts and organizational workforce needs, (2) increased diversity of and enhanced supports for our staff serving as recruiters, and (3) instituted stronger program management and accountability processes. We have seen positive outcomes from these efforts. Consistent with our recommendations to other agencies, we have established stronger linkages between our recruitment efforts and our workforce needs identified through our annual workforce and strategic planning processes and in our annual Workforce Diversity Plans. To accomplish this, we adopted a recruiting framework that has allowed us to better address our skill gaps and enhance the diversity of our workforce, such as hiring more Hispanics, individuals with disabilities, and veterans. This framework was particularly critical this year, as we needed to identify how to address our needs despite significant fiscal constraints. Using this framework, we made decisions to discontinue certain efforts or initiate new ones to meet our needs and better allocate our resources. For example, we customized our interactions with campuses so that we could devote the appropriate level and type of resources needed to meet our needs. While we continue to believe that developing and maintaining strong relationships with college and university campuses is critical, on-site visits are less necessary given workforce and technological changes. As a result, based on an analysis of our workforce needs, school characteristics (e.g., student demographics, academic programs, and proximity of the campus to GAO offices), and our history with the campuses (e.g., number of applicants, applicant experience, and hires), our efforts now include a range of both on- site and virtual activities. The benefit of this approach is that we can adjust it at any time based on our needs. We also made critical decisions about how to best supplement our campus outreach efforts to support our workforce needs in the most cost-effective manner. We considered our costs to participate in various events, results from past participation, and the anticipated future benefits in order to set our future priorities about what organizations and events we would centrally support. For example, we supported participation in the Careers and the disABLED Expo and the Association of Latinos in Public Finance and Accounting Conference to help enhance the diversity of our workforce as well as to attract candidates with needed skills. We also partnered with the Hispanic Association of Colleges and Universities, as well as the Public Policy and International Affairs Fellowship Program, to hire 10 qualified student interns. We also determined how we could cost- efficiently use other approaches to meet our needs. As a result, we have advertised in those journals targeting individuals with disabilities, African- Americans, or critical skill areas (e.g., economists) to expand our outreach. We also utilized low-cost mechanisms such as electronically notifying hundreds of colleges and universities and relevant organizations about vacancies, revamping our external careers web site, and updating our recruitment materials to provide better information about GAO's worklife, programs, and values. These efforts are important ways to inform any interested candidate about GAO and available opportunities. Given the important role our recruiters serve in our campus recruitment program, we have taken steps to have a recruitment cadre that is diverse and well-trained. We solicited recruiters from throughout GAO and asked representatives from our numerous employee groups to serve as recruiters. Our recruitment cadre is diverse--representing staff from various GAO offices, teams, locations, job levels and positions. We also required that each employee interested in becoming a recruiter obtain senior management approval and attend our training workshop to learn about GAO-wide workforce needs and improve his or her ability to provide accurate, consistent, and timely information about our operations, programs, worklife, and values. This training has helped to ensure that all recruiters understand their responsibilities. We also have developed additional support for our recruiters to ensure consistent and timely dissemination of information. This support has included a slide presentation that describes GAO's core values, business operations, and impact; a tip sheet that helps recruiters understand how to work with prospective applicants who may need to be accommodated; and a listing of specific types of activities recruiters can undertake at targeted campuses. While we have not identified a single "best practice," some of our efforts that that have proven successful include: sending recruitment brochures/supplies to campus contacts; researching and contacting appropriate campus-based groups that have a diverse membership, as well as professional associations and relevant academic programs; establishing strong relationships with career placement staff; conducting information sessions with appropriate audiences; participating in career fairs, when appropriate; making class presentations that illustrate the nature of our work; getting our work incorporated into program curricula; and serving on advisory boards or as adjunct faculty with colleges and universities. To further assist our recruiters, we have provided real-time information and suggestions to help them better leverage their time. Specifically, we have kept recruiters apprised of the status of hiring announcements and shared data on the number of individuals hired for different positions-- including the names of individuals hired from their specific schools--so recruiters could see the results of their efforts. Given additional budget constraints, we have suggested ways for our recruiters to more cost- effectively maintain strong campus relationships such as asking various academic programs within the same college or university to schedule joint presentations or visits by GAO; asking recent interns/hires to serve as informal ambassadors; and using local GAO staff to attend events at various campuses. In order to be able to better manage our campus recruitment program and assess program outcomes, we instituted a number of structural and administrative changes over the last several years. We placed overall program responsibility in our Human Capital Office and created three senior-level advisory boards to provide insight on our program operations and results. To obtain more robust information on recruiter activity, as well as create more program accountability, we have developed a standardized template to document recruiters' strategies for working with individual schools and organizations. Through this template, recruiters must provide information on the members of the recruitment team, planned activities at the school or organization, and estimated costs. This strategy document must be completed by the recruiters, submitted to, and approved by Human Capital Office staff before funding is authorized and activities can begin. When an event is completed, recruiters report what occurred and assess the outcome. This information is summarized and subsequently shared with our recruiters in the form of best practices or lessons learned. The template also serves as the basis for data collection on agency-wide recruitment activity, including number of campuses and organizations visited, number and type of events conducted, costs associated with each event, and recruiters' views on the effectiveness of various events. We also have instituted more rigorous data collection and analysis of applicant and hire information. For example, for fiscal year 2010 vacancies, we analyzed information on the background and diversity of our applicants and hires (e.g., degree level obtained, school attended, years of work experience, ethnicity, race, gender) and the information applicants provided on why they applied for the job. Through analysis of these data, we were able to gain insight on how our program activities related to our hiring outcomes. For example, we identified the percentage of applicants and hires that came from the colleges and universities we targeted, or that applied because of an interaction with GAO. While not perfect, this analysis has helped us to learn what is working, or what changes we need to make to enhance our recruitment approach. While we have made great strides in using data to inform and assess our campus recruitment program operations, we continue to explore how to judge the effectiveness of our recruitment efforts. For example, it is challenging to define a specific benchmark when assessing whether the number of applicants and hires from the schools or organizations we target is sufficient given our expenditures. Additionally, it is difficult to specifically identify those factors beyond our outreach--such as our mission, recognition as one of the best places to work, or informal communications--that affect an individual's decision to apply to GAO. To that end, we plan to gather more detailed information from our applicants about the role of factors beyond our outreach efforts that have influenced their decisions to apply to GAO. This information can inform our future recruitment efforts. Our efforts have led to positive outcomes. We have achieved the institutional focus we were seeking by ensuring that our recruitment efforts are both driven by and support organizational needs. We also have gained efficiencies by adopting approaches that allow us to be more agile in responding to changing workforce needs and budget constraints. We continue to be an employer of choice and we received thousands of applications for our open positions in fiscal year 2010. As an example, we received about 20 applications for each of our GAO Graduate Analyst Intern positions filled in fiscal year 2010. Even more, representation of African-Americans, Hispanics, and Asian-Americans in the pool of qualified applicants and hires for the intern and entry-level positions filled in fiscal year 2010 exceeded the established benchmarks. Along with attracting and hiring high-quality, diverse staff, we have implemented programs and policies to support new staff once they arrive at GAO. The support for our entry-level staff comes predominantly through their participation in our highly regarded, 2-year, Professional Development Program (PDP). This program provides new employees with the foundations to be successful because it teaches them about our core values, how we do our work, and the standards by which we assess our performance. All entry-level analyst or analyst-related new hires are assigned advisers to assist in their development and provide support, although staff are also strongly encouraged to take an active role in their own career development by crafting Individual Development Plans and assessing their own strengths and growth areas. Staff receive multiple assignments while in the program so they can gain firsthand experience with the wide range of our work. They also receive a rigorous regimen of classroom and on-the-job training to learn about our work processes and requirements. Staff in the PDP program also receive formal feedback every 3 months and twice-yearly performance appraisals that can result in salary increases. In addition, actions of our senior leaders as well as several policies and other programs help our new hires make a successful adjustment to GAO. For example, various agency leaders, including the Comptroller General; Chief Human Capital Officer; Managing Director, Office of Opportunity and Inclusiveness; General Counsel; and our Chief Learning Officer participate in new-hire orientation. In addition, the Comptroller General and others meet with new employees during their first few months to answer any questions about GAO or our relationship with Congress. Other senior managers, including Managing Directors and directors in each GAO team, are encouraged not only to meet with new staff but take an active role in their development and day-to-day work environment. We also have policies in place to foster an inclusive and supportive work environment and help all staff balance work and life. For example, we support flexible scheduling, including telework and part-time arrangements, as allowed, given work responsibilities. We also have a student loan repayment program to help eligible staff defray educational costs. PDP staff, as all staff at GAO, can take advantage of a mentoring program to assist staff in becoming effective leaders, managing their work environments, and developing their careers. These programs and policies have helped make GAO a great place to work, as evidenced by our employees' decisions to stay with GAO and results from our employee feedback surveys. GAO's overall attrition rate has generally been below 10 percent for the last 5 years, and it was 6 percent in fiscal year 2010. About 90 percent of analyst and analyst-related staff hired in fiscal year 2008 are still with us. Feedback from newly hired staff show high levels of overall job satisfaction, as well as high levels of satisfaction regarding the on-the-job training they receive and staff development opportunities they are provided. Overall employee satisfaction levels contributed to GAO being named as the second best place to work in the federal government in both 2009 and 2010. Chairman Akaka, Ranking Member Johnson, and Members of the Subcommittee, this concludes my prepared remarks. I will be happy to answer any questions you or other members of the Subcommittee may have. For more information about this testimony, please contact Carolyn M. Taylor, Chief Human Capital Officer, at (202) 512-5811 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 testimony. Individuals making key contributions to this testimony included Lori Rectanus, Assistant Director; Harriet Ganson, Assistant Director; Cady Panetta, Senior Analyst; and Susan Aschoff, Senior Communications Analyst. 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 GAO's campus recruitment program. As an organization committed to having a high-performing, diverse workforce, GAO places great importance on attracting, hiring, training, and retaining employees with the skills needed to support GAO's mission to serve Congress and the American public. GAO has a multi-disciplinary workforce, with most staff having backgrounds in public policy, public administration, law, business, computer science, accounting, social sciences, or economics. While our current and future hiring will be shaped by today's constrained budget environment, over the past 5 years, on average, GAO has hired about 300 employees each year. The majority of these hires were for analyst and analyst-related positions at the entry level. GAO also has a robust paid student intern program each year. Many of these interns return as entry-level analysts. Having a strong campus recruitment program has played a key role in attracting highly qualified candidates for our permanent and intern positions and building our workforce. In response to congressional request, the remarks will focus on (1) the strong partnerships developed through our campus recruitment program, (2) recent actions GAO has taken to enhance the program and the positive outcomes GAO has experienced, and (3) the programs and policies we have in place to support new staff. Through our campus recruitment program, we have established ongoing relationships with many colleges and universities across the country. While we advertise all of our new positions publicly, currently we have relationships with about 70 colleges and universities, including private and public colleges and universities, Historically Black Colleges and Universities, Hispanic-serving institutions, and other minority-serving institutions. These targeted schools have academic programs relevant to our skill needs (e.g., public policy, accounting, business or computer science) and that prepare students well for success at GAO. Our relationship-building over the years has been based primarily on visiting many of these schools to participate in on-campus events. As part of overall efforts to focus more attention on our strategic human capital management, we have taken proactive steps to improve our recruitment program. Specifically, we (1) established stronger linkages between our recruitment efforts and organizational workforce needs, (2) increased diversity of and enhanced supports for our staff serving as recruiters, and (3) instituted stronger program management and accountability processes. We have seen positive outcomes from these efforts. Along with attracting and hiring high-quality, diverse staff, we have implemented programs and policies to support new staff once they arrive at GAO. The support for our entry-level staff comes predominantly through their participation in our highly regarded, 2-year, Professional Development Program (PDP). This program provides new employees with the foundations to be successful because it teaches them about our core values, how we do our work, and the standards by which we assess our performance. All entry-level analyst or analyst-related new hires are assigned advisers to assist in their development and provide support, although staff are also strongly encouraged to take an active role in their own career development by crafting Individual Development Plans and assessing their own strengths and growth areas. Staff receive multiple assignments while in the program so they can gain firsthand experience with the wide range of our work. They also receive a rigorous regimen of classroom and on-the-job training to learn about our work processes and requirements. Staff in the PDP program also receive formal feedback every 3 months and twice-yearly performance appraisals that can result in salary increases. In addition, actions of our senior leaders as well as several policies and other programs help our new hires make a successful adjustment to GAO. The Comptroller General and others meet with new employees during their first few months to answer any questions about GAO or our relationship with Congress. Other senior managers, including Managing Directors and directors in each GAO team, are encouraged not only to meet with new staff but take an active role in their development and day-to-day work environment. We also have policies in place to foster an inclusive and supportive work environment and help all staff balance work and life. We also have a student loan repayment program to help eligible staff defray educational costs. PDP staff, as all staff at GAO, can take advantage of a mentoring program to assist staff in becoming effective leaders, managing their work environments, and developing their careers. These programs and policies have helped make GAO a great place to work.

The C-17 military transport, which is being produced for the Air Force by the McDonnell Douglas Corporation, is designed to airlift substantial payloads over long ranges without refueling. The Air Force intends the C-17 to be its core airlifter and the cornerstone of its future airlift force. The Congress had appropriated about $20.7 billion and authorized the acquisition of 40 aircraft, through fiscal year 1996, for the C-17 program. The $20.7 billion includes $5.9 billion for research and development, $14.6 billion for procurement, and $170 million for military construction. The Congress has also authorized the Department of Defense (DOD) to enter into a multiyear contract for the acquisition of the remaining 80 aircraft of the 120 aircraft C-17 program. As of July 3, 1996, 27 aircraft have been delivered. The C-17 development contract required the Air Force to conduct a 30-day evaluation of the aircraft's compliance with RM&A specifications. The evaluation was also used to determine how much of a $12-million incentive fee the contractor was entitled to for meeting those specifications. In October 1992, the Air Force developed a draft RM&A evaluation plan that was closely tailored to the contract specifications. The plan was revised during 1994 and issued in July 1994. The 30-day RM&A evaluation was conducted between July 7 and August 5, 1995. It consisted of a 23-day peacetime segment and a 7-day wartime segment. Aircraft operations, using 12 aircraft, were conducted at 6 U.S. airfields and 1 overseas base. Table 1 shows the number of missions, sorties, and flight hours flown during the evaluation. Missions included logistics (transporting equipment, personnel, and supplies); joint operations (training with equipment and personnel from the Army); and peacetime aircrew training. The wartime logistics missions were designed to simulate long-range movement of equipment, personnel, and supplies to forward operating bases or small austere airfields. Peacetime and wartime missions included aerial refueling; equipment and personnel airdrops; formation flying; low-level operations; and operations into small, austere airfields. The wartime missions ranged from 12.5 to 26 hours, while the peacetime missions ranged from 2 to 20.5 hours. By the end of the evaluation, the C-17 fleet had logged about 13,000 total operational flying hours since initial squadron operations began in 1993. The RM&A evaluation represents about 2 percent of the 100,000 flying hours needed to meet aircraft fleet maturity. The C-17 met or exceeded 10 of the 11 RM&A evaluation contract specification requirements. (See app. I.) However, the RM&A evaluation was less demanding than originally called for in the contract specifications and the 1992 draft RM&A plan. The RM&A evaluation, based on the 1994 revised plan, decreased the ratio of sorties to total flying hours. The decrease weakened the link between the evaluation as executed and the RM&A measurement criteria. In addition, the evaluation was less demanding because the number of airdrops and landings on small austere airfields was decreased and lighter average cargo loads than called for in the contract specifications were carried. The 1992 draft RM&A evaluation plan was based on 25 C-17 mission profiles representing the aircraft's projected peacetime and wartime usage over a 30,000-hour airframe life included in the development contract. In developing its 1992 draft plan, the Air Force conducted extensive analyses and reviews to ensure that the plan adhered to the contractual requirements. In January 1994, as part of the settlement related to the C-17 development program between DOD and the contractor, DOD directed the Air Force and the contractor to revise the C-17 RM&A evaluation plan to make it more operationally realistic. That is, to more realistically mirror the planned use of the aircraft. In addition, because of reliability problems with the C-17, the scheduled November 1995 Defense Acquisition Board was to consider the evaluation results when it decided whether to continue the C-17 program beyond 40 aircraft. As part of the 1994 revisions, the Air Mobility Command changed the mission profiles used in the October 1992 draft plan because they did not represent complete and comprehensive missions. Command officials were also concerned that the 1992 draft plan would not demonstrate the aircraft's wartime surge utilization rates included in the C-17 Operational Requirements Document. In July 1994, the Air Force issued the revised RM&A evaluation plan. The plan included a wartime scenario representative of a major regional contingency, additional sorties to simulate complete missions, and additional flying hours to increase the aircraft's utilization rate. The revised mission profiles in the final RM&A plan increased the total number of flying hours, number of aircraft sorties, and average wartime sortie duration, but did not maintain the proportional mix of sorties to flying hours that was based on contract specifications. The impact of these changes was longer duration wartime sorties and a reduced ratio of sorties to flying hours, resulting in less stress on the RM&A aircraft than originally planned. Longer missions with fewer cycles, such as strategic intertheater missions, place less stress on an aircraft and will result in longer aircraft life. The 1992 draft evaluation plan provided for 1,725 total flying hours. The RM&A evaluation increased the level to 2,259 flying hours, an increase of 31 percent over the draft plan. The total number of sorties flown increased 12 percent, but the average sortie time increased 17 percent. Peacetime sorties increased 34 percent, from 248 to 334, but the number of wartime sorties decreased 15 percent, from 211 to 179. Although the change in the duration of the average peacetime sortie was negligible, the average wartime sortie increased by 50 percent, from 3.99 to 5.97 hours. (See app. II.) Because the average wartime sortie significantly increased, the number of sorties in relation to the number of flying hours was less than planned in the 1992 draft RM&A evaluation plan. We estimate that if the average duration of peacetime and wartime aircraft sorties had not changed, the Air Force would have needed to fly 90 additional sorties. This represents a 15-percent increase in the number of sorties necessary to maintain the proportional mix of flying hours to aircraft sorties identified in the 1992 draft evaluation plan. (See app. III.) The ratio of flying hours to sorties specified in the contract and 1992 draft plan mission profiles was based on the profiles used in the development of selected RM&A measurement criteria. In addition to reducing the stress on the RM&A aircraft, changes to the original mission profiles weakened the link between the RM&A evaluation scenarios and the assessment criteria developed using the original profiles. The Air Force used the C-17 lifetime mission profiles in the contract specifications to develop the test profiles in the 1992 draft of the RM&A evaluation plan. These lifetime mission profiles were also used to develop a number of the C-17 RM&A growth curve parameters, such as mission completion success probability, full mission capable rate, and partial mission capable rate. The RM&A growth curves, based on total C-17 fleet flying hours, are the criteria used to measure the C-17 RM&A results. A 1981 report by the contractor noted that the operational profiles flown during the RM&A evaluation must be the same as the profiles used to develop the growth curves. Since the original mission profiles were used as a basis for developing RM&A growth curve criteria, a revision in the profiles required a corresponding adjustment in the respective growth curves. The failure to make such an adjustment affected the use of the growth curves as RM&A measurement criteria. The total number of airdrops and austere airfield landings accomplished in the RM&A evaluation were less than called for in the 1992 draft plan, thus causing less stress and wear on the C-17 aircraft and its subsystems. The total number of airdrops was reduced from 189 to 158, a 16-percent reduction. Wartime airdrops were decreased by 92 percent, from 50 to 4. Air Force officials stated that they significantly decreased the number of wartime airdrops because the 1992 Mobility Requirements Study and the 1995 Mobility Requirements Study Bottom-Up Review Update did not include airdrop as a requirement for a major regional contingency warfighting scenario. The number of C-17 small, austere airfield landings was 16 percent less than called for in the 1992 draft plan--138 instead of 164. According to Air Mobility Command officials, they reduced the number of landings from 164 to 148 because they did not believe the additional landings were needed to determine the RM&A evaluation impact and an additional 10 planned landings were not accomplished due to mechanical or environmental problems. Although the type of cargo carried during the RM&A evaluation was realistic, the average weight of the loads was less than half that projected in the mission profiles in the contract specifications. As a result, the aircraft and its subsystems experienced less stress and wear during the evaluation. Based on the mission profiles in the contract specifications, the average cargo weight per mission over the lifetime of the C-17 aircraft is 48,649 pounds. However, the aircraft only carried an average cargo weight of approximately 23,000 pounds during the RM&A evaluation. In addition, the actual average cargo weight carried during landings on small austere airfields was nearly 2.5 times less than the average cargo loads projected in the contract specifications (about 18,600 rather than 45,000 pounds). We are currently reviewing the C-17's performance in Bosnia. This work should provide greater insights into aircraft performance when carrying heavier loads. One reason for revising the 1992 draft RM&A evaluation plan was to demonstrate the wartime surge utilization rate included in the C-17 Operational Requirements Document--that is, operate 15.2 flying hours a day per aircraft for 45 days. Aircraft utilization rate goals were met and slightly exceeded during the RM&A evaluation. However, the evaluation was not intended to provide a statistically valid basis for predicting the C-17's ability to meet its wartime surge rate. It did not demonstrate what a mature C-17 fleet would do during 45 days of wartime surge operations. The evaluation simply demonstrated that high utilization rates could be achieved over a 48-hour period. The actual peacetime utilization rate was 4.3 hours per aircraft. The wartime sustained rate was 12.7 hours, with wartime surge rates of 16.6 and 17.1 hours demonstrated during two 24-hour periods. According to DOD and Air Force officials, it would not be economically feasible to conduct more realistic tests because of the large amount of flying hours and resources required. Moreover, while utilization rates are used as one basis for budgeting for logistics resources and mission planning, a higher utilization rate does not necessarily mean that one aircraft is a better airlifter than another. Simply stated, utilization rate is the number of hours, per aircraft, that a fleet of airplanes is in the air on a given day. More time in the air yields higher utilization rates, more time spent on the ground yields lower utilization rates. The rate is a function of the total airlift system that includes, among other things, aircraft, personnel, airfields, logistics resources, and concepts of operation. All these factors influence the attainment of a utilization rate objective, and most have little or nothing to do with an aircraft's inherent capability. For example, utilization rates can be increased by longer mission flying times, slower airspeeds, aircrew augmentation, and ramp space availability. Conversely, a faster aircraft flying the same distance will have a lower utilization rate. The Air Force awarded the C-17 contractor $5.91 million of the maximum $12-million incentive fee. However, our review showed that amount was $750,000 more than justified under the contract. The amount should have been reduced because the C-17 aircraft were not full mission capable during the evaluation. (See app. IV for our calculation of the appropriate incentive fee.) According to the C-17 development contract, the RM&A incentive fee was to be based on the degree that the contractor met each of 11 individual RM&A parameter goals. That is, to receive the total $12-million payment, the contractor had to achieve the goals for each of the 11 parameters. If any parameter was not met, the payment was reduced by the amount for that parameter and half of the amounts for the remaining parameters. The contractor was awarded only $5.91 million because the C-17 did not meet the requirement for the built-in-test false indication parameter. In awarding the $5.91-million fee, the Air Force gave the contractor credit for meeting the full mission capable goal. In our opinion, none of the aircraft should have been considered full mission capable during the evaluation. First, the Air Force, based on the results of developmental testing, had restricted the aircraft from executing the formation personnel airdrop mission under operational conditions for safety reasons. This mission was a requirement identified in C-17 operational documents. The restriction on formation personnel airdrop existed because turbulence caused by the aircraft can cause injuries to paratroopers. As a result, the aircraft are not permitted to fly in sufficiently close formation to airdrop the required number of personnel under operationally representative conditions as required by the contract specification. Second, the aircraft were not considered effective for the aeromedical evacuation mission, which was not completely tested during the RM&A evaluation. The aircraft were reconfigured to demonstrate this capability, but not all the systems that would be needed to accomplish the mission were used. Initial operational test and evaluation testing, which included the information developed during the RM&A evaluation, identified a number of problems that prevented the aircraft from being considered able to perform the aeromedical evacuation mission. For example, the emergency oxygen supply to patient litters was defective. As a result, the Army has classified the aircraft as not functionally effective for aeromedical evacuation. We recommend that the Secretary of Defense direct the Secretary of the Air Force to initiate action to recover the $750,000 in incentive fee overpayment from the contractor. In commenting on a draft of this report, DOD partially concurred with our findings but did not concur with our recommendation. DOD stated that the 1994 plan was actually more extensive and more operationally representative than the draft 1992 plan because it increased the total flying hours, the number of sorties, wartime sortie duration, aerial refueling, and formation flying missions. However, DOD acknowledged that the 1994 plan reflected (1) a 30-percent reduction in the number of airdrop sorties, (2) a 10-percent reduction in the number of small austere airfield landings, and (3) more than a 50-percent reduction in the average cargo loads carried during the evaluation compared to the 1992 draft plan. DOD indicated that the 1992 draft plan should not be used as a benchmark, rather the contract specification, including the 1994 Settlement Agreement between DOD and the contractor, should have been used. Further, DOD stated that not adjusting the growth curves to account for the changes made in the plan would have had only minimal impact on the results of the evaluation. We did not use the 1992 draft plan as a benchmark. Rather, we pointed out that scenarios in the 1992 draft plan and the growth curves, which are the criteria used to measure the success of the evaluation, were both based on the same factors from the contract specification. The 1994 plan changed the scenarios being flown in the evaluation to make it more operationally realistic and to more closely resemble a major regional contingency. However, the growth curves were not adjusted. DOD provided no documentation to support its assertion that adjusting the growth curves would have had only minimal impact. Moreover, the C-17 contractor has stressed that the profiles flown during the evaluation must be the same as those used to develop the growth curves. DOD acknowledged that the limited wartime surge activities during the RM&A evaluation did not provide a statistical basis for predicting the C-17's ability to meet its wartime surge rate. DOD said we questioned the value of utilization rates in this report, even though in a prior report we had indicated that utilization rates were a useful statistic when comparing aircraft. Our point in the prior report was that the value of comparing utilization rates was undermined when DOD artificially constrained the utilization rate of one aircraft while using the planned wartime surge utilization rate for another. However, to assure that our position in this report is clear, we have modified the text dealing with utilization rates. DOD disagreed with our recommendation to seek reimbursement of $750,000 from the contractor, asserting that the aircraft was properly considered full mission capable as long as all the equipment required for the mission was available and operative. The contract specification defines full mission capable as the aircraft being capable of performing all of its design missions. Since it could not perform the formation personnel airdrop and aeromedical evacuation missions, we believe that the aircraft was incorrectly listed as full mission capable. The aircraft is restricted from performing the formation personnel airdrop mission for safety reasons. While the aircraft were reconfigured to perform the aeromedical evacuation mission, some of the equipment was not tested to ensure it was operating as needed to enable the aircraft to perform the mission. Further, the aircraft was classified as not functionally effective for aeromedical evacuation as a result of initial operational test and evaluation testing because of a number of problems, including equipment problems. We, therefore, continue to believe that the aircraft should not have been considered as full mission capable and the contractor should not have been paid the incentive award fee of $750,000 for meeting the full mission capable objective. To determine the overall performance of the C-17 during the evaluation, we monitored the conduct and coordination of the RM&A evaluation from the 437th Airlift Wing, Charleston Air Force Base, South Carolina. This included the daily RM&A evaluation activities of the exercise as well as related data collection and documentation activities. We also flew on selected C-17 missions and observed ground operations at C-17 operating bases, including North Auxiliary Airfield, South Carolina; Pope Air Force Base, North Carolina; and forward operating bases at Barstow-Daggett Municipal Airport, California, and Bicycle Lake Army Airfield, California. To determine the validity of the test design, mission mix, and operational realism of the exercise, we analyzed the RM&A evaluation plan. Specifically, we reviewed its purpose, structure, preparation, and execution as well as the results of the evaluation. We also interviewed officials from the 14th Airlift Squadron; the 17th Airlift Squadron; the 437th Airlift Wing; the 315th Reserve Airlift Wing; Air Mobility Command Headquarters; the C-17 System Program Office; C-17 Site Activation Task Force; San Antonio Air Logistics Center; Air Force Operational Test and Evaluation Center; Air Force Office of Operational Test and Evaluation; Headquarters U.S. Air Force; U.S. Army Test and Evaluation Command; U.S. Army Test and Experimentation Command; Institute for Defense Analysis; and McDonnell Douglas, the C-17 contractor. We conducted our review from June 1995 to March 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services; the Subcommittee on Defense, Senate Committee on Appropriations; the House Committee on National Security; the Subcommittee on National Security, House Committee on Appropriations; the Secretaries of Defense and the Air Force; and the Director of the Office of Management and Budget. We will also provide copies to other interested parties as requested. If you or your staff have any questions concerning this report, please contact me on (202) 512-4841. The major contributors to this report are listed in appendix VI. RM&A evaluation July 7 to August 5, 1995 MTBM(i) MTBM(c) Mission capable (capable to perform at least one mission) Full mission capable (capable to perform all missions) Mission completion success probability (complete mission objectives without experiencing failure or performance degradation due to equipment problems) Mean time between maintenance-inherent (mean flight hours between unscheduled, on-equipment, inherent maintenance actions) Mean time between maintenance-corrective (mean flight hours between unscheduled corrective actions) Mean time between removal (mean flying hours between removal of any repairable equipment) Maintenance man hours per flying hour (total maintenance hours expended for each flight hour) Mean man hours to repair (the mean maintenance man hours required to complete a corrective maintenance action) Built-in-test fault detection (percentage of occurrences in which BIT correctly detects a malfunction) Built-in-test fault isolation (percentage of occurrences in which BIT correctly isolates a detected malfunction to the failed equipment item) Built-in-test false fault indication (percentage of occurrences in which BIT indicated a malfunction when none existed) Revised plan (July 1994) Original plan (October 1992) Difference between revised and original (36) (17) (32) (15) (0.16) (05) MTBM (I) MTBM (C) Noel J. Lance Dorian R. Dunbar Larry J. Bridges The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Air Force's reliability, maintainability, and availability (RM&A) evaluation of the C-17 aircraft, focusing on: (1) RM&A planning, preparation, execution, and results; and (2) whether the evaluation demonstrated the aircraft's wartime surge rate. GAO found that: (1) the Air Force reported that the C-17 aircraft met or exceeded 10 of the 11 contract requirements during its RM&A evaluation, but the evaluation was less demanding than originally planned; (2) although the revised RM&A evaluation plan increased total flying hours, the number of sorties, and average wartime sortie duration, it decreased the ratio of sorties to flying hours, which weakened the application of RM&A measurement criteria and lessened the stress on the aircraft; (3) the RM&A evaluation also had fewer airdrops and austere airfield landings than originally planned, and the aircraft flew cargo loads that averaged less than one-half the weight projected in contract specifications; (4) three years of operational testing show that the aircraft generally met RM&A requirements with the exception of those related to built-in-test parameters; (5) the RM&A evaluation was not a statistically valid test for determining C-17 fleet wartime utilization rates because the test's duration was too short; and (6) the incentive fee should have been reduced, since the aircraft could not perform the formation personnel airdrop mission under operational conditions, or the aeromedical evacuation mission.

USPS's financial condition has continued to deteriorate in the first 5 months of fiscal year 2009 and USPS expects its financial condition to continue deteriorating for the rest of the fiscal year, including: accelerating declines in mail volume after the first quarter, with a total decline of about 11 billion pieces; and accelerating losses after the first quarter, with a total loss of about $2 billion. USPS has updated its projections for fiscal year 2009, projecting a mail volume decline by a record 22.7 billion pieces (11.2 percent) from fiscal year 2008; a record $6.4 billion net loss, and an unprecedented $1.5 billion cash shortfall (i.e., insufficient cash to cover expenses and obligations), assuming cost-cutting targets of $5.9 billion are achieved; and plans to increase outstanding debt by $3 billion (the annual statutory limit) to $10.2 billion, or two-thirds of the total $15 billion statutory limit. USPS attributes much of its net loss this fiscal year to the economic recession that has resulted in unprecedented declines in mail volume and decreased revenues. Thus far in fiscal year 2009, First-Class Mail volume (e.g., correspondence, bills, payments, and statements) dropped about 9 percent, while Standard Mail volume (primarily advertising) dropped about 15 percent. According to USPS, the housing market downturn, the credit crisis, and lower retail sales have contributed to these volume declines. The financial and housing sectors are major mail users, mailing bills, statements, and advertising such as credit card, mortgage, and home equity solicitations. Volume declines have accelerated for both First-Class Mail and Standard Mail, as shown by quarterly data (see fig. 1) and results for January 2009 (see app. I). In addition, USPS projects its financial difficulties will continue in fiscal year 2010 and result in an even greater cash shortfall at the end of that fiscal year, despite plans for additional cost-cutting and additional borrowing of $3 billion, which would bring USPS's total debt to $13.2 billion. Thus, USPS's immediate problem is to generate sufficient cash to remain financially viable in fiscal years 2009 and 2010. USPS reports reducing expenses by $773 million in the first 5 months of fiscal year 2009 (compared to the first 5 months of fiscal year 2008), primarily through reductions of 50 million work hours that USPS made as it adjusted to declining mail volumes and workload. USPS reduced overtime and captured additional work hour savings as it reduced the size of its workforce through attrition and implemented other cost-saving initiatives. However, these savings and added revenue from rate increases were insufficient to fully offset the impact of declines in mail volume and rising costs from cost-of-living allowances (COLA) provided to postal employees covered by union contracts, as well as rising workers' compensation and retirement costs. Also, although almost 8,500 employees accepted USPS's early retirement offer during the first quarter of fiscal year 2009, the resulting savings to date have been limited because the effective dates for the majority of these retirements were December 31, 2008 or later. USPS has high overhead (institutional) costs that are hard to change in the short term, including providing 6-day delivery and retail services at close to 37,000 post offices and retail facilities. Compensation and benefits for USPS's workforce, which included about 646,000 career employees and about 98,000 noncareer employees in February 2009, generate close to 80 percent of its costs. Collective bargaining agreements with USPS's four largest unions include layoff protections and work rules that constrain USPS's flexibility, as well as semiannual COLAs linked to the Consumer Price Index (CPI) and employee benefits including health and life insurance premium payments. Under these agreements, which expire in 2010 or 2011: USPS paid 85 percent of employee health benefit premiums in fiscal year 2007, about 13 percent more than the share for other federal agencies. USPS's share is decreasing annually to 81 percent in 2011 or 80 percent in 2012, depending on the agreement. USPS pays 100 percent of employee life insurance premiums, about 67 percent more than most other federal agencies. USPS pays 100 percent of both employee health benefit premiums and life insurance premiums for its Postal Career Executive Service, which included 724 executives in fiscal year 2008. Executives at comparable grades in most other federal agencies do not receive such benefits. USPS's financial outlook has continued to deteriorate during fiscal year 2009. USPS has increased its estimate of losses in total mail volume in fiscal year 2009 to 22.7 billion pieces (11.2 percent). As a result, USPS now projects a net loss of $6.4 billion for fiscal year 2009, despite increasing its cost-cutting target to $5.9 billion for the fiscal year. Based on these projections, USPS expects cash from operations and borrowing will be insufficient to cover expenses at the end of the fiscal year, with the shortfall projected to be $1.5 billion. This projected net loss and cash shortfall assumes USPS will meet its cost-cutting target and factors in USPS's plans to borrow $3 billion. USPS's Chief Financial Officer told us on March 16 that achieving USPS's target to eliminate 100 million work hours this fiscal year will be critical to achieving its goal of reducing costs by $5.9 billion. He expressed guarded optimism that USPS can reach this ambitious cost-cutting target, explaining that the target is difficult, but achievable. He noted that USPS plans to continue efforts to reduce work hours as it responds to mail volume declines, including reductions in overtime and additional work hour savings achieved through attrition and other initiatives. Additional USPS cost-saving efforts include: Implementing a service-wide hiring freeze and reducing staffing levels for managers and other employees not covered by union agreements by 15 percent at headquarters and 19 percent at the nine Area offices. Evaluating more than 93,000 city delivery carrier routes (more than half of all city routes), eliminating about 2,500 city routes, and adjusting many other city routes, which USPS expects will result in saving about 3.2 million work hours in fiscal year 2009. An agreement between USPS and the National Association of Letter Carriers to expedite evaluation and adjustment of city delivery routes enabled this progress. Consolidating excess capacity in mail processing and transportation networks, including consolidating operations at some mail processing facilities, moving some mail processing employees from the day shift to evening hours, and streamlining transportation. Halting construction starts of new postal facilities. To increase its revenues, USPS has increased rates, including a January 2009 increase for competitive products (e.g., Priority Mail and Express Mail), and a planned May 2009 increase for market-dominant products (e.g., First-Class Mail, Standard Mail, Periodicals, and some types of Package Services). USPS has also introduced volume discounts, negotiated service agreements, and added some enhancements to competitive products since the Postal Accountability and Enhancement Act of 2006 (PAEA) was enacted in 2006. However, these products generated only about 11 percent of USPS's revenues and covered about 6 percent of its overhead costs in fiscal year 2008. USPS is considering alternatives to try to increase First-Class Mail and Standard Mail revenues. USPS will be challenged to achieve and maintain high-quality service as it works to implement unprecedented cost-cutting measures. USPS recently reported for the first time on the service quality of many market-dominant postal products; thereby making important progress in improving transparency and meeting the requirements of PAEA. USPS has cautioned that limitations have affected the quality of new measurement data and said that it will work to improve data quality. As table 1 shows, on-time delivery of all major types of market-dominant products in the first quarter of fiscal year 2009 fell short of USPS's targets for the full fiscal year. To put these results into context, the timeliness of mail delivery is an important part of USPS's mission of providing affordable, high-quality universal postal services on a self-financing basis. USPS has stated that service is at the heart of its brand and the key to increasing its competitiveness and profitability. Action is needed on various options, as no single action will be sufficient for USPS to remain financially viable in the short and long term. The short- term challenge for USPS is to cut costs quickly enough to offset the unprecedented volume and revenue declines so that it does not run out of cash this fiscal year. The long-term challenge is to restructure USPS's entire operations and networks to reflect the changes in mail volume, mailer preferences, and USPS's capacity to cover its costs. Based on USPS's poor financial condition and outlook, the time to take action is relatively short, and USPS's business model and its ability to remain self- financing may be in jeopardy. A key factor in determining USPS's financial viability is whether mail volume will rebound sufficiently once the economy improves, as volume has done in the past, so that USPS revenues will cover costs (see fig. 2). As the Postal Regulatory Commission (PRC) noted in December 2008, current pressures from declining volume and revenue do not appear to be abating, but rather, seem to be increasing. During the economic downturn, there has been accelerated diversion of business and individual mail to electronic alternatives, and some mailers have left the mail entirely. An economic recovery may not stimulate the same rebound in mail volume as in the past, because of changes in how people communicate and use the mail. Specifically: First-Class Mail volume has declined in recent years and is expected to decline for the foreseeable future as businesses, nonprofit organizations, governments, and households continue to move to electronic alternatives, such as Internet bill payment, automatic deduction, and direct deposit. USPS's analysis has found that electronic diversion is associated with the growing adoption of broadband technology. As PRC reported, the availability of alternatives to mail eventually impacts mail volume. It is unclear whether Standard Mail will grow with an economic recovery. Standard Mail now faces growing competition from electronic alternatives, such as Internet-based search engine marketing, e-mail offers, and advertisements on Web sites. The average rate increase for Standard Mail is limited by the price cap to the increase in the Consumer Price Index, but future rate increases will likely have some impact on volume. Options to assist USPS through its short-term difficulties--some of which would require congressional action--include: Reduce USPS payments for retiree health benefits for 8 years: USPS has proposed that Congress change the statutory obligation to pay retiree health benefits premiums for current retirees from USPS to the Postal Service Retiree Health Benefits Fund (Fund) for the next 8 years. This proposal would also reduce USPS's expenses through 2016 by an estimated $25 billion--with $2 billion in fiscal year 2009, $2.3 billion in fiscal year 2010, and the remaining annual expenses increasing from $2.6 billion to $4.2 billion over the remaining 6 years. This proposal is poorly matched to alleviate USPS's immediate projected cash shortfalls. In addition, this proposal would reduce the Fund balance by an estimated $32 billion (including interest charges) by 2016, so that in 2017, the remaining current unfunded obligation would be an estimated $75 billion (rather than $43 billion) to be amortized for future payments. This large obligation would create the risk that USPS would have difficulty making future payments, particularly considering mail volume trends and the impact of payments on postal rates if volume declines continue. USPS's proposal also would shift responsibility for these benefits from current to future rate payers. Reduce USPS payments for retiree health benefits for 2 years: Another option would be for Congress to revise USPS's statutory obligation so that the Fund, not USPS, would pay for current retiree health benefits for only 2 years (fiscal years 2009 and 2010), which would provide USPS with $4.3 billion in relief. We support this option because it would have much less impact on the Fund and it would allow Congress to revisit USPS's financial condition to determine if further relief is needed and review actions USPS has taken in 2009 and 2010 to improve its viability. Relief from retiree health premium costs is no substitute for aggressive USPS action--beyond current efforts-- to dramatically reduce costs and improve efficiency. It is not clear that either of these options would be sufficient, because USPS projects it will operate on a thin margin. This means that even if such relief is provided, a cash shortfall could develop in either fiscal year 2009 and/or 2010 if USPS does not meet its ambitious cost-cutting goals, mail volume declines more than projected, or unexpected costs materialize, such as unexpected increases in fuel costs. One option that would not require congressional action would be for USPS and its unions to continue their dialogue and agree on ways to achieve additional short-term savings, such as by modifying rules to facilitate reducing work hours. Such labor-management cooperation is critical to USPS's ability to make immediate changes in order to achieve cost reductions. Other available options, based on statutory provisions, could include (1) seeking PRC approval for an exigent rate increase and (2) increasing USPS's annual borrowing limit. First, USPS could request PRC approval for an exigent rate increase that would increase rates for market-dominant classes of mail above the statutory price cap. Mailers have voiced strong concern about the potential impact of such a rate increase on their businesses. In our view, this option should be a last resort. It could be self- defeating for USPS in both the short and long term because it could increase incentives for mailers to further reduce their use of the mail. Second, Congress could temporarily raise the statutory $3 billion annual limit on increases in USPS's debt, which would provide USPS with funding if needed. This option would be preferable to an exigent rate increase. However, it is unclear when USPS would repay any added debt, which would quicken USPS's movement toward its $15 billion statutory debt limit. In our view, this option should be regarded only as an emergency stop-gap measure. Although USPS is taking unprecedented actions to cut costs, comprehensive action beyond USPS's current efforts is urgently needed to maintain financial viability. Given the growing gap between revenues and expenses, USPS's business model and its ability to remain self-financing may be in jeopardy. Progress in many areas will be needed so that USPS can cover operating expenses and maintain and modernize its infrastructure. I want to emphasize that action is urgently needed to streamline USPS's costs in two areas where it has been particularly difficult--compensation and benefits and the mail processing and retail networks. We have reported for many years that USPS needs to right size its workforce and realign its network of mail processing and retail facilities. USPS has made some progress, particularly by reducing its workforce by more than 100,000 employees since 2000 with no layoffs and by closing some smaller mail processing facilities. Yet, as USPS recognizes, more needs to be done. USPS no longer has sufficient revenue to cover the cost of maintaining its large network of processing and retail facilities. Closing postal facilities would be controversial, but is necessary to streamline costs. Congress encouraged USPS to expeditiously move forward in its streamlining efforts in PAEA, and its continued support would be helpful to facilitate progress in this area. We recommended that USPS enhance the transparency and strengthen the accountability of its realignment efforts to assure stakeholders that realignment would be implemented fairly, preserve access to postal services, and achieve the desired results. USPS has taken steps to address our recommendations and, thus, should be positioned to take action. In addition, it is imperative for USPS and Congress to take informed action to review mail use, what future postal services will be needed, and what operational and statutory options are available to provide those services. Key areas with options include: Universal Postal Service: A recently completed PRC study identified options for universal service and trade-offs involving quality and costs. When USPS asked Congress in January 2009 to eliminate the long- standing statutory provision mandating 6-day delivery, it provided little information on where it would reduce delivery frequency, and the potential impact on cost, mail volume, revenue, and mail users. Because the number of delivery days is fundamental to universal service, Congress should have more complete information before it considers any statutory changes in this area. A mechanism to obtain such information would be for USPS to request an advisory opinion from PRC, which would lead to a public proceeding that could generate information on USPS's request and stakeholder input. USPS workforce costs: USPS's ability to control wage and benefit costs will be critical to cost-saving efforts. One option would be for USPS and its unions to negotiate changes to wages and benefits that apply to employees covered by collective bargaining agreements. USPS will begin negotiating next year with two of its major unions, whose agreements will expire in November 2010, and the following year with its other two major unions, whose agreements expire in November 2011. Retail postal service: USPS has alternatives to provide lower-cost retail services than in traditional post offices, such as contract postal facilities, carrier pick-up of packages, and selling stamps at supermarkets, drug stores, and by telephone, mail, and the Internet. USPS's retail network has been largely static, despite the expansion of alternatives, population shifts, and changes in mailing behavior. We have reported that USPS could close unnecessary retail facilities and lower its network costs. It is important to note that large retail facilities--generally located in large urban areas where more postal retail alternatives are available--generate much higher costs than the smallest rural facilities and may, therefore, potentially generate more cost savings. Mail processing: USPS has several options for realigning its mail processing operations to eliminate growing excess capacity and associated costs, but has taken only limited action. In 2005, we reported that, according to USPS officials, declining mail volume, worksharing, and the evolution of mail processing operations from manual to automated equipment has led to excess capacity that has impeded efficiency gains. USPS has terminated operations at 58 Airport Mail Centers in recent years, but has closed only 1 of over 400 major mail processing facilities. As USPS consolidates its operations, it needs to consider how it can best use its facilities, if it is cost effective to retain ones that are underutilized, and take the actions necessary to right size its network. Transportation: Various options exist for reducing USPS's transportation costs beyond its current streamlining efforts. For example, a joint USPS-mailer workgroup has identified a destination entry discount for First-Class Mail as an option that could reduce the need for USPS to provide long-distance transportation and some mail processing. USPS could publicly provide its analysis of the potential savings and the impact of such a discount. Delivery: USPS has various options for reducing delivery costs by continuing to realign delivery routes, implementing efficiency initiatives, and making more fundamental changes to delivery operations, such as delivering mail to more cost-effective receptacles, including cluster boxes. USPS's business model: We will discuss options to change USPS's business model in a report that PAEA requires us to issue by December 2011. Given USPS's projection that it faces record losses and cash shortfalls, it is important for USPS to continue providing Congress and the public with timely and sufficiently detailed information to understand USPS's current financial situation and outlook. Such information is essential to help congressional policymakers understand USPS actions and plans to maintain its financial viability in both the short and long term, particularly in view of proposals to give USPS financial relief from some retiree health benefit costs. Recently USPS took steps in this direction by providing monthly financial information to the PRC, which then made this information publicly available. We asked USPS to comment on a draft of our testimony. USPS generally agreed with the accuracy of our statement and provided technical comments, which we incorporated where appropriate. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or the Members of the Subcommittee may have. For further information regarding this statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Shirley Abel, Teresa Anderson, David Hooper, Kenneth John, Emily Larson, Joshua Ormond, Susan Ragland, and Crystal Wesco. (Volume and revenue data in thousands) FY 2008 through Jan. 2008 Market-dominant products primarily include First-Class Mail--domestic and international single-piece mail (e.g., bill payments and letters) and domestic bulk mail (e.g., bills and advertising); Standard Mail (mainly bulk advertising and direct mail solicitations), periodicals (mainly magazines and local newspapers), some types of package services (primarily single-piece Parcel Post, Media Mail, library mail, and bound printed matter). Market-dominant revenues also include revenues from services such as post office boxes and Delivery Confirmation. Competitive products primarily include Express Mail; Priority Mail; bulk Parcel Post, which the Postal Service calls Parcel Select; and bulk international mail. The Postal Service did not report separate data for each competitive product, which the Postal Service considers to be proprietary. 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.

When Congress passed the Postal Accountability and Enhancement Act in December 2006, the U.S. Postal Service (USPS) had just completed fiscal year 2006 with its largest mail volume ever--213 billion pieces of mail and a net income of $900 million. Two years later, USPS's financial condition has deteriorated. Mail volume declined by a record 9.5 billion pieces (4.5 percent) in fiscal year 2008, leading to a loss of $2.8 billion--the second largest since 1971. According to USPS, this was largely due to declines in the economy, especially in the financial and housing sectors, as well as shifts in transactions, messages, and advertising from mail to electronic alternatives. Declining mail volume flattened revenues despite rate increases, while USPS's cost-cutting efforts were insufficient to offset the impact of declining mail volume and rising costs in fuel and cost-of-living allowances for postal employees. USPS's initial fiscal year 2009 budget expected that the turmoil in the economy would result in more mail volume decline and a loss of $3.0 billion. This testimony focuses on (1) USPS's financial condition and outlook and (2) options and actions for USPS to remain financially viable in the short and long term. It is based on GAO's past work and updated postal financial information. We asked USPS for comments on our statement. USPS generally agreed with the accuracy of our statement and provided technical comments, which we incorporated where appropriate. USPS's financial condition has continued to deteriorate in the first 5 months of fiscal year 2009 and USPS expects its financial condition to continue deteriorating for the rest of the fiscal year. Key results include: (1) accelerating declines in mail volume after the first quarter, with a total decline of about 11 billion pieces, and (2) accelerating losses after the first quarter, with a total loss of about $2 billion. USPS's updated fiscal year 2009 projections suggest the magnitude of the challenges it faces: (1) mail volume will decline by a record 22.7 billion pieces (11.2 percent),(2) a record $6.4 billion net loss and an unprecedented cash shortfall of $1.5 billion, assuming that cost-cutting targets of $5.9 billion are achieved, and (3) plans to increase outstanding debt by $3 billion (the annual statutory limit) to $10.2 billion, or two-thirds of the $15 billion statutory limit. In addition, USPS projects its financial difficulties will continue in fiscal year 2010 and result in an even greater cash shortfall. USPS's most immediate challenge is to dramatically reduce costs fast enough to meet its financial obligations. USPS has proposed that Congress give it financial relief of $25 billion over 8 years by changing the statutory mandate for funding its retiree health benefits. GAO recognizes the need for immediate financial relief, but prefers 2-year relief so that Congress can determine what further actions are needed. It is not clear that either option would be sufficient because USPS projects it will operate on a thin margin, risking a larger cash shortfall if it does not meet its ambitious cost-cutting goals, mail volume declines more than projected, or unexpected costs materialize, such as fuel cost increases. Although USPS is taking unprecedented actions to cut costs, comprehensive action beyond USPS's current effort is urgently needed to maintain financial viability. Given the growing gap between revenues and expenses, USPS's business model and its ability to remain self-financing may be in jeopardy. Action is needed to streamline costs in two difficult areas: (1) compensation and benefits, which generate close to 80 percent of costs and (2) mail processing and retail networks, which have growing excess capacity. Closing postal facilities is controversial, but necessary, because the declining mail volume and growing deficits indicate that USPS cannot afford to maintain such an extensive network. Information will be critical to determine what other actions are needed, including options to cut costs as well as their impact on mail volume and mail users. It is also imperative to review mail use, what future postal services will be needed, and what options are available in many areas, including universal service, workforce costs, retail services, mail processing, delivery, transportation, and USPS's business model.

In our audit of the fiscal year 2004 financial statements for SEC, we found the financial statements as of and for the fiscal year ended September 30, 2004, including the accompanying notes, are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles; SEC did not have effective internal control over financial reporting (including safeguarding of assets), but had effective control over compliance with laws and regulations that could have a material effect on the financial statements as of September 30, 2004; and no reportable noncompliance with laws and regulations we tested. We issued an unqualified, or clean, opinion on the SEC's financial statements. This means that the financial statements and accompanying notes present fairly, in all material respects, SEC's financial position as of September 30, 2004, and, as well, certain other financial information that the statements must provide: net cost, changes in net position, budgetary resources, financing, and custodial activities for the year then ended. We also found that the statements conform to U.S. generally accepted accounting principles. In order to reach our conclusions about the financial statements, we (1) tested evidence supporting the amounts and disclosures in the financial statements, (2) assessed the accounting principles used and significant estimates made by management, and (3) evaluated the presentation of the financial statements. We found three material weaknesses in internal control and thus issued an adverse opinion on internal control--stating that SEC management did not maintain effective internal control over financial reporting and the safeguarding of assets as of September 30, 2004. Internal control over financial reporting consists of an entity's policies and procedures that are designed and operated to provide reasonable assurance about the reliability of that entity's financial reporting and its process for preparing and fairly presenting financial statements in accordance with generally accepted accounting principles. It includes policies and procedures for maintaining accounting records, authorizing receipts and disbursements, and the safeguarding of assets. Because SEC makes extensive use of computer systems for recording and processing transactions, SEC's financial reporting controls also include controls over computer operations and access to data and computing resources. Our opinion on SEC's internal control means that SEC's internal control did not reduce to a relatively low level the risk that misstatements material to the financial statements may occur and go undetected by employees in the normal course of their work. This conclusion on SEC's internal controls did not affect our opinion on SEC's financial statements. This is because during the audit process SEC made the adjustments identified during the audit as necessary for the fair presentation of its financial statements. However, the weaknesses we found could affect other, unaudited information used by SEC for decision making. Our evaluation of internal control covered SEC's financial reporting controls which also cover certain operational activities that result in SEC's financial transactions, such as activities pertaining to stock exchange transaction fees, public-filing fees, maintaining disgorgements and penalties receivable, payroll-related transactions, and others. We also tested SEC's compliance with selected provisions of laws and regulations that have a direct and material impact on the financial statements. For example, we tested for compliance with sections of the Securities Exchange Act of 1934, as amended, that requires SEC to collect fees from the national securities exchanges and the National Association of Securities Dealers based on volume of stock transactions, and sections of the Securities Act of 1933, as amended, that requires SEC to collect fees from registrants for public filings. Our tests found no instances of noncompliance that are reportable. We also found that SEC maintained, in all material respects, effective internal control over compliance. I would now like to discuss in detail the three material internal control weaknesses we found during our audit. We found that SEC did not have formalized processes or documentation for the procedures, systems, analysis of accounts, and personnel involved in developing key balances and preparing the financial statements and related disclosures. As I will discuss later, this issue is compounded by SEC's limitations with its financial management system. Also, SEC did not have formalized quality control or review procedures. As a result, we identified errors in the beginning asset and liability balances and in the September 30, 2004, draft financial statements prepared by SEC management, that if had not been corrected, would have resulted in materially misleading operating results for fiscal year 2004. SEC's lack of formalized processes, documented procedures, and quality assurance checks, significantly delayed the reporting of fiscal year 2004 financial results, consumed significant staff resources, caused audit inefficiencies, and resulted in higher financial statement preparation and audit costs. I would like to highlight the following items we found: SEC did not have documentation providing an explanation or a crosswalk between the financial statements and the source systems, general ledger accounts, account queries, and account analyses. SEC did not maintain a subsidiary ledger for certain activities, such as customer deposit amounts pertaining to filing fees. Accounting staff had difficulty in retrieving support for certain account balances, such as undelivered-order amounts, and for certain property and equipment leases. Reconciliations of detail and summary account balances were not prepared for certain financial statement line items, such as for the customer deposit liability relating to filing fees and the associated earned filing fee revenue; the accounts receivable related to exchange fees and the related amount of earned exchange fee revenue; and the budgetary accounts related to undelivered and delivered orders, thus requiring SEC staff to create an audit trail after the fact. There also was no consistent evidence of supervisory review of journal entries, including closing and adjusting journal entries made in connection with preparing quarterly and year-end financial statements. Comprehensive accounting policies and procedures were still in draft or had not yet been developed for several major areas related to financial statements, including disgorgements and penalties, filing fees, exchange fees, and fixed asset capitalization. GAO's Standards for Internal Control in the Federal Government requires that controls over the financial statement preparation process be designed to provide reasonable assurance regarding the reliability of the balances and disclosures reported in the financial statements and related notes in conformity with generally accepted accounting principles, including the maintenance of detailed support that accurately and fairly reflect the transactions making up the balances in the financial statements and disclosures. In addition, an effective financial management system includes policies and procedures related to the processing of accounting entries. SEC's difficulties in the area of financial statement preparation are exacerbated because SEC's financial management system is not set up to generate the user reports needed to perform analyses of accounts and activity on a real-time basis leading to SEC's staff-intensive and time- consuming efforts to prepare financial statements. Because SEC does not maintain standard schedules for producing certain basic reports of account detail for analysis, users have to request reports generated on an ad hoc basis by a software application whose operations are known only to some SEC staff. Also, as I will discuss in more detail later, not all of SEC's systems used for tracking and recording financial data are integrated with the accounting system. Federal agencies preparing financial statements are required to develop a financial management system to prepare a complete set of statements on a timely basis in accordance with generally accepted accounting principles. The financial statements should be the product of an accounting system that is an integral part of an overall financial management system with structure, internal control, and reliable data. Office of Management and Budget Circular No. A-127, Financial Management Systems, requires that each agency establish and maintain a single integrated financial management system--basically a unified set of financial systems electronically linked for agencywide support. Integration means that the user is able to obtain needed information efficiently and effectively from any level of use or access point. (This does not necessarily mean having only one software application covering all financial management system needs or storing all information in the same database.) Interfaces between systems are acceptable as long as the information needed to enable reconciliation between the systems is accessible to managers. Interface linkages should be electronic unless the number of transactions is so small that it is not cost beneficial to automate the interface. Reconciliations between systems, where interface linkages are appropriate, should be maintained to ensure data accuracy. To support its financial management functions, SEC relies on several different systems to process and track financial transactions that include filing and exchange fees, disgorgements and penalties, property and equipment, administrative items pertaining to payroll and travel, and others. Not all of these systems are integrated with the accounting system. For example, the case-tracking system and the spreadsheet application used to account for significant disgorgement and penalty transactions and the system used to account for property and equipment are not integrated with the accounting system. Without a fully integrated financial management system, SEC decision makers run the risk of delays in attaining relevant data or using inaccurate information inadvertently while at the same time dedicating scarce resources toward the basic collection of information. A properly designed and implemented financial statement preparation and reporting process (which encompasses the financial management system) should provide SEC management with reasonable assurance that the balances presented in the financial statements and related disclosures are materially correct and supported by the underlying accounting records. To address the issues related to SEC's financial statement preparation and reporting processes, we recommended that SEC take the following 13 actions to improve controls over the process. 1. Develop written policies and procedures that provide sufficient guidance for the year-end closing of the general ledger as well as the preparation and analysis of quarterly and annual financial statements. 2. Establish clearly defined roles and responsibilities for the staff involved in financial reporting and the preparation of interim and year-end financial statements. 3. Prepare a crosswalk between the financial statements and the source systems, general ledger accounts, and the various account queries and analyses that make up key balances in the financial statements. 4. Maintain subsidiary records or ledgers for all significant accounts and disclosures so that the amounts presented in the financial statements and footnotes can be supported by the collective transactions making up the balances. 5. Perform monthly or periodic reconciliations of subsidiary records and summary account balances. 6. Perform a formal closing of all accounts at an interim date or dates to reduce the level of accounting activity and analysis required at year- end. The formal closing entails procedures to ensure that all transactions are recorded in the proper period through the closing date, and then closing the accounting records so that no new entries can be posted during that period. 7. Distinguish common closing and adjusting entries in a formal listing, which is used in the general ledger closing process and in preparing financial statements. 8. Require supervisory review for all entries posted to the general ledger and financial statements, including closing entries. A supervisor should review revisions to previously approved entries and revised financial statements and footnotes. All entries and review should be documented. 9. Establish milestones for preparing and reviewing the financial statements by setting dates for critical phases such as closing the general ledger; preparing financial statements, footnotes, and the performance and accountability report; and performing specific quality control review procedures. 10. Use established tools (i.e., checklists and implementation guides) available for assistance in compiling and reviewing financial statements. 11. Maintain documentation supporting all information included in the financial statements and footnotes. This documentation should be more self-explanatory than what has been retained in the past. The documentation should be at a level of detail to enable a third party, such as an auditor, to use the documentation for substantiating reported data without extensive explanation or re-creation by the original preparer. 12. Take advantage of in-house resources and expertise in establishing financial reporting policies, internal controls, and business practices, as well as in review of financial statement and footnote presentation. 13. Develop or acquire an integrated financial management system to provide timely and accurate recording of financial data for financial reporting and management decision making. In response to our audit findings, SEC plans to increase its financial reporting staff this fiscal year, formalize its policies and procedures, and solicit advice from corporate financial reporting experts within SEC. SEC senior management has reviewed and endorsed certain initial policies applied in the first year of financial reporting, and has modified or recommended others for further review. In addition, SEC plans to establish a formal audit committee to provide for regular review by key management officials and advise on policies and controls. SEC is undertaking a multiyear project to replace the existing case-tracking system with a system that is better designed for financial reporting purposes. Now I would like to shift to the second material internal control weakness. As part of its enforcement responsibilities, SEC issues and administers judgments that order disgorgements and civil penalties against violators of federal securities laws. The resulting transactions for fiscal year 2004 involved collections of about $945 million, and recording and reporting of fiduciary and custodial balances on the financial statements. SEC records and tracks information on over 12,000 parties in SEC enforcement cases involving disgorgements and penalties through a case-tracking system. However, the case-tracking system is not designed for financial reporting and is not integrated with SEC's general ledger accounting system, which accumulates, tracks, and summarizes SEC's financial transactions. To compensate for limitations in the system, SEC staff compiles quarterly subsidiary ledgers using extensive and time-consuming procedures. After downloading financial information on disgorgements and penalties from the case-tracking system to a spreadsheet with thousands of cases and defendants with a magnitude of approximately 1 million data elements, SEC staff performs numerous calculations using the data in the spreadsheet to compile the disgorgement and penalty balances as of the end of each quarter. Such a process is inherently inefficient and prone to error. Further, since the source of the data included on the spreadsheet is from the case-tracking system, whose data reliability has been reported as a problem by SEC for the past three years, it is imperative that specific control procedures be put in place to provide reasonable assurance over the completeness and reliability of the data in the case-tracking system. In addition, control procedures are needed to reduce the risk of errors in the spreadsheet and ultimately the reported financial statement information. Finally, when reviewing case files we noted instances in which the supporting documentation in the files contained notations by the case managers indicating that potential activities or transactions related to the case had occurred. However, there was not adequate supporting documentation to support an entry to the case-tracking system. These instances raised questions about whether SEC's accounting and financial reporting information related to penalties and disgorgements was potentially incomplete or out-of-date. As a result of the issues I have described, we concluded that SEC did not have adequate control procedures in place to provide adequate assurance over the reliability of financial information related to this area. Thus, our auditors performed additional testing over SEC's financial statement balances related to penalties and disgorgements. GAO's Standards for Internal Control in the Federal Government requires that agencies establish controls to ensure that transactions are recorded in a complete, accurate, and timely manner. Although SEC has a draft policy that covers certain aspects of accounting for disgorgements and penalties, it is not comprehensive. For example, the policy does not define who is responsible for recording disgorgement and penalty data or the documentation that should be maintained to support the amounts recorded. Of even greater importance, the policy does not identify controls that are critical for determining the amounts to be recorded and for reviewing entries for completeness and accuracy, including the specific types of controls needed for the quarterly downloading of data and use of the spreadsheets for arriving at the accounting entries. Nor does the policy address supervisory review necessary to ensure consistent application of the procedures. A lack of comprehensive policies and controls over disgorgement and penalty transactions increases the risk that the transactions will not be completely, accurately, and consistently recorded and reported. In our audit of the estimated net amounts receivable from disgorgements and penalties, we did find errors in the recorded balances for the related gross accounts receivable and allowance for loss. Specifically, we noted errors where SEC had made entries to the accounting system that conflicted with information in the files. We also noted inconsistent treatment in recording judgments, interest amounts, terminated debts, and collection fees imposed by Treasury. We believe that these errors and inconsistencies occurred because of the control weaknesses we found. While, in most cases, these errors and inconsistencies were offsetting, such errors raise concern about the reliability of the $1.673 billion gross accounts receivable for disgorgements and penalties and the related allowance amounts of $1.394 billion reported in footnote 3 to SEC's financial statements. To address internal control weaknesses over disgorgements and penalties, we recommended that SEC 1. implement a system that is integrated with the accounting system or that provides the necessary input to the accounting system to facilitate timely, accurate, and efficient recording and reporting of disgorgement and penalty activity; 2. review the disgorgement and penalty judgments and subsequent activities documented in each case file by defendant to determine whether individual amounts recorded in the case-tracking system are accurate and reliable; 3. implement controls so that the ongoing activity involving disgorgements and penalties is properly, accurately, and timely recorded in the case-tracking system and the accounting system; 4. strengthen coordination, communication, and data flow among staff of SEC's Division of Enforcement and Office of Financial Management who share responsibility for recording and maintaining disgorgement and penalty data; and 5. develop and implement written policies covering the procedures, documentation, systems, and responsible personnel involved in recording and reporting disgorgement and penalty financial information. The written procedures should also address quality control and managerial review responsibilities and documentation of such a review. SEC agrees with our findings in this area and has begun efforts to strengthen internal controls. For example, SEC plans to complete a comprehensive review of files and data and review and strengthen policies and procedures for recording and updating amounts receivable for disgorgements and penalties. SEC anticipates that consistent application of strengthened internal controls and potentially some limited redesign of the existing management information system will be adequate to resolve the material weaknesses in fiscal year 2006. However, SEC acknowledges that a replacement of the current case-tracking system and a more thorough reexamination of the relevant business process would provide more effective assurance. Accordingly, in fiscal year 2006, SEC plans to complete a requirements analysis as the first phase of the multiyear project to replace the case-tracking system. Now I would like to shift to the discussion of the material internal control weakness pertaining to information security. Information system controls are essential for any organization that depends on computer systems and networks to carry out its mission or business and maintain key records and accountability information. Without proper safeguards, organizations run the risk that intruders may obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. SEC--which relies extensively on computer systems to support its operations--needs a comprehensive program of general controls to monitor and manage information security risks. Our review of SEC's information system general controls found that the commission did not effectively implement controls to protect the integrity, confidentiality, and availability of its financial and sensitive information. In March 2005, we reported weaknesses in electronic access controls, including controls designed to prevent, limit, and detect access to SEC's critical financial and sensitive systems. We found these weaknesses in user accounts and passwords, access rights and permissions, network security, and the audit and monitoring of security-related events. These weaknesses were heightened because SEC had not fully established a comprehensive monitoring program. We identified the following electronic access control weaknesses: SEC operating personnel did not consistently set password parameters--such as a minimum of six digits including both numbers and letters--to ensure a level of difficulty for an intruder trying to guess a password, and users sometimes did create easy-to-guess passwords. All 4,100 network users were inadvertently granted access that would allow them to circumvent the audit controls in the commission's main financial systems. Key network devices were not configured to prevent unauthorized individuals from gaining access to detailed network system policy settings and lists of users or user groups. SEC did not have a comprehensive monitoring program for routine review, audit, or monitoring of system user-access activities. For example, audit logging, which is typically used to track certain types of activity on a system, was not consistently implemented on network services and there was no real-time capability to target unusual or suspicious network events for review. In addition, SEC had not fully implemented a network intrusion-detection system. The commission did, however, have several initiatives under way to monitor user access activity. We also identified weaknesses in other information system controls-- including physical security, segregation of computer functions, application change controls, and service continuity. For instance: At the time of our review, 300 employees and contractors had physical access to SEC's data center. Persons with access included an undetermined number of application programmers, budget analysts, administrative staff, and customer support staff. Typically, persons serving these functions do not need access to the data center for their work. SEC had not sufficiently separated incompatible system administration and security administration functions on its key financial applications. Although a change control board at SEC was responsible for authorizing all application changes, none of the software modifications reviewed had documentation to show that such authorizations had been obtained. SEC had not implemented a service-continuity plan to ensure that the system and its major applications could continue to function after a major disruption, such as a loss of electricity. As a result of these weaknesses, sensitive SEC data--including payroll and financial transactions, personnel data, regulatory, and other mission- critical information--were at increased risk of unauthorized disclosure, modification, or loss. A key reason for weaknesses in SEC's information system general controls is that the commission has not fully developed and implemented a comprehensive agency information security program. The Federal Information Security Management Act (FISMA) requires each agency to develop, document, and implement an agencywide information security program to provide security for the information and systems that support the operations and assets of the agency. Agencies are required to use a risk- based approach to information security management. FISMA also requires an agency's information security program to include these key elements: periodic assessments of risk and the magnitude of harm that could result from unauthorized access, use, or disruption of information systems; policies and procedures that are based on risk assessments and risk reductions to ensure that information security is addressed throughout the life cycle of each system and that applicable requirements are met; security awareness training to inform all users of information security risks and users' responsibilities in complying with information security policies and procedures; and periodic tests and evaluations of the effectiveness of information security policies, procedures, and practices related to management, operational, and technical controls of every major system. Although SEC has taken some actions to improve security management-- including establishing a central security management group and appointing a senior information security officer to manage the information security program--further efforts are needed. For example, we found that the commission had not clearly defined roles and responsibilities for the central security group it had established. In addition, SEC had not fully (1) assessed its risks, (2) established or implemented security policies, (3) promoted security awareness, or (4) tested and evaluated the effectiveness of its information system controls. SEC and its Office of Inspector General (OIG) have recognized weaknesses in the commission's information security program. Since 2002, SEC has reported information security as a material weakness in its FMFIA reports. In its fiscal year 2004 FISMA report, SEC's OIG reported that the commission had several weaknesses in information security and was not substantially in compliance with information security requirements contained in FISMA. Without proper safeguards for its information systems, SEC is at risk from malicious intruders entering inadequately protected systems. It is at risk that intruders will use this access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. We believe the primary cause of these weaknesses has been the lack of a fully developed and implemented entitywide information security program. In our March 2005 report, we recommended 6 actions to fully develop and implement an effective security program. In addition, we made 52 recommendations to correct specific information security weaknesses related to electronic access control and other information system controls. Due to their sensitivity, these recommendations were included in a separate report designated for "Limited Official Use Only." A fully developed, documented, and implemented agency information security program would provide the commission with a solid foundation for resolving its information security problems and for ongoing management of its information security risks. We believe that if our recommendations and SEC's planned actions are carried out effectively, SEC can make considerable progress toward its declared vision as "the standard against which federal agencies are measured" and will be in a stronger position to manage its daily operations and accomplish its mission. This testimony is based on our recent audit of SEC's fiscal year 2004 financial statements, which was conducted in accordance with U.S. generally accepted government auditing standards. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or the other members of the Subcommittee may have. For further information on this testimony, please contact Jeanette Franzel at (202) 512-9471 or at [email protected]. and Greg Wilshusen at (202) 512-6244 or at [email protected]. Individuals making key contributions to this testimony include Cheryl Clark, Kim McGatlin, Charles Vrabel, Estelle Tsay, Kristi Dorsey, and Maxine Hattery. 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.

Pursuant to the Accountability for Tax Dollars Act of 2002, the Securities and Exchange Commission (SEC) is required to prepare and submit to Congress and the Office of Management and Budget audited financial statements. GAO agreed, under its audit authority, to perform the initial audit of SEC's financial statements. GAO's audit was done to determine whether, in all material respects, (1) SEC's fiscal year 2004 financial statements were reliable, (2) SEC's management maintained effective internal control over financial reporting and compliance with laws and regulations, and (3) SEC's management complied with applicable laws and regulations. Established in 1934 to enforce the securities laws and protect investors, the SEC plays an important role in maintaining the integrity of the U.S. securities markets. GAO was asked by the Chairman of the Senate Subcommittee on Federal Financial Management, Government Information, and International Security, Committee on Homeland Security and Governmental Affairs, to present the results of its May 26, 2005, report, Financial Audit: Securities and Exchange Commission's Financial Statements for Fiscal Year 2004 (GAO-05-244). The SEC's first ever financial audit was performed by GAO for fiscal year 2004. In reporting on the results of the audit, GAO issued an unqualified, or clean, opinion on the financial statements of the SEC. This means that SEC's financial statements presented fairly, in all material respects, its financial position as of September 30, 2004, and the results of operations for the year then ended. However, because of material internal control weaknesses in the areas of preparing financial statements and related disclosures, recording and reporting disgorgements and penalties, and information security, GAO issued an adverse opinion on internal controls, concluding that SEC did not maintain effective internal control over financial reporting as of September 30, 2004. However, SEC did maintain, in all material respects, effective internal control over compliance with laws and regulations material in relation to the financial statements as of September 30, 2004. In addition, GAO did not find reportable instances of noncompliance with laws and regulations it tested. It is important to remember that GAO's opinions on SEC's financial statements and internal controls reflect a point in time. SEC prepared its first complete set of financial statements for fiscal year 2004 and made significant progress during the year in building a financial reporting structure for preparing financial statements for audit. However, GAO identified inadequate controls over SEC's financial statement preparation process including a lack of sufficient documented policies and procedures, support, and quality assurance reviews, increasing the risk that SEC management will not have reasonable assurance that the balances presented in the financial statements and related disclosures are supported by SEC's underlying accounting records. In addition, GAO identified inadequate controls over SEC's disgorgements and civil penalties activities, increasing the risk that such activities will not be completely, accurately, and properly recorded and reported for management's use in its decision making. GAO also found that SEC has not effectively implemented information system controls to protect the integrity, confidentiality, and availability of its financial and sensitive data, increasing the risk of unauthorized disclosure, modification, or loss of the data, possibly without detection. The risks created by these information security weaknesses are compounded because the SEC does not have a comprehensive monitoring program to identify unusual or suspicious access activities. SEC agreed with our findings and is currently working to improve controls in all these areas.

Multiple executive-branch agencies are responsible for different phases of the federal government's personnel security clearance process. For example, in 2008, Executive Order 13467 designated the DNI as the Security Executive Agent. As such, the DNI is responsible for developing policies and procedures to help ensure the effective, efficient, and timely completion of background investigations and adjudications relating to determinations of eligibility for access to classified information and eligibility to hold a sensitive position. In turn, executive branch agencies determine which of their positions--military, civilian, or private-industry contractors--require access to classified information and, therefore, which people must apply for and undergo a personnel security clearance investigation. Investigators--often contractors--from Federal Investigative Services within the Office of Personnel and Management (OPM) conduct these investigations for most of the federal government using federal investigative standards and OPM internal guidance as criteria for collecting background information on applicants. OPM provides the resulting investigative reports to the requesting agencies for their internal adjudicators, who use the information along with the federal adjudicative guidelines to determine whether an applicant is eligible for a personnel security clearance. DOD is OPM's largest customer, and its Under Secretary of Defense for Intelligence (USD(I)) is responsible for developing, coordinating, and overseeing the implementation of DOD policy, programs, and guidance for personnel, physical, industrial, information, operations, chemical/biological, and DOD Special Access Program security. Additionally, the Defense Security Service, under the authority, direction, and control of the USD(I), manages and administers the DOD portion of the National Industrial Security Program for the DOD components and other federal services by agreement, as well as providing security education and training, among other things. The Intelligence Reform and Terrorism Prevention Act of 2004 prompted government-wide suitability and security clearance reform. required, among other matters, an annual report to Congress--in February of each year from 2006 through 2011--about progress and key measurements on the timeliness of granting security clearances. It specifically required those reports to include the periods of time required for conducting investigations and adjudicating or granting clearances. However, the Intelligence Reform and Terrorism Prevention Act requirement for the executive branch to annually report on its timeliness expired in 2011. More recently, the Intelligence Authorization Act of 2010 established a new requirement that the President annually report to Congress the total amount of time required to process certain security clearance determinations for the previous fiscal year for each element of the Intelligence Community. The Intelligence Authorization Act of 2010 additionally requires that those annual reports include the total number of active security clearances throughout the United States government, including both government employees and contractors. Unlike the Intelligence Reform and Terrorism Prevention Act of 2004 reporting requirement, the requirement to submit these annual reports does not expire. Pub. L. No. 108-458 (2004) (relevant sections codified at 50 U.S.C. SS 3341). In 2007, DOD and the Office of the Director of National Intelligence (ODNI) formed the Joint Security Clearance Process Reform Team, known as the Joint Reform Team, to improve the security clearance process government-wide. In a 2008 memorandum, the President called for a reform of the security clearance and suitability determination processes and subsequently issued Executive Order 13467, which in addition to designating the DNI as the Security Executive Agent, also designated the Director of OPM as the Suitability Executive Agent. Specifically, the Director of OPM, as Suitability Executive Agent, is responsible for developing policies and procedures to help ensure the effective, efficient, and timely completion of investigations and adjudications relating to determinations of suitability, to include consideration of an individual's character or conduct. Further, the executive order established a Suitability and Security Clearance Performance Accountability Council (Performance Accountability Council) to oversee agency progress in implementing the reform vision. Under the executive order, this council is accountable to the President for driving implementation of the reform effort, including ensuring the alignment of security and suitability processes, holding agencies accountable for implementation, and establishing goals and metrics for progress. The order also appointed the Deputy Director for Management at the Office of Management and Budget as the Chair of the council. To help ensure the trustworthiness and reliability of personnel in positions with access to classified information, executive branch agencies rely on a personnel security clearance process that includes multiple phases: requirements determination, application, investigation, adjudication, appeals (if applicable, where a clearance has been denied), and reinvestigation (where applicable, for renewal or upgrade of an existing clearance). Figure 1 illustrates the steps in the personnel security clearance process, which is representative of the general process followed by most executive branch agencies and includes procedures for appeals and renewals. While different departments and agencies may have slightly different personnel security clearance processes, the phases that follow are illustrative of a typical process. In the first step of the personnel security clearance process, executive branch officials determine the requirements of a federal civilian position, including assessing the risk and sensitivity level associated with that position, to determine whether it requires access to classified information and, if required, the level of access. Security clearances are generally categorized into three levels: top secret, secret, and confidential. The level of classification denotes the degree of protection required for information and the amount of damage that unauthorized disclosure could reasonably be expected to cause to national defense. A sound requirements determination process is important because requests for clearances for positions that do not need a clearance or need a lower level of clearance increase investigative workloads and resultant costs. In addition to cost implications, limiting the access to classified information and reducing the associated risks to national security underscore the need for executive branch agencies to have a sound process to determine which positions require a security clearance. In 2012, we reported that the DNI, as the Security Executive Agent, had not provided agencies with clearly defined policy and procedures to consistently determine if a position requires a security clearance, or established guidance to require agencies to review and revise or validate existing federal civilian position designations. We recommended that the DNI issue policy and guidance for the determination, review, and validation of requirements, and ODNI concurred with those recommendations, stating that it recognized the need to issue or clarify policy. We routinely monitor the status of agency actions to address our prior report recommendations. As part of that process, we found that a January 25, 2013 presidential memo authorized the DNI and OPM to jointly issue revisions to part 732 of Title 5 of the Code of Federal Regulations, which provides requirements and procedures for the designation of national security positions. Subsequently, ODNI and OPM drafted the proposed regulation; published it in the Federal Register on May 28, 2013; and the comment period closed. We reported on October 31, 2013 that ODNI and OPM officials stated that they would jointly review and address comments and prepare the final rule for approval from the Office of Management and Budget. Once an applicant is selected for a position that requires a personnel security clearance, a security clearance must be obtained in order for an individual to gain access to classified information. To determine whether an investigation would be required, the agency requesting a security clearance investigation conducts a check of existing personnel security databases to determine whether there is an existing security clearance investigation underway or whether the individual has already been favorably adjudicated for a clearance in accordance with current standards. During the application submission phase, a security officer from an executive branch agency (1) requests an investigation of an individual requiring a clearance; (2) forwards a personnel security questionnaire (Standard Form 86) using OPM's electronic Questionnaires for Investigations Processing (e-QIP) system or a paper copy of the Standard Form 86 to the individual to complete; (3) reviews the completed questionnaire; and (4) sends the questionnaire and supporting documentation, such as fingerprints and signed waivers, to OPM or its investigation service provider. During the investigation phase, investigators--often contractors--from OPM's Federal Investigative Services use federal investigative standards and OPM's internal guidance to conduct and document the investigation of the applicant. The scope of information gathered in an investigation depends on the needs of the client agency and the personnel security clearance requirements of an applicant's position, as well as whether the investigation is for an initial clearance or a reinvestigation to renew a clearance. For example, in an investigation for a top secret clearance, investigators gather additional information through more time-consuming efforts, such as traveling to conduct in-person interviews to corroborate information about an applicant's employment and education. However, many background investigation types have similar components. For instance, for all investigations, information that applicants provide on electronic applications is checked against numerous databases. Both secret and top secret investigations contain credit and criminal history checks, while top secret investigations also contain citizenship, public record, and spouse checks as well as reference interviews and an Enhanced Subject Interview to gain insight into an applicant's character. Table 1 highlights the investigative components generally associated with the secret and top secret clearance levels. After OPM, or the designated provider, completes the background investigation, the resulting investigative report is provided to the requesting agencies for their internal adjudicators. In December 2012, ODNI and OPM jointly issued a revised version of the federal investigative standards for the conduct of background investigations for individuals who work for or on behalf of the federal government. According to October 31, 2013, testimony by an ODNI official, the revised standards will be implemented through a phased approach beginning in 2014 and continuing through 2017. During the adjudication phase, adjudicators from the hiring agency use the information from the investigative report along with federal adjudicative guidelines to determine whether an applicant is eligible for a security clearance. To make clearance eligibility decisions, the adjudication guidelines specify that adjudicators consider 13 specific areas that elicit information about (1) conduct that could raise security concerns and (2) factors that could allay those security concerns and permit granting a clearance. If a clearance is denied or revoked, appeals of the adjudication decision are possible. We have work under way to review the process for security clearance revocations. We expect to issue a report on this process in the spring of 2014. Once an individual has obtained a personnel security clearance and as long as he or she remains in a position that requires access to classified national security information, that individual is reinvestigated periodically at intervals that depend on the level of security clearance. For example, top secret clearance holders are reinvestigated every 5 years, and secret clearance holders are reinvestigated every 10 years. Some of the information gathered during a reinvestigation would focus specifically on the period of time since the last approved clearance, such as a check of local law enforcement agencies where an individual lived and worked since the last investigation. Further, the Joint Reform Team began an effort to review the possibility of continuing evaluations, which would ascertain on a more frequent basis whether an eligible employee with access to classified information continues to meet the requirements for access. Specifically, the team proposed to move from periodic review to that of continuous evaluation, meaning annually for top secret or similar positions and at least once every 5 years for secret or similar positions, as a means to reveal security-relevant information earlier than the previous method, and provide increased scrutiny of populations that could potentially represent risk to the government because they already have access to classified information. The revised federal investigative standards state that the top secret level of security clearances may be subject to continuous evaluation. Executive branch agencies do not consistently assess quality throughout the personnel security clearance process, in part because they have not fully developed and implemented metrics to measure quality in key aspects of the process. We have emphasized--since the late 1990s--the need to build and monitor quality throughout the personnel security clearance process to promote oversight and positive outcomes such as maximizing the likelihood that individuals who are security risks will be scrutinized more closely. For example, in 2008 two of the key factors we identified to consider in efforts to reform the security clearance process were building quality into every step of the clearance processes and having a valid set of metrics for evaluating efficiency and effectiveness.We have begun additional work to review the quality of investigations. GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: Jan. 2005). Every 2 years at the start of a new Congress, GAO issues a report that identifies government operations that are high risk because of their vulnerabilities to fraud, waste, abuse, and mismanagement, or are most in need of transformation to address economy, efficiency, or effectiveness. percent of all federal clearance investigations, including those for DOD; and (2) the granting of some clearances by DOD adjudicators even though some required data were missing from the investigative reports used to make such determinations. For example, in May 2009, we reported that, with respect to DOD initial top secret clearances adjudicated in July 2008, documentation was incomplete for most OPM investigative reports. We independently estimated that 87 percent of about 3,500 investigative reports that DOD adjudicators used to make clearance decision were missing at least one type of documentation required by federal investigative standards. The type of documentation most often missing from investigative reports was verification of all of the applicant's employment followed by information from the required number of social references for the applicant and investigative reports did not contain a required personal subject interview. Officials within various executive branch agencies have noted to us that the information gathered during the interview and investigative portion of the process is essential for making adjudicative decisions. Department of Defense, DOD Personnel Security Program Regulation 5200.2-R (January 1987, incorporating changes Feb. 23, 1996). ability to explain the extent to which or the reasons why some files are incomplete. In November 2010, we reported that agency officials who utilize OPM as their investigative service provider cited challenges related to deficient investigative reports as a factor that slows agencies' abilities to make adjudicative decisions. The quality and completeness of investigative reports directly affects adjudicator workloads, including whether additional steps are required before adjudications can be made, as well as agency costs. For example, some agency officials noted that OPM investigative reports do not include complete copies of associated police reports and criminal record checks. Several agency officials stated that in order to avoid further costs or delays that would result from working with OPM, they often choose to perform additional steps internally to obtain missing information. According to ODNI and OPM officials, OPM investigators provide a summary of police and criminal reports and assert that there is no policy requiring inclusion of copies of the original records. However, ODNI officials also stated that adjudicators may want or need entire records, as critical elements may be left out. For example, according to Defense Office of Hearings and Appeals officials, in one case, an investigator's summary of a police report incorrectly identified the subject as a thief when the subject was actually the victim. As a result of the incompleteness of OPM's investigative reports on DOD personnel and the incompleteness of DOD's adjudicative files that we first identified in our 2009 report, we made several recommendations to OPM and DOD. We recommended that OPM measure the frequency with which its investigative reports meet federal investigative standards, so that the executive branch can identify the factors leading to incomplete reports and take corrective actions. OPM did not agree or disagree with our recommendation. In a subsequent February 2011 report, we noted that the Office of Management and Budget, ODNI, DOD, and OPM leaders had provided congressional members and executive branch agencies with metrics to assess the quality of investigative reports and adjudicative files and other aspects of the clearance process. For example, the Rapid Assessment of Incomplete Security Evaluations was one tool the executive branch agencies planned to use for measuring quality, or completeness, of OPM's background investigations. However, in June 2012 an OPM official said that OPM chose not to use this tool and opted to develop another tool. We currently have work under way to review any actions OPM has taken to develop and implement metrics for measuring the completeness of OPM's investigative reports. However, ODNI officials confirmed in January 2014 that OPM did not have such metrics in place. According to OPM officials, OPM also continues to assess the quality of investigations based on voluntary reporting from customer agencies. Specifically, OPM tracks investigations that are (1) returned for rework from the requesting agency, (2) identified as deficient using a web-based customer satisfaction survey, or (3) identified as deficient through adjudicator calls to OPM's quality hotline. In our past work, we have noted that the number of investigations returned for rework is not by itself a valid indicator of the quality of investigative work because DOD adjudication officials told us that they have been reluctant to return incomplete investigations in anticipation of delays that would affect timeliness. Further, relying on agencies to voluntarily provide information on investigation quality may not reflect the quality of OPM's total investigation workload. We also recommended in 2009 that DOD measure the frequency with which adjudicative files meet requirements, so that the executive branch can identify the factors leading to incomplete files and include the results of such measurement in annual reports to Congress on clearances.November 2009, DOD subsequently issued a memorandum that established a tool to measure the frequency with which adjudicative files meet the requirements of DOD regulation. Specifically, the DOD memorandum stated that DOD would use a tool called the Review of Adjudication Documentation Accuracy and Rationales, or RADAR, to gather specific information about adjudication processes at the adjudication facilities and assess the quality of adjudicative In documentation. In following up on our 2009 recommendations, as of 2012, a DOD official stated that RADAR had been used in fiscal year 2010 to evaluate some adjudications, but was not used in fiscal year 2011 because of funding shortfalls. DOD restarted the use of RADAR in fiscal year 2012. Several efforts are underway to review the security clearance process, and those efforts, combined with sustained leadership attention, could help facilitate progress in assessing and improving the quality of the security clearance process. After the September 16, 2013 shooting at the Washington Navy Yard, the President directed the Office of Management and Budget, in coordination with ODNI and OPM, to conduct a government-wide review into the oversight, nature, and implementation of security and suitability standards for federal employees and contractors. In addition, in September 2013, the Secretary of Defense directed an independent review to identify and recommend actions that address gaps or deficiencies in DOD programs, policies, and procedures regarding security at DOD installations and the granting and renewal of security clearances for DOD employees and contractor personnel. The primary objective of this review is to determine whether there are weaknesses in DOD programs, policies, or procedures regarding physical security at DOD installations and the security clearance and reinvestigation process that can be strengthened to prevent a similar tragedy. We initially placed DOD's personnel security clearance program on our high-risk list in 2005 because of delays in completing clearances. In February 2011, we removed DOD's personnel security clearance program from our high-risk list largely because of the department's demonstrated progress in expediting the amount of time processing clearances. We also noted DOD's efforts to develop and implement tools to evaluate the quality of investigations and adjudications. Even with the significant progress leading to removal of DOD's program from our high-risk list, the Comptroller General noted in June 2012 that sustained leadership would be necessary to continue to implement, monitor, and update outcome-focused performance measures.initial development of some tools and metrics to monitor and track quality not only for DOD but government-wide were positive steps; however, full implementation of these tools and measures government-wide has not yet been realized. While progress in DOD's personnel security clearance program resulted in the removal of this area from our high-risk list, significant government-wide challenges remain in ensuring that personnel security clearance investigations and adjudications are high-quality. However, if the oversight and leadership that helped address the timeliness issues focuses now on the current problems associated with quality, we believe that progress in helping executive branch agencies to assess the quality of the security clearance process could be made. Although executive branch agency officials have stated that reciprocity is regularly granted as it is an opportunity to save time as well as reduce costs and investigative workloads, we reported in 2010 that agencies do not consistently and comprehensively track the extent to which reciprocity is granted government-wide. In addition to establishing objectives for timeliness, the Intelligence Reform and Terrorism Prevention Act of 2004 established requirements for reciprocity, which is an agency's acceptance of a background investigation or clearance determination completed by any authorized investigative or adjudicative executive branch agency, subject to certain exceptions such as completing additional requirements like polygraph testing. Further, in October 2008, ODNI issued guidance on the reciprocity of personnel security clearances. The guidance requires, except in limited circumstances, that all Intelligence Community elements "accept all in-scope security clearance or access determinations." Additionally, Office of Management and Budget guidance requires agencies to honor a clearance when (1) the prior clearance was not granted on an interim or temporary basis; (2) the prior clearance investigation is current and in-scope; (3) there is no new adverse information already in the possession of the gaining agency; and (4) there are no conditions, deviations, waivers, or unsatisfied additional requirements (such as polygraphs) if the individual is being considered for access to highly sensitive programs. While the Performance Accountability Council has identified reciprocity as a government-wide strategic goal, we have found that agencies do not consistently and comprehensively track when reciprocity is granted, and lack a standard metric for tracking reciprocity. Further, while OPM and the Performance Accountability Council have developed quality metrics for reciprocity, the metrics do not measure the extent to which reciprocity is being granted. For example, OPM created a metric in early 2009 to track reciprocity, but this metric only measures the number of investigations requested from OPM that are rejected based on the existence of a previous investigation and does not track the number of cases in which an existing security clearance was or was not successfully honored by the agency. Without comprehensive, standardized metrics to track reciprocity and consistent documentation of the findings, decision makers will not have a complete picture of the extent to which reciprocity is granted or the challenges that agencies face when attempting to honor previously granted security clearances. In 2010, we reported that executive branch officials stated that they routinely honor other agencies' security clearances, and personnel security clearance information is shared between OPM, DOD, and, to some extent, Intelligence Community databases.that some agencies find it necessary to take additional steps to address limitations with available information on prior investigations, such as insufficient information in the databases or variances in the scope of investigations, before granting reciprocity. For instance, OPM has taken However, we found steps to ensure that certain clearance data necessary for reciprocity are available to adjudicators, such as holding interagency meetings to determine new data fields to include in shared data. However, we also found that the shared information available to adjudicators contains summary-level detail that may not be complete. As a result, agencies may take steps to obtain additional information, which creates challenges to immediately granting reciprocity. Further, we reported in 2010 that according to agency officials since there is no government-wide standardized training and certification process for investigators and adjudicators, a subject's prior clearance investigation and adjudication may not meet the standards of the inquiring agency. Although OPM has developed some training, security clearance investigators and adjudicators are not required to complete a certain type or number of classes. As a result, the extent to which investigators and adjudicators receive training varies by agency. Consequently, as we have previously reported, agencies are reluctant to be accountable for investigations or adjudications conducted by other agencies or organizations. To achieve fuller reciprocity, clearance-granting agencies seek to have confidence in the quality of prior investigations and adjudications. Because of these issues identified by agency officials as hindrances to reciprocity and because the extent of reciprocity was unknown, we recommended in 2010 that the Deputy Director of Management, Office of Management and Budget, in the capacity as Chair of the Performance Accountability Council, should develop comprehensive metrics to track reciprocity and then report the findings from the expanded tracking to Congress. Although the Office of Management and Budget agreed with our recommendation, a 2011 ODNI report found that Intelligence Community agencies experienced difficulty reporting on reciprocity. The agencies are required to report on a quarterly basis the number of security clearance determinations granted based on a prior existing clearance as well as the number not granted when a clearance existed. The numbers of reciprocal determinations made and denied are categorized by the individual's originating and receiving organizational type: (1) government to government, (2) government to contractor, (3) contractor to government, and (4) contractor to contractor. The ODNI report stated that data fields necessary to collect the information described above do not currently reside in any of the data sets available, and the process was completed in an agency-specific, semimanual method. The Deputy Assistant Director for Special Security of ODNI noted in testimony in June 2012 that measuring reciprocity is difficult, and despite an abundance of anecdotes, real data are hard to come by. To address this problem, in 2013 ODNI planned to develop a web-based form for individuals to use to submit their experience with reciprocity issues to ODNI. According to ODNI, this would allow it to collect empirical data, perform systemic trend analysis, and assist agencies with achieving workable solutions. However, in January 2014, ODNI officials told us that required resources and information technology were not available to support the development and implementation of a web-based form. Instead, ODNI is conducting a Reciprocity Research Study that will involve, among other things, agencies identifying their ability to collect reciprocity metrics. This study would assist ODNI in developing reciprocity performance measures and a new policy for reciprocity. ODNI would also use the study to determine if a web-based form would be of value. In conclusion, to avoid the risk of damaging, unauthorized disclosures of classified information, oversight of the reform efforts to measure and improve the quality of the security clearance process is imperative. The progress that was made with respect to reducing the amount of time required for processing clearances would not have been possible without committed and sustained congressional oversight and the leadership of the Performance Accountability Council. Further actions are needed now to fully develop and implement metrics to oversee quality at every step in the process. Further, ensuring the quality of personnel security clearance investigations and adjudications is important government-wide, not just for DOD. While reciprocity is required by law and, if implemented correctly, could enhance efficiency and present cost savings opportunities, much is unknown about the extent to which previously granted security clearance investigations and adjudications are honored government-wide. Therefore, we recommended that metrics are needed to track reciprocity, which have yet to be fully developed and implemented. Assurances that all clearances are of a high quality may further encourage reciprocity of investigation and adjudications. We will continue to monitor the outcome of the agency actions discussed above to address our outstanding recommendations. Chairman Issa, Ranking Member Cummings and Members of the Committee, this concludes my statement for the record. For further information on this testimony, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, who may be reached at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony include Margaret Best (Assistant Director), Lori Atkinson, Kevin Copping, Elizabeth Hartjes, Jeffrey Heit, Suzanne Perkins, Amie Steele, Erik Wilkins-McKee, and Michael Willems. Personnel Security Clearances: Actions Needed to Help Ensure Correct Designations of National Security Positions. GAO-14-139T. Washington, D.C.: November 20, 2013. Personnel Security Clearances: Opportunities Exist to Improve Quality Throughout the Process. GAO-14-186T. Washington, D.C.: November 13, 2013. Personnel Security Clearances: Full Development and Implementation of Metrics Needed to Measure Quality of Process. GAO-14-157T. Washington, D.C.: October 31, 2013. Personnel Security Clearances: Further Actions Needed to Improve the Process and Realize Efficiencies. GAO-13-728T. Washington, D.C.: June 20, 2013. Managing for Results: Agencies Should More Fully Develop Priority Goals under the GPRA Modernization Act. GAO-13-174. Washington, D.C.: April 19, 2013. Security Clearances: Agencies Need Clearly Defined Policy for Determining Civilian Position Requirements. GAO-12-800. Washington, D.C.: July 12, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. Background Investigations: Office of Personnel Management Needs to Improve Transparency of Its Pricing and Seek Cost Savings. GAO-12-197. Washington, D.C.: February 28, 2012. GAO's 2011 High-Risk Series: An Update. GAO-11-394T. Washington, D.C.: February 17, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February, 2011. Personnel Security Clearances: Overall Progress Has Been Made to Reform the Governmentwide Security Clearance Process. GAO-11-232T. Washington, D.C.: December 1, 2010. Personnel Security Clearances: Progress Has Been Made to Improve Timeliness but Continued Oversight Is Needed to Sustain Momentum. GAO-11-65. Washington, D.C.: November 19, 2010. DOD Personnel Clearances: Preliminary Observations on DOD's Progress on Addressing Timeliness and Quality Issues. GAO-11-185T. Washington, D.C.: November 16, 2010. Personnel Security Clearances: An Outcome-Focused Strategy and Comprehensive Reporting of Timeliness and Quality Would Provide Greater Visibility over the Clearance Process. GAO-10-117T. Washington, D.C.: October 1, 2009. Personnel Security Clearances: Progress Has Been Made to Reduce Delays but Further Actions Are Needed to Enhance Quality and Sustain Reform Efforts. GAO-09-684T. Washington, D.C.: September 15, 2009. Personnel Security Clearances: An Outcome-Focused Strategy Is Needed to Guide Implementation of the Reformed Clearance Process. GAO-09-488. Washington, D.C.: May 19, 2009. DOD Personnel Clearances: Comprehensive Timeliness Reporting, Complete Clearance Documentation, and Quality Measures Are Needed to Further Improve the Clearance Process. GAO-09-400. Washington, D.C.: May 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Personnel Security Clearances: Preliminary Observations on Joint Reform Efforts to Improve the Governmentwide Clearance Eligibility Process. GAO-08-1050T. Washington, D.C.: July 30, 2008. Personnel Clearances: Key Factors for Reforming the Security Clearance Process. GAO-08-776T. Washington, D.C.: May 22, 2008. Employee Security: Implementation of Identification Cards and DOD's Personnel Security Clearance Program Need Improvement. GAO-08-551T. Washington, D.C.: April 9, 2008. Personnel Clearances: Key Factors to Consider in Efforts to Reform Security Clearance Processes. GAO-08-352T. Washington, D.C.: February 27, 2008. DOD Personnel Clearances: DOD Faces Multiple Challenges in Its Efforts to Improve Clearance Processes for Industry Personnel. GAO-08-470T. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Improved Annual Reporting Would Enable More Informed Congressional Oversight. GAO-08-350. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Delays and Inadequate Documentation Found for Industry Personnel. GAO-07-842T. Washington, D.C.: May 17, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. DOD Personnel Clearances: Additional OMB Actions Are Needed to Improve the Security Clearance Process. GAO-06-1070. Washington, D.C.: September 28, 2006. DOD Personnel Clearances: New Concerns Slow Processing of Clearances for Industry Personnel. GAO-06-748T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Funding Challenges and Other Impediments Slow Clearances for Industry Personnel. GAO-06-747T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD's Program, But Concerns Remain. GAO-06-233T. Washington, D.C.: November 9, 2005. DOD Personnel Clearances: Some Progress Has Been Made but Hurdles Remain to Overcome the Challenges That Led to GAO's High-Risk Designation. GAO-05-842T. Washington, D.C.: June 28, 2005. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. DOD Personnel Clearances: Preliminary Observations Related to Backlogs and Delays in Determining Security Clearance Eligibility for Industry Personnel. GAO-04-202T. Washington, D.C.: May 6, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Recently the DNI reported that more than 5.1 million federal government and contractor employees held or were eligible to hold a security clearance. GAO has reported that the federal government spent over $1 billion to conduct background investigations (in support of security clearances and suitability determinations for federal employment) in fiscal year 2011. A high quality process is essential to minimize the risks of unauthorized disclosures of classified information and to help ensure that information about individuals with criminal activity or other questionable behavior is identified and assessed as part of the process for granting or retaining clearances. This statement addresses (1) a general overview of the security clearance process; (2) what is known about the quality of investigations and adjudications, which are the determinations made by executive branch agency officials to grant or reject clearance requests based on investigations; and (3) the extent of reciprocity, which is the decision of agencies to honor clearances previously granted by other agencies. This statement is based on GAO work issued from 2008 to 2013 on DOD's personnel security clearance program and government-wide suitability and security clearance reform efforts. As part of that work, GAO (1) reviewed relevant statutes, federal guidance, and processes, (2) examined agency data on the timeliness and quality of investigations and adjudications, (3) assessed reform efforts, and (4) reviewed a sample of case files for DOD personnel. Several agencies have key roles and responsibilities in the multi-phased personnel security clearance process, including the Director of National Intelligence (DNI) who, as the Security Executive Agent, is responsible for developing policies and procedures related to security clearance investigations and adjudications, among other things. The Deputy Director for Management at the Office of Management and Budget chairs the Performance Accountability Council that oversees reform efforts to enhance the personnel security process. The security process includes: the determination of whether a position requires a clearance, application submission, investigation, and adjudication. Specifically, agency officials must first determine whether a federal civilian position requires access to classified information. After an individual has been selected for a position that requires a personnel security clearance and the individual submits an application for a clearance, investigators--often contractors--from the Office of Personnel Management (OPM) conduct background investigations for most executive branch agencies. Adjudicators from requesting agencies use the information from these investigations and federal adjudicative guidelines to determine whether an applicant is eligible for a clearance. Further, individuals are subject to reinvestigations at intervals based on the level of security clearance. Executive branch agencies do not consistently assess quality throughout the personnel security clearance process, in part because they have not fully developed and implemented metrics to measure quality in key aspects of the process. For more than a decade, GAO has emphasized the need to build and monitor quality throughout the clearance process to promote oversight and positive outcomes such as maximizing the likelihood that individuals who are security risks will be scrutinized more closely. GAO reported in 2009 that, with respect to initial top secret clearances adjudicated in July 2008 for the Department of Defense (DOD), documentation was incomplete for most of OPM's investigative reports. GAO independently estimated that 87 percent of about 3,500 investigative reports that DOD adjudicators used to make clearance eligibility decisions were missing some required documentation, such as the verification of all of the applicant's employment, the required number of social references for the applicant, and complete security forms. In May 2009, GAO recommended that OPM measure the frequency with which its investigative reports met federal investigative standards to improve the completeness--that is, quality--of investigation documentation. In January 2014, DNI officials said that metrics to measure quality of investigative reports had not been established. GAO reported in 2010 that executive branch agencies do not consistently and comprehensively track the extent to which reciprocity is occurring because no government-wide metrics exist to consistently and comprehensively track when reciprocity is granted. The acceptance of a background investigation or personnel security clearance determination completed by another authorized agency is an opportunity to save resources and executive branch agencies are required by law to grant reciprocity, subject to certain exceptions, such as completing additional requirements like polygraph testing. GAO's 2010 recommendation that the leaders of the security clearance reform effort develop metrics to track reciprocity has not been fully implemented.

Advisory groups--both FACA and non-FACA--exist throughout the executive branch of the federal government, providing input and advice to agencies in a variety of ways, such as preparing reports and developing recommendations. Agencies are not required to implement the advice or recommendations of advisory groups because they are by design advisory. While an advisory group's input or recommendations may form the basis for a federal agency's decisions or policies, other factors may play a role in determining what action an agency ultimately takes. However, both types of advisory groups serve as a mechanism for federal agencies to obtain input from internal and external stakeholders such as academics, industry associations, or other agencies. FACA was enacted in 1972 in response to concerns that federal advisory groups were proliferating without adequate review, oversight, or accountability. The General Services Administration (GSA) Committee Management Secretariat oversees each federal agency's management of FACA advisory groups, develops guidelines and regulations, and conducts an annual review of FACA advisory groups governmentwide. For example, GSA provides guidance to federal agencies sponsoring FACA advisory groups and is involved in the process to establish new and oversee the management of existing FACA advisory groups. GSA collects and makes available governmentwide FACA advisory group information that agencies--including DOT and DOE--are required to provide through a publicly accessible database each fiscal year. In addition, each agency also develops its own policies and procedures for following FACA requirements. For example, DOT and DOE each have policy manuals governing the management of their FACA advisory groups. Each agency sponsoring FACA advisory groups appoints a Committee Management Officer responsible for overseeing compliance with FACA requirements, and appoints to each FACA advisory group a Designated Federal Official (DFO) responsible for attending meetings, approving agendas, and maintaining records on costs and membership, among other duties. Decisions regarding the establishment of new FACA advisory groups and recommendations to terminate or continue existing groups are made by the head of each agency based on recommendations made by the Committee Management Officer, the DFO assigned to each group, or other agency officials. FACA sets forth requirements for FACA advisory groups' formation, their operations, and how they provide advice and recommendations to the federal government. To help avoid duplication of resources, FACA regulations require that the process to establish, renew, or reestablish discretionary FACA advisory groups--those established under agency authority or authorized by statute--must include an explanation stating why the group's functions cannot be performed by the agency, another existing group, or other means. FACA also articulates broad requirements for balance, transparency, and independence. For example, for transparency, a range of information is to be reported in the FACA database, and meeting minutes and reports are to be made available to the public. The act also requires that all FACA advisory groups have a charter containing specific information, including the group's scope and objectives, a description of duties, and the period of time necessary to carry out its purposes. Charters--and thus the FACA advisory groups-- generally expire at the end of 2 years unless renewed by the agency, the Congress, or executive order. This requirement was intended to encourage agencies to periodically reexamine their need for FACA advisory groups. As previously noted, not every advisory group that provides advice or recommendations to an agency is subject to the FACA requirements. An advisory group may not be subject to FACA for a variety of reasons, including statutory language that may exempt a group from FACA. Further, certain types of groups are also exempt from FACA, including groups not managed or controlled by the executive branch, groups with membership consisting entirely of federal government officials, or intergovernmental groups. Non-FACA advisory groups are generally less formal than those established under and subject to the requirements of FACA. Because they are not subject to FACA, non-FACA advisory groups are not required to follow FACA requirements to hold public meetings or to make meeting minutes and reports publicly available. Similarly, agencies are not required to collect or report information identifying non-FACA advisory groups, and GSA does not have any oversight responsibilities pertaining to non-FACA advisory groups. While there is no specific entity or office that oversees non-FACA advisory groups, general guidance for the management of some of these groups-- such as federal interagency groups--may be included within the agency's committee management policy manuals. For example, DOT's committee management policy covers FACA advisory groups, as well as interagency groups--one type of non-FACA advisory group--while DOE's policy is focused exclusively on FACA advisory groups. Agency-reported fiscal year 2010 costs for DOT and DOE FACA advisory As noted groups were approximately $4 and $13.6 million, respectively. above, agencies self-report cost information, such as travel and per diem costs incurred by FACA advisory group activity or payments to members or consultants. Agencies sponsoring FACA advisory groups determine the level of financial and administrative support for their groups. Variations in costs are common given factors such as the number of meetings held or compensation rates for groups' members. For fiscal year 2010, the FACA database identified the 15 DOT and 21 DOE actively chartered FACA advisory groups covering various topics and issues related to their respective agency's mission. The approach used by DOT and DOE to assess duplication amongst advisory groups is often informal, and agency officials are not always clear about what steps should be taken to ensure the assessment of existing advisory groups is consistently made. GSA relies on federal agencies to follow the FACA requirement to check for duplication prior to filing a charter to establish a new, or renew an existing, FACA advisory group under agency authority. Furthermore, guidance for our two selected agencies requires officials to determine whether the objectives or duties of a proposed FACA advisory group could be achieved by an existing entity, committee, or organization within the agency or governmentwide. Some DOT and DOE officials told us they use the FACA database to check for potentially duplicative advisory groups. This may be a good first step to identifying FACA groups working on similar issues; however, it does not necessarily provide an adequate assessment for duplication. While the FACA database contains information on advisory group issue areas, it is limited in its ability to directly identify related groups. For example, a search of the FACA database in the issue area of "surface and vehicular transportation" yielded approximately 60 FACA advisory groups working across 10 federal agencies. Further, issue areas are self- identified by agency officials and may not be consistently defined across agencies. We found that several agency officials were not aware of a process to determine whether the objectives or duties of an advisory group could be achieved by an existing entity, committee, or organization. In cases where officials indicated they were aware of a process, when asked to describe the process, a number described informal approaches for checking for duplication and did not articulate consistent steps taken to make these determinations. Several DOE officials reported that the agency's Committee Management Office is involved and engages each FACA advisory group's DFO to be aware of any existing entity or committee that could achieve the objectives being proposed, but they did not provide additional detail outlining formal steps taken to identify these groups. DOT and DOE officials also indicated that agency officials working in a program or issue area are generally able to identify groups that may be addressing similar topics using their existing knowledge of agency offices and programs. For example, some DOT officials noted that high-level program officials are likely to be aware of other groups dealing with an area of possible duplication and that this approach can serve as an informal mechanism to help identify relevant advisory groups working on related issues. However, without a process with specific steps to check for duplication (such as reaching out to key contacts of relevant advisory groups) assessment results may be inconsistent or incomplete. In contrast, one of the DOT agency offices we reviewed, the Federal Aviation Administration (FAA) Office of Rulemaking, has a policy that outlines specific steps agency officials should take prior to establishing a new advisory group. This policy is specific to aviation rulemaking advisory groups, covers both FACA and non-FACA advisory groups, and clearly lays out the process used to determine the need for and how to establish a new group. For instance, when an FAA office identifies an issue on which it would be helpful to obtain advice from industry, officials decide whether to request the standing Aviation Rulemaking Advisory Committee to accept the task or to charter a new aviation rulemaking committee based on the best fit given the specific topic or activity. The Aviation Rulemaking Advisory Committee is a formal, standing FACA advisory group; aviation rulemaking committees are non-FACA advisory groups formed on an ad hoc basis, for a specific purpose, and are typically of limited duration. One FAA official involved in these rulemaking advisory groups noted that this guidance offers those offices establishing advisory groups a process they can use to establish and manage their advisory groups, a useful tool because Congress often directs FAA to use these types of advisory groups to conduct rulemakings. While readily available information on FACA advisory groups--such as a designated point of contact and description of objectives--is accessible through a centralized database managed by GSA, similar information is not available for non-FACA advisory groups. Information on all FACA advisory groups--including DOT's and DOE's fiscal year 2010 groups--is readily available through the public FACA database, providing agency officials and interested parties with a basic level of transparency. This includes basic information such as contact information and descriptions of activities. In contrast, federal agencies are not required to, and may or may not track their non-FACA advisory groups, and neither of our two selected agencies had an existing inventory of all non-FACA advisory groups that provide advice or input to the agency. Using an agreed-upon definition for non-FACA advisory groups, DOT identified 19 and DOE identified 33 fiscal year 2010 non-FACA advisory groups. However, we could not confirm whether the groups identified include all of the non- FACA advisory groups for each agency, and DOT and DOE officials noted they do not necessarily consider their various groups as falling under a single definition of non-FACA advisory groups. Both DOT and DOE agency officials faced some challenges identifying and collecting basic information for non-FACA advisory groups--including agency points of contact and brief group descriptions--and the process was, at points, time consuming or cumbersome for them. DOT and DOE officials used different approaches to identify non-FACA advisory groups but encountered the following similar challenges in collecting basic information on these groups: DOT generally relied on officials at the program level to identify the agency's non-FACA advisory groups, and in most cases, agency liaisons served as a conduit to identify the groups by providing officials working on various programs with the non-FACA definition. According to DOT officials, challenges in compiling the requested information included identifying the agency point of contact and locating additional descriptive information pertaining to non-FACA advisory group activities. For example, one agency official we spoke with relied on an Internet search engine to locate relevant information about some of the non-FACA advisory groups. Another DOT official was able to identify a few advisory groups based on indirect involvement and knowledge of agency activities and programs. Of the four DOT agency components that identified non-FACA advisory groups for this review, only one identified these groups based on a readily available roster. In this case, Maritime Administration officials identified five non-FACA advisory groups using a committee roster the agency maintains for internal purposes. This roster identifies the names of both FACA and non-FACA groups, any subcommittees, and primary and secondary points of contact. DOE officials coordinated with each of their program offices to identify their non-FACA advisory groups based on the agreed-upon definition. The officials told us there was some difficulty in trying to identify the non-FACA advisory groups because basic information pertaining to these groups is not readily available as it is for FACA advisory groups. DOE officials told us that they had to coordinate the efforts of multiple program offices to compile the information and noted the process was time-consuming because there is no existing source for non-FACA advisory group information. As a result, the program officers had to cull much of the information for these groups from various Internet websites. Because there is no way to readily identify non-FACA advisory groups providing advice to the agencies, there is no formal source of information enabling agency officials to conduct a comprehensive check for potentially duplicative groups. For example, DOT officials told us that, because they are only able to check whether a FACA advisory group overlaps or duplicates the work of existing FACA advisory groups, they would not necessarily be aware of potential overlap with advisory groups not subject to FACA. DOT officials also pointed out that, given the time and resources required to establish and manage an advisory group, there is no incentive to maintain a FACA advisory group that duplicates the activities of another group. However, with limited visibility over the universe of non-FACA advisory groups, there is no assurance that agency officials checking for duplication would know where to look or whom to contact for additional information necessary to assess duplication vis-a-vis those groups. This raises the risk that new advisory groups may be created or existing groups retained that are unnecessarily duplicative and therefore not an efficient use of agency resources. Further, this absence of readily available information may hinder other federal agencies from coordinating with or ensuring that their advisory groups are not unnecessarily duplicative with DOT or DOE non-FACA advisory groups. GAO, Unmanned Aircraft Systems: Federal Actions Needed to Ensure Safety and Expand Their Potential Uses within the National Airspace System, GAO-08-511 (Washington, D.C.: May 15, 2008). offices, and advisory groups have emerged over time and serve a similar role as the Air Traffic Procedures Advisory Committee (ATPAC), a DOT FACA advisory group. Based on their review, agency officials involved in ATPAC identified potential duplication with ATPAC and other DOT advisory groups covering aviation topics including aviation charts, publications, or procedures. In this case, extensive knowledge of the organization, its history, and awareness of current advisory groups agencywide enabled these officials to perform this assessment, which raised questions about the ongoing need for ATPAC. According to FAA officials, ATPAC was the only mechanism of its kind for industry input to the FAA when it was created in 1976 but, over time, has essentially become a conduit to pass issues identified by members on to the appropriate FAA office or group. However, these officials noted this was the first step in the assessment process that will ultimately require internal agency concurrence to consider whether to retain or terminate ATPAC. Other agency officials we spoke with had differing perspectives regarding whether unnecessary duplication with ATPAC and other DOT aviation advisory groups exists. While advisory groups are not the sole source of information or input for agencies such as DOT and DOE, they can be a relatively effective and efficient way to gather input on topics of interest. Specifically, advisory groups can inform agencies about topics of importance to the agency's mission, consolidate input from multiple sources, and provide input at a relatively low cost. We reviewed information on 36 DOE and DOT FACA advisory groups and found that these groups all provided some form of input to agencies about topics related to the agency's mission. For example, each of the 36 FACA advisory groups had goals and topics that were aligned with their respective agency's missions or strategic goals, and each was engaged in activities that could help it produce advice, such as producing reports and making formal recommendations. To further review the usefulness of advisory groups, we conducted case studies on five DOT and DOE FACA and non-FACA advisory groups and identified several practices that helped enhance the usefulness of some of these advisory groups and, in some cases, also helped avoid duplication (see table 1 below). The five case studies provided examples of how agencies may address issues that could impact an advisory group's usefulness. According to some members, stakeholders, and agency officials involved in these five advisory groups, certain practices or circumstances positively affected the group's usefulness, while in other cases, the absence of those practices or circumstances may have limited the group's usefulness. Practices identified as influencing the usefulness of some advisory groups include (1) securing clear agency commitment, (2) finding a balance between responsiveness to the agency and independence, (3) leveraging resources through collaboration with similar groups, and (4) evaluating the group's usefulness to identify future directions for the group or actions to improve its usefulness. Securing agency commitment: Clear agency commitment to an advisory group can help enhance the group's usefulness. As we have noted before, perhaps the single most important element in successfully implementing organizational change is the demonstrated, sustained Agency commitment to advisory groups can commitment of top leaders.be demonstrated by active participation in meetings, open communication with group members, and allocation of resources to the group. Some agency officials, members, and third party stakeholders explained that the level of agency commitment can positively or negatively impact the usefulness of advisory groups. For example, high-level agency participation can help the advisory group consider the agency's needs when developing recommendations and may impact the likelihood that recommendations are implemented. In contrast, an absence of agency commitment to an advisory group can hinder the group's usefulness by limiting resources or information that may help the group to be useful to the agency. According to DOT officials, involvement of high level decision makers enhanced the usefulness of the Federal Interagency Committee on Emergency Medical Services (FICEMS). FICEMS is a statutorily mandated body not subject to FACA whose members primarily are The group shares information and discusses federal agency officials.methods to improve emergency medical services and produces formal recommendations and reports. The Administrator of DOT's National Highway Traffic Safety Administration is a FICEMS member, which officials believe enhances the group's usefulness. Because DOT has committed high-level involvement to FICEMS, the items discussed during meetings directly involve the agency's decisionmakers with the authority to make changes based on the advice. The marine transportation system encompasses numerous modes of transportation overseen by multiple agencies, one of which is the Maritime Administration. highways. According to members and a stakeholder, the Maritime Administration may have had limited commitment to MTSNAC in part because the group's original scope was the marine transportation system and all related federal agencies, some of which is beyond the administration's jurisdiction. In their view, MTSNAC provided a useful and needed service by addressing the wide-ranging issues affecting the marine transportation system, but its advice may have been better targeted at agency officials with a commitment to the broader marine transportation system. Balancing responsiveness with independence: Balancing responsiveness to agencies' needs with ensuring independence can improve the usefulness of an advisory group. On one hand, responding to agencies' needs may help advisory groups produce useful recommendations or reports. But on the other hand, as we have previously reported, the advice and recommendations of federal advisory groups should be independent of influence by the entity that created the advisory group. Similarly, we previously reported that advisory groups' independence is important because the effectiveness of FACA advisory groups can be undermined if the members are, or are perceived to be, lacking independence. According to officials and members of the Electricity Advisory Committee (EAC), a DOE FACA advisory group, EAC's responsiveness to DOE needs enhanced its usefulness and officials worked closely with the group's members to focus the direction of the group to meet the agency's needs. According to some EAC members, agency officials generally identified the topic to be covered while members determined how EAC would address the topic and sometimes identified additional topics to cover. Officials found EAC members to be responsive to DOE needs. For example, at DOE's suggestion, EAC began developing "quick response" products to react to agency requests for information and input in lieu of lengthier reports. DOE officials also assisted with the development of agendas for meetings, which can be highly interactive. This type of dialogue between agency officials and advisory group members can help the advisory group meet agency needs and enhance the usefulness of the group's products. However, there may be a tension between responsiveness and independence that could affect the group's usefulness. Some advisory group members indicated that some situations may challenge members' efforts to maintain independence. For example, in one instance, members of MTSNAC said that their sponsoring agency drafted recommendations and asked the group to endorse them, which the group declined. The members believed that the consensus-based recommendations they developed were valid even if they were not the recommendations that the agency wanted to hear. When asked for their perspectives on the group's usefulness in general, DOT officials stated that they implemented some of MTSNAC's recommendations and, while they did not always agree with other recommendations, members' diverse and varied perspectives could be useful. Leveraging resources through collaboration: Collaboration between an advisory group and other groups focusing on similar topics can help agencies spend resources efficiently, prevent unnecessary duplication, and enhance the group's usefulness. As we reported in 2011, interagency mechanisms or strategies to coordinate programs that address crosscutting issues may reduce potentially duplicative, overlapping, and Collaboration with groups focusing on similar topics fragmented efforts.may help ensure that groups are not duplicating activities but are instead focusing on the most useful tasks. Similarly, it may help advisory groups leverage existing resources to more quickly obtain information or expertise already possessed by other groups, thereby enhancing their usefulness and efficiency. Some advisory groups--such as non-FACA interagency coordination groups--share resources and information with other advisory groups. One official explained that collaborating and coordinating helps DOE's federal Smart Grid Task Force (SGTF) to be useful and accomplish its purpose. SGTF is a statutorily mandated non-FACA group created primarily for the federal agencies involved in smart grid activities to coordinate projects and priorities, and the group's members are representatives of the relevant agencies. According to one agency official and a third party stakeholder, SGTF's coordinating function is useful in part because member agencies can become more aware of ongoing or proposed activities in the federal government that may affect their agency. Further, an agency official explained that members contributed to the body of knowledge about smart grid activities, for example, by collaboratively identifying common challenges for smart grid implementation. DOE also benefits from SGTF reaching out beyond the federal government--involving states and other entities--to accomplish its purpose. For example, SGTF members are statutorily required to coordinate with members of EAC's smart grid subcommittee, who are nonfederal parties with interests or expertise in the smart grid. According to DOE agency officials, SGTF and EAC members meet every few months to discuss smart grid technological changes and developments. Agency officials stated that this type of coordination helps minimize the risk of unnecessary duplication of efforts. GAO-08-1026T. changes needed to bring about performance improvements and enhance usefulness. Some officials from DOT's FAA have taken steps to evaluate ATPAC, a FACA advisory group, and are consequently better equipped to assess the group's strengths, weaknesses, and whether the group continues to be relevant and useful. For example, officials (1) collected information on the group's accomplishments--identifying the number of issues addressed over a number of years, (2) gathered members' perspectives on the relevance and continuation of the group, and (3) informally considered whether the group's costs outweigh its benefits. Based on the information gathered on ATPAC's accomplishments, officials determined that the group's workload had decreased. For example, while the committee resolved an average of about 16 issues per year over its first 29 years, over the last 6 years, ATPAC resolved approximately 6 issues per year. According to agency officials, FAA and ATPAC have responded to the change in workload by decreasing the frequency of meetings from about four to three times a year. Agency officials explained that they are further evaluating the group and may consider additional actions in the future. The practices identified through our advisory group case studies-- securing agency commitment, balancing responsiveness with independence, leveraging resources through collaboration with similar groups, and evaluating usefulness--can help agencies leverage the advice produced by both FACA and non-FACA advisory groups to better address topics of importance to the agencies and avoid duplication of efforts. Advisory groups exist governmentwide and are generally considered useful and cost efficient mechanisms for federal agencies to obtain advice and input from a range of stakeholders and experts. However, the advisory group environment is fluid, and the potential for duplication exists both within and outside the agency as advisory groups are routinely established and used, taking on new issues in response to emerging agency needs. Therefore, assessments of whether existing advisory groups continue to be needed or whether another body or entity may be better suited to carry out advisory functions are important to help prevent unnecessary duplication and inefficient use of government resources. FACA requirements direct agencies to check for duplication among advisory groups, and DOT and DOE guidance incorporates these requirements. However, neither agency's guidance includes specific steps for assessing duplication, resulting in an informal process that is not always comprehensive. These issues are further exacerbated by the lack of visibility over non-FACA groups, which often address the same or similar issues as FACA advisory groups. Advisory groups addressing similar issues may also be housed in different agencies across government, further complicating any assessment for duplication. While agencies are not required to track their non-FACA advisory groups, having available at least minimal information about non-FACA advisory groups, as well as specific assessment steps, would help ensure more comprehensive assessments of whether new advisory groups should be created and existing groups should be retained. DOT and DOE are only two among many federal government agencies that widely use advisory groups, however, these actions could be a good first step in facilitating coordination and sharing of information of advisory groups governmentwide. To reduce the risk of potential duplication of efforts and further inform assessments of advisory groups, we recommend that the Secretary of Transportation and the Secretary of Energy take the following two actions: Identify and document specific steps that should be taken in periodically assessing potential duplication and the ongoing need for both FACA and non-FACA advisory groups. Develop and make public (e.g., on the agency's website) information identifying non-FACA advisory groups providing advice to the agency--including the group name, agency point of contact, and a brief description of the group's purpose. We provided copies of our draft report to DOT, DOE, and GSA for their review and comment. DOT and DOE agreed to consider the recommendations. GSA provided technical comments, which we incorporated. We are sending copies of this report to the appropriate congressional committees, the Secretary of Transportation, the Secretary of Energy, the Administrator of the General Services Administration, and other interested parties. The report also 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 (206) 287-4809 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The FACA database is available to the public at www.fido.gov/facadatabase. groups may have a mix of federal and nonfederal members and are established to provide advice or recommendations on issues or policies pertaining to the agency or its components. Because the non-FACA advisory groups were self-identified by DOT and DOE officials based on this definition, the groups identified may not include all of the existing non-FACA advisory groups for each agency.Non-FACA advisory groups are not subject to FACA for a variety of reasons, including statutory language that excludes a group or membership consisting entirely of federal government employees. We gathered information for each of the 88 FACA and non-FACA advisory groups identified as active in fiscal year 2010 using the FACA database and working with agency officials to collect information for each non-FACA group, such as a purpose statement or group descriptions. To better understand advisory group management, operations, and agency oversight responsibilities, we reviewed relevant documentation such as the FACA regulations and guidance, DOT and DOE committee management policies, and prior GAO reports on advisory groups. We interviewed agency officials within GSA's Committee Management Secretariat and General Counsel and agency officials within DOT and DOE Committee Management Offices to better understand how each agency operates and manages advisory groups. We also spoke with aviation industry groups that participate as members in some DOT aviation advisory groups to obtain their perspectives on general experiences with these advisory groups. To assess the reliability of the FACA database, we (1) reviewed existing documentation related to the database, (2) reviewed a previous GAO data reliability assessment of the FACA database, (3) reviewed database use protocols, including verification and internal controls, and (4) interviewed knowledgeable agency officials about the data. We determined that the data used were sufficiently reliable for the purposes of identifying FACA advisory groups and their status, presenting the total cost of FACAs, determining the most commonly reported interest areas, and analyzing FACA missions and activities. To assess the extent to which DOT's and DOE's assessment process helps to ensure advisory groups efforts are not duplicative, and to determine what challenges may exist in assessing duplication, we narrowed the scope of our review and assessed the potential for duplication, overlap, and fragmentation among 47 of the 88 FACA and non-FACA advisory groups identified as active within fiscal year 2010. Specifically, we reviewed the 47 groups focusing on those interest areas most relevant to DOT and DOE--using the interest area identification in the FACA database and assigning these same interest areas to the non- FACA advisory groups--ultimately identifying aviation and energy as the most common advisory group interest areas for DOT and DOE, respectively. We also formulated definitions for duplication, overlap, and fragmentation using the broad definitions provided in GAO's recent work.For the FACA advisory groups, we reviewed information within the FACA database performance measures section, their charters, and other agency documentation; for the non-FACA advisory groups, we reviewed agency provided descriptions and other agency documentation to help determine with more specificity the types of issues or topics the groups covered. We reviewed responses to a brief questionnaire sent to agency points of contact for the 47 selected DOT and DOE groups asking the respondents to identify, among other items, (1) any internal agency processes used to determine duplication, overlap, or fragmentation of proposed advisory groups with existing advisory groups and (2) their awareness of any other FACA or non-FACA advisory group within the agency or governmentwide that focused on the same issues as their group. From these 47 advisory groups, we then selected those groups that focus on common issues or topic areas in these broad areas for further analysis to better understand whether in fact the groups' efforts were potentially duplicative and interviewed agency officials in the following offices: DOT: Federal Aviation Administration (FAA) officials within the Office of the Deputy Administrator; Air Traffic Organization; Office of Aviation Safety; and Office of Policy, International Affairs and Environment that were involved in five FACA and four non-FACA advisory groups that were identified as potentially duplicative, overlapping or fragmented; and DOE: Office of the Secretary; Office of Science; Office of Health, Safety and Security; and Office of Energy Efficiency and Renewable Energy officials that were involved in three FACA and five non-FACA advisory groups that were identified as potentially duplicative, overlapping, or fragmented. To review the usefulness of DOT and DOE advisory groups in assisting their respective agencies in carrying out their mission, and to identify practices to enhance their usefulness or help avoid duplication, we conducted in-depth case studies on three FACA and two non-FACA advisory groups. See table 3 below. We judgmentally selected these five advisory groups to obtain a mix of characteristics with the purpose of reporting additional details on a targeted selection of advisory groups.coverage across several characteristics, we considered the following factors in selecting the advisory group case studies: the agency they advise, FACA status, age, how the group was established, and whether they generated reports or recommendations. For FACA advisory groups, we also considered results from the performance measures section of the FACA database, but this information was not available for non-FACA advisory groups. For each case study, we reviewed relevant documentation and interviewed agency officials, advisory group members, and third party or industry stakeholders to obtain their perspectives on the group's activities and its usefulness to the agency. For instance, to understand the group's usefulness, we asked about how helpful the group was at assisting the agency in carrying out its mission, the impact the group or its products had on the agency, and the value added by the group. For example, we met with FAA, Maritime Administration, and National Highway Traffic Safety Administration officials to discuss the effectiveness and usefulness of selected DOT advisory groups. The two selected non-FACA advisory groups were interagency coordination bodies whose membership consisted of federal employees. Because of this, the interviewees were able to represent both the agency and member perspectives. We reviewed advisory group charters, reports, meeting minutes, and performance measures from the To obtain a diverse mix and FACA database, other documentation as available, and observed an advisory group meeting for the Electricity Advisory Committee. In addition, we developed criteria to understand the extent to which advisory groups provided input on topics of importance to their respective agencies' missions and to describe the advice producing activities of advisory groups, such as whether the advisory group held meetings and produced reports and recommendations and if the groups' objectives were documented and were related to the agency's strategic goals or mission. We developed these criteria by reviewing a selection of previous GAO reports, including those on the Government Performance and Results Act Modernization Act of 2010 (GPRAMA) and the Program Assessment Review Tool (PART),assess effectiveness and usefulness in consultation with internal GAO experts, and soliciting the perspectives of agency officials. We applied these criteria only to the 36 DOT and DOE FACA advisory groups actively chartered in fiscal year 2010 because similar information for non-FACA advisory groups was not available. We also gathered information on a selection of FACA and non-FACA advisory groups by reviewing information from the FACA database, advisory group charters and websites, relevant agency strategic planning documents, and interviewing agency officials for both FACA and non-FACA advisory groups. identifying a list of potential criteria to We conducted this performance audit from January 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 the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To identify DOT and DOE FACA advisory groups, agency officials verified the active fiscal year 2010 groups identified in the FACA database. To identify non-FACA advisory groups providing input and advice to DOT and DOE, agency officials used the following definition: groups active in fiscal year 2010 that serve primarily an advisory function and provide input to the agency and/or component agency offices on areas related to the agency or office's mission. These groups may have a mix of federal and nonfederal members, and are established to provide advice or recommendations on issues or policies pertaining to the agency or its components. We selected those groups focusing on the most common advisory group issue areas of aviation for DOT and energy for DOE for further review, covering 47 of the 88 DOT and DOE advisory groups active in fiscal year 2010 (see tables 4, 5, 6, 7, 8). To understand the extent to which advisory groups provided input to agencies on topics of importance to their missions, we reviewed information on the 15 DOT and 21 DOE FACA advisory groups that were actively chartered in fiscal year 2010. We selected information to review by developing criteria based on agency officials' input and a review of relevant literature--including FACA guidelines and GAO reports on the Government Performance and Results Act Modernization Act. Each of the 36 FACA advisory groups had documented goals and topics that were aligned with their respective agency's missions or strategic goals (See table 9). Further, each was engaged in activities that could help the group produce advice (See table 10). Linda Calbom, (206) 287-4809 or [email protected]. In addition to the individual named above, Sharon Silas, Assistant Director; Kathy Gilhooly; Laura Henry; Delwen Jones; Hannah Laufe; Janet Lee; Sara Ann Moessbauer; Steven Putansu; and Maria Wallace made key contributions to this report.

Advisory groups--those established under the Federal Advisory Committee Act (FACA) and other groups not subject to the act--can play an important role in the development of policy and government regulations. There are more than 1,000 FACA advisory groups and an unknown number of non-FACA advisory groups governmentwide. Non-FACA groups include intergovernmental groups. Section 21 of Pub. L. No. 111-139 requires GAO to conduct routine investigations to identify programs, agencies, offices, and initiatives with duplicative goals and activities. In that context, GAO reviewed (1) the extent to which the Department of Transportation's (DOT) and Department of Energy's (DOE) assessment process helps ensure advisory group efforts are not duplicative and what challenges, if any, exist in assessing potential duplication, and (2) to what extent DOT and DOE advisory groups are useful in assisting their respective agencies in carrying out their missions and how the groups' usefulness could be enhanced. GAO selected DOT and DOE for review based on knowledge of these agencies' advisory groups. GAO interviewed agency officials; reviewed advisory group documentation; and conducted case studies of five advisory groups. Federal Advisory Committee Act (FACA) and Department of Transportation (DOT) and Department of Energy (DOE) guidance require officials to check for duplication prior to filing a charter to establish a new or renew an existing FACA advisory group. However, GAO found that DOT and DOE's processes for assessing duplication are often informal, and neither agency has specific steps identified for making such an assessment. Using an informal approach without specific steps makes it more likely that agency assessments for duplication will be inconsistent or incomplete. In addition, while basic information about the 15 DOT and 21 DOE fiscal year 2010 FACA advisory groups is publicly available in the FACA database, including designated points of contact and the objectives of the groups, no such information is readily available for non-FACA advisory groups. This limits the agencies' ability to fully assess the universe of advisory groups for particular topic areas. DOT and DOE officials faced some challenges identifying and collecting information for the 19 DOT and 33 DOE non-FACA advisory groups GAO reviewed, relying on various sources and Internet searches to gather basic information, since neither agency maintains an inventory of its non-FACA advisory groups and their activities. In addition, advisory groups often address complex and highly technical issues that span across agencies. For example, one advisory group GAO identified focused on experimental and theoretical research in nuclear physics. Agency officials familiar with these types of technical topic areas and other potential stakeholders covering these same topics are best positioned to assess the potential for unnecessary duplication and would be even better positioned to do so if the departments develop specific assessment steps and enhance the visibility of non-FACA advisory groups. DOT and DOE advisory groups can be effective tools for agencies to gather input on topics of interest by informing agency leaders about issues of importance to the agencies' missions, consolidating input from multiple sources, and providing input at a relatively low cost. To further review the usefulness of advisory groups, GAO conducted case studies on five DOT and DOE FACA and non-FACA advisory groups and identified several practices that could enhance the usefulness of these advisory groups and, in some cases, also help avoid duplication. These practices include the following: securing clear agency commitment, finding a balance between responsiveness to the agency and independence, leveraging resources through collaboration with similar groups, and evaluating the group's usefulness to identify future directions for the group or actions to improve its usefulness. The practices identified can help agencies leverage the advice produced by advisory groups to more efficiently and effectively address topics of importance to the agencies. For example, DOE officials from a FACA advisory group stated that coordination with officials involved in related groups helps to ensure sharing of useful information and that efforts are complementary rather than duplicative. GAO recommends that DOT and DOE document specific steps to assess potential duplication among FACA and non-FACA advisory groups and develop and make public basic information identifying non-FACA advisory groups to further inform periodic assessments. DOT and DOE agreed to consider the recommendations.

Since the early 1970s, we and others have reported on redundancies and excess capacity in DOD depots. The excess capacity problem has been exacerbated in recent years by reductions in military force structure and related weapon system procurement; changes in military operational requirements due to the end of the Cold War; and the increased reliability, maintainability, and durability of military systems. We recently determined that excess capacity in the DOD depot maintenance system is about 40 percent for fiscal year 1996. Additionally, the private sector, which has seen its production workload for new systems and equipment decline and has significant excess production capacity, is seeking an increased share of the depot maintenance workload. The BRAC process of closing or realigning depots and transferring their workloads either to remaining depots or to the private sector has, in the past decade, been the most effective way of addressing DOD's problem of excess capacity. During the 1995 BRAC process, one of DOD's recommendations was to close the Louisville depot and transfer its workload to other Navy facilities--primarily the naval gun workload to the Norfolk Naval Shipyard, Virginia; the Phalanx workload to the Naval Surface Warfare Center, Crane, Indiana; and the engineering support functions to the Naval Surface Warfare Center, Port Hueneme, California. "transfer(ing) workload, equipment, and facilities to the private sector or local jurisdiction as appropriate if the private sector can accommodate the workload on site; or relocate necessary functions along with necessary personnel, equipment, and support to other naval technical activities, primarily the Naval Shipyard, Norfolk, Virginia; Naval Surface Warfare Center, Hueneme, California; and the Naval Surface Warfare Center, Crane, Indiana." The Louisville Detachment of the Naval Surface Warfare Center, Crane Division, is located on a 142-acre site within the city limits of Louisville, Kentucky. The Louisville depot is responsible for providing engineering and technical support as well as overhaul and remanufacturing capability for naval surface ship gun and missile systems, including the 5-inch Mark 45 and Mark 75 guns, missile launchers, gun computer and fire control systems, torpedo tubes, and the Navy's anti-missile Phalanx Close-In-Weapon System. Louisville has nine major production buildings with approximately 1.4 million square feet of plant space. The facility provides a wide range of mechanical capability, including weapon system disassembly and assembly, gun manufacturing, machining, component fabrication, welding, metal plating, and surface finishing. The depot has 3.8 million direct labor hours of maximum potential capacity to perform 1.3 million hours of work, leaving the facility with 2.5 million hours of excess capacity and only 34 percent utilization. At the time of the BRAC decision, the depot employed approximately 1,600 civilian personnel. The Navy is planning to privatize the workload in place in the Louisville facility. On June 13, 1996, the Secretary of the Navy notified Congress that, under the Competition in Contracting Act, the Navy intended to award contracts restricting competition in the public interest to the two defense contractors selected by the local redevelopment authority. The Navy awarded contracts to Hughes Missile Systems Company and United Defense Limited Partnership on July 19, 1996. Because the Navy plans to privatize the Louisville depot's current workload in place, neither excess capacity nor associated maintenance costs will be reduced at other DOD depots or the private sector. The 1994 Defense Science Board Task Force on Depot Maintenance Management, which included representatives from the public and private sectors, stated that divestiture of excess infrastructure is a key element of reducing overall depot maintenance costs. Private industry representatives pointed out that through consolidations, mergers, and closures, the defense industry has attempted to address its significant excess capacity problem and DOD needs to do the same. Privatizing-in-place transfers excess capacity to the private sector but does not eliminate it. DOD pays for this excess capacity, whether it is in the public or the private sector. DOD has had little success eliminating underused industrial facilities except through the BRAC process. In making its recommendations to the BRAC Commission on the Louisville closure, the Navy proposed transferring 402,500 direct labor hours to the Norfolk Naval Shipyard and about 925,750 and 187,250 direct labor hours to the Crane and Port Hueneme locations, respectively, of the Naval Surface Warfare Center. Based on an evaluation of maximum potential capacity and programmed workload for fiscal year 1996, naval shipyards had 35-percent excess capacity, representing 18.5 million direct labor hours. The Norfolk Naval Shipyard has 34-percent excess capacity, representing about 5.4 million direct labor hours, and Crane has 69-percent excess capacity, representing about 1.7 million direct labor hours. The Navy has started to privatize these workloads in place at Louisville. Consequently, an opportunity to reduce excess capacity at the other Navy industrial activities is missed. In developing its privatization-in-place plans, the Navy did not consider consolidating the Louisville workloads with comparable workloads in contractor facilities. United Defense Limited Partnership and Hughes Missile Systems Company, which will operate the Louisville site, also have extensive excess capacity in their own facilities. Although these are manufacturing rather than repair facilities, they have significant excess capacity the contractors believe could be adapted for repair. The Navy believes that privatization of the Louisville depot will minimize the impact of the closure on the local community and will produce substantial savings. However, the Navy's position on savings is not well supported. Navy officials cited several reasons why privatization would produce savings. First, the Commission on Roles and Missions concluded that privatizing depot maintenance activities could lower DOD depot maintenance costs by 20 percent. Second, although Navy officials said they would not complete their cost analysis until the day before they expect to award contracts for the Louisville workloads, their preliminary analysis indicates that privatization is less expensive. Third, the city of Louisville required contractors to commit to reducing labor rates below the current Navy rates. The Commission's assumption that privatization can reduce costs by 20 percent is not well supported, as we reported in July 1996. The Commission's assumption was based primarily on reported savings from public-private competitions for commercial activities under Office of Management and Budget Circular A-76. Unlike depot maintenance activities, which require large investments in capital equipment, technical data, and highly trained and skilled personnel, these commercial activities involved simple, routine, and repetitive tasks. Also, public activities won about half of these competitions. The A-76 competitions generally had many competitors--unlike depot maintenance where most contracts are awarded without competition. Further, reports by us and defense audit groups indicate that projected savings from the A-76 competitions were often not fully achieved. Lastly, there was no competition between Hughes and United Defense and other contractors for the Louisville workloads. In its June 13, 1996, letter to Congress, the Navy stated its awards are in the public interest since the Louisville redevelopment authority had already competitively selected the two contractors. However, our review does not support the Navy's position that a competition occurred. In June 1995, prior to the completion of the BRAC process, the city of Louisville entered into an agreement with Hughes and United Defense to operate the Louisville depot maintenance facility in the event of a BRAC decision. On July 1, 1995, the BRAC Commission forwarded its closure and realignment recommendations to the President, who forwarded the report to Congress on July 13, 1995. Congress completed its review and accepted the Commission's recommendations in September 1995. In a December 1, 1995, letter, the Navy asked the Louisville redevelopment authority to reaffirm that it was finalizing its agreements with Hughes and United Defense. In February 1996, another contractor submitted an unsolicited business concept offering to the city of Louisville for the management and operation of the Louisville facility. In a February 24, 1996, letter to the local redevelopment authority, the Navy expressed concern that the community might open its selection process to competition. The Navy letter stated that the "introduction of a competitor in Louisville will complicate the interface between the depot and the original equipment manufacturers." On March 5, 1996, the Navy wrote the redevelopment authority urging it to make its decision no later than March 7, 1996. According to redevelopment authority officials, on March 7, 1996, they advised the three contractors that the redevelopment authority board had decided not to hold a competition and the workloads would be awarded to Hughes and United Defense. As of July 10, 1996, Navy officials said they had not fully developed a cost model for evaluating the two options planned for consideration and had not determined what cost elements would be evaluated. However, they expected to complete their final analysis prior to contract award, which was expected on July 15, 1996. Under the first option, which the Navy indicated in its June 13, 1996, congressional notification letter, the Navy planned to award contracts for the Louisville workloads, assuming it determines that privatization is the more cost-effective alternative. The second option was to transfer workloads to Navy facilities the 1995 BRAC process identified as candidates to receive the Louisville workload. Navy officials expected the first option to be more cost-effective based on a preliminary comparison of the estimated one-time transition costs and their assumption that a contractor will have lower recurring costs. However, the data used in this comparison were inaccurate and incomplete. In June 1995, the Navy estimated that transferring the workload to other naval facilities would cost about $302 million. In March 1996, the Navy estimated that it would cost $132 million, or $170 million less, to privatize-in-place and retain a small Navy engineering support activity at Louisville. Based on these preliminary estimates, the Navy concluded that privatization-in-place was more cost-effective. This analysis did not consider all recurring costs and savings. Some factors in the Navy's June 1995 one-time cost estimates for transferring the workload to other Navy sites are overstated. For example: The average cost factor used for permanent change-of-station moves was higher for the transfer option than the privatization-in-place option. Under the March 1996 privatization option cost estimate, the Navy estimated it would cost an average of $26,400 to move each of the 409 employees projected to take government jobs, which was about $3,000 lower than the figure developed by the Navy for the BRAC 1995 process. In contrast, the June 1995 estimate for transferring the workload included an average cost of $48,145 to move 819 employees. The two estimates have a difference of $21,745 per person. We could find no reason why the Navy used higher costs for the depot transfer option. However, assuming that $26,400 is the accurate cost factor, the transfer option is overstated by about $17 million. The overstatement of the permanent change-of-station costs also overstated the estimate for DOD's relocation income tax allowance program. The program, which compensates individuals for federal income taxes incurred on permanent change-of-station payments, is based on a percentage of the payments received. The Navy's estimate overstated the program's cost estimate by $2.4 million. The workload transfer cost estimate included $36 million to overhaul larger numbers of spares than normally required to satisfy demands. This was included because the Navy believed extra stock would be needed as a cushion during the transition period. However, normal customer sales would generate about $32 million; therefore, this figure should not have been included in the transfer option. The appropriate cost estimate was an additional $4 million that will not be recovered through customer sales. The workload transfer cost estimate included $37.6 million for military construction at the Norfolk Naval Shipyard. During its fiscal year 1997 budget review, the Navy later determined this estimate was overstated by $11.2 million. The workload transfer estimate included about $2.2 million for DOD's homeowners assistance program, under which DOD offers to buy an employee's house if it cannot be sold and provides compensation for some property value losses. According to Navy officials, since this program will not be available for Louisville depot employees, their initial cost estimate should not have included this cost for the transfer option. The one-time cost estimate of $302 million for transferring the Louisville workload is overstated by about $66 million, as summarized in table 1. We attempted to analyze other cost factors used in the depot transfer option and noted other costs were potentially overstated, such as those for the employee assistance program and equipment shipment and reinstallation. However, we have not yet developed a more realistic cost for these factors. Nonetheless, because the Navy used preliminary estimates developed for budget purposes, further evaluation is needed. In March 1996, the Navy estimated it would cost $132 million to privatize the Louisville depot in place, but this estimate appears to be understated. Based on our preliminary analysis, understated costs include (1) consolidation of equipment to reduce the facility's size and more efficiently use capacity, (2) incentives paid to contractors for hiring displaced Navy employees, and (3) separation incentives. On July 15, 1996, when we provided a draft of this report to DOD for comment, the Navy was revising its estimates for the costs of privatization-in-place. Subsequently, in a July 19,1996, letter to the House Committee on National Security and the Senate Committee on Armed Services, the Navy reported that its updated cost analysis showed that privatizing the Louisville workload rather than transferring it to other Navy depots should save $60 million--a reduction of about $110 million in savings from its earlier estimate. Our preliminary analysis of the initial cost estimates are presented below. As you requested we are in the process of reviewing the Navy's updated cost analysis and will report the results of that work later this year. Our previous BRAC work shows that consolidating depot maintenance workloads can significantly reduce recurring costs for all workloads in the remaining facilities. However, choosing the best option requires assessing both one-time transition costs and recurring costs of operation after the transition period. As of July 10, 1996, Navy officials had not yet determined the impact of transferring the Louisville workload on recurring maintenance costs for all workloads at other Navy activities. At that time, they noted that, although they may consider this factor in their final cost analysis, no decision had yet been made to do so. We estimated the potential savings if the Louisville workloads were consolidated at other Navy facilities by (1) using labor rate data from the three potential receiving locations and (2) revising it to reflect the overhead costs that would be reduced by spreading fixed overhead costs over a larger workload base. Using hour and rate information from contractor proposals, we also calculated the estimated annual costs for the privatization option. Based on these estimates, we projected that the Navy could achieve recurring annual savings of about $47.8 million through workload transfers to the Navy activities originally identified to receive these workloads. Our calculations are based primarily on lower rates for workloads currently at Norfolk and Crane, which occurred by increasing the use of these facilities. This projection does not include the $31 million the Commission estimated would be saved by eliminating personnel and operating costs at Louisville. Combining these savings with the $47.8 million resulting from transferring workloads results in an annual savings of about $78.8 million. Therefore, even with one-time transfer costs of $236 million (see table 1), the Navy could recoup the transition costs within 3 years and begin to save $394 million over 5 years. Given this opportunity for savings, privatization-in-place does not appear to be the most cost-effective approach. The Navy expects Hughes and United Defense to lower hourly rates as they gain experience and add comparable commercial work to their Louisville operations. Accomplishing this goal is uncertain because, although the contractors have already agreed with the Louisville reuse authority to reduce labor costs, they also agreed to retain a certain level of the existing workforce and to guarantee current pay and benefits. The Navy did not incorporate these agreements into its contract solicitations. It opted for cost-type contracts. Further, the contractors might also have trouble attracting commercial workload to the Louisville facility, particularly in light of the age and condition of the equipment and facilities. One contractor official told us the Louisville facility is in worse condition than any other owned or operated by his company. Thus, it is questionable whether the expected efficiency gains will be achieved. Title 10 U.S.C. 2464 provides that DOD activities should maintain a core logistics capability sufficient to provide the technical competence and resources necessary for effective and timely response to a mobilization or other national defense emergency. Navy data submitted during the 1995 BRAC process indicated that about 95 percent of the Louisville workload was mission essential, needed to support contingency requirements, and considered necessary to sustain core capabilities. In an April 1996 report to Congress on depot maintenance policy, DOD required the military services to conduct a risk assessment before privatizing mission-essential workloads. DOD officials stated that qualitative factors have been established for conducting a risk assessment and that privatization is determined to be an acceptable risk when an adequate number of private sector sources exist, and those sources are economical, possess the capability and capacity to do the work, and have demonstrated proven past performance. According to Navy officials, they did not perform a risk assessment for the Louisville depot maintenance workloads. As we previously reported, various statutory restrictions may affect how much DOD depot-level workloads can be converted to private-sector performance, including 10 U.S.C. 2464, 10 U.S.C. 2466, and 10 U.S.C. 2469. Title 10 U.S.C. 2464 provides that the Secretary of Defense must identify a "core" logistics capability and DOD must maintain it unless the Secretary waives DOD performance as not required for national defense. Titles 10 U.S.C. 2466 and 10 U.S.C. 2469 limit the extent to which depot-level workloads can be converted to private-sector performance. Title 10 U.S.C. 2466 specifies that not more than 40 percent of the funds allocated in a fiscal year for depot-level maintenance or repair can be spent on private sector performance--the so-called "60/40" rule. Title 10 U.S.C. 2469 prohibits DOD from transferring in-house maintenance and repair workloads valued at not less than $3 million to another DOD activity without using "merit-based selection procedures for competitions" among all DOD depots or to contractor performance without the use of "competitive procedures for competitions among private and public sector entities." Although each statute affects the allocation of DOD's depot-level workload, 10 U.S.C. 2469 is the primary impediment to privatization without a public-private competition. The current competition requirements of 10 U.S.C. 2469 were enacted in 1994 and apply to all changes to depot-level workload valued at not less than $3 million currently performed at DOD installations, including the Navy depot at Louisville. The statute does not provide any exemptions from its competition requirements and, unlike most of the other laws governing depot maintenance, does not contain a waiver provision. Further, there is nothing in the Defense Base Closure and Realignment Act of 1990--the authority for the BRAC recommendations--that, in our view, would permit the implementation of a recommendation involving privatization outside the competition requirements of 10 U.S.C. 2469. "to the private sector or local jurisdiction as appropriate if the private sector can accommodate the workload on site; or relocate necessary functions along with necessary personnel, equipment and support to other technical activities, primarily the Naval Shipyard, Norfolk, Virginia; Naval Surface Warfare Center, Hueneme, California; and the Naval Surface Warfare Center, Crane, Indiana." The Navy is privatizing Louisville's depot-level workload in place by awarding two contracts to private firms selected by the local redevelopment authority. The Navy concluded that privatizing Louisville's workload will be more cost-effective than transferring it to the naval facilities identified in the BRAC recommendation. In reviewing the Navy's privatization-in-place plan, we asked Navy officials to explain how the plan complied with existing statutory restrictions. They said they were "seeking to execute" the first alternative of the BRAC recommendation and would not award a contract until they evaluated the relative cost of the two alternatives. They did not provide details to support their position that the privatization plan conformed to existing statutory restrictions, and we were not able to identify any element of the plan that addressed the 10 U.S.C. 2469 requirement for a public-private competition. We recommend that the Secretary of Defense direct the Secretary of the Navy, before exercising any contract options for the Louisville depot maintenance workloads, to ensure military depots have the required capability needed to sustain core depot repair and maintenance capability and adequately document a risk assessment for privatizing mission-essential work being considered for privatization; at a minimum, revise the Navy's cost analysis to reflect the annual cost savings from workload transfers on the workloads currently performed at those locations by spreading the fixed costs over the increased workload; and use competitive procedures, where applicable, to ensure the cost-effectiveness of the Louisville privatization-in-place initiative. DOD provided oral comments on our draft report. DOD disagreed with our conclusion that privatization transfers excess capacity to the private sector rather than eliminates it. DOD officials stated that privatization-in-place allows private industry to rightsize the facility and workforce, eliminating the excess capacity that may have existed in the government-run facility. We agree that privatizing-in-place allows private industry to eliminate excess capacity at that facility. Our concern is that substantial excess capacity exists in both DOD's depot system and in existing private sector industrial facilities. Privatization-in-place does not reduce this excess capacity. For example, closing the Louisville facility and transferring the workloads to other underutilized public or private facilities would result in a greater reduction in total system excess capacity than privatizing-in-place. DOD also disagreed with our conclusion that the Navy's privatization plan did not address the requirement, as specified in 10 U.S.C. 2469, that the Navy hold a public-private competition to determine the most cost-effective method of workload allocation. In its July 19,1996, letter to the House Committee on National Security and the Senate Committee on Armed Services, the Navy asserted that its plan is consistent with 10 U.S.C. 2469 because (1) 10 U.S.C. 2469 does not generally apply to actions implementing a BRAC recommendation and (2) it already complied with this requirement in its cost analysis. We have found nothing in the Closure Act or in its legislative history that would support the Navy's view that it may implement a BRAC recommendation involving privatization without complying with 10 U.S.C. 2469. While the Navy suggests that support for its position can be found in the legislative history of 10 U.S.C. 2469, the report language it cites deals only with the separate statutory requirement that DOD use merit-based selection procedures when transferring depot workloads between DOD facilities. Furthermore, we do not believe that the Navy's cost analysis constituted a public-private competition under 10 U.S.C. 2469. As previously mentioned, 10 U.S.C. 2469 requires that "competitive procedures for competitions among public and private sector entities" be used. The statute does not prescribe the elements that make up a competition, and we believe that, in any given case, the extent of competition may be affected by the legitimate mission-related needs of DOD. However, in our view, a "competition" fundamentally entails a process that provides public depots with a reasonable opportunity to offer their services and facilities and uses established criteria to compare their proposed performance with that of private firms. In this case, we are not aware of any attempt by the Navy to provide existing depots with an opportunity to offer their services to perform the Louisville workload, and there were no established criteria for comparing contractor and depot performance. Our draft report included a recommendation for the Navy to complete a cost analysis considering the savings potential from consolidating the Louisville workload at other DOD depots and defense contractor facilities. Subsequently, DOD provided us a copy of its cost analysis, which we are currently reviewing in detail. While our analysis is still in process, it is clear that the Navy's final analysis did not factor in the savings that could be achieved annually for the workload currently performed at potential receiving locations by spreading fixed costs over the increased workload. The Navy also awarded contracts that privatized-in-place the work at Louisville. Therefore we revised our recommendations to address Navy actions prior to exercising any contract options, to include revising its cost analysis to reflect the workload transfer savings impact on existing workloads. DOD made other technical comments on this report, and we incorporated them where appropriate. Appendix I provides our scope and methodology. We are sending copies of this letter to the Secretaries of Defense and the Navy; the Director, Office of Management and Budget; and interested congressional committees. Copies will be made available to others upon request. If you would like to discuss this matter, please contact me at (202) 512-8412. Major contributors to this report are listed in appendix II. We obtained documents and interviewed officials from the Offices of the Secretary of Defense and the Secretary of the Navy in Washington, D.C.; the Naval Sea Systems Command and Naval Surface Warfare Center headquarters, Arlington, Virginia; Naval Surface Warfare Center field locations at Louisville, Kentucky; Port Hueneme, California; and Crane, Indiana; and the Norfolk Naval Shipyard, Virginia. Whenever possible, we relied on information previously gathered as part of our overall review of the Department of Defense's (DOD) depot maintenance operations. To evaluate the impact on excess capacity, we compared maximum potential capacity and programmed workload forecast data, as certified to the Joint Cross Service Group for Depot Maintenance prior to the 1995 Commission on Base Closure and Realignment. We determined current excess capacity percentages by comparing maximum potential capacity and workload forecasts for fiscal year 1996. To determine the impact of workload reallocation plans on recurring operating costs at remaining Navy facilities, we obtained direct labor hour rates for the Navy's Norfolk, Port Hueneme, and Crane sites recalculated based on the total workload transfers of 1.3 million direct labor hours from the Louisville site. To determine the cost-effectiveness of the Navy's planned privatization in Louisville, we held discussions with local redevelopment representatives, responsible Navy management and contracting officials, and contractor representatives. Although we reviewed available documentation from the Naval Surface Warfare Center, we could not fully evaluate this analysis because the Navy had not completed its cost model at the time our field work was completed. Therefore, we reviewed historical documents and based our analysis and conclusions on available data. Since our review of the Navy's analysis is ongoing and was constrained by the preliminary nature of some cost estimates and the absence of some cost data, our analysis is based on assumptions that may change as better data becomes available. Subsequent to the completion of our field work, we were provided the Navy's updated cost analysis. As agreed with the requesters, our review of that analysis will be reported on separately. To evaluate compliance with statutory requirements, we identified the applicable requirements and how they could affect the Navy's plans to privatize depot-level maintenance workloads. We also obtained a letter from the Naval Sea Systems Command General Counsel explaining how the Navy intends to comply with applicable statutes. We conducted our review from May 1996 through July 1996 in accordance with generally accepted government auditing standards. Bobby R. Worrell, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) plans to privatize-in-place the Navy's Louisville, Kentucky, depot maintenance workload, focusing on the: (1) impact on excess depot capacity and operating costs at remaining industrial facilities; (2) cost-effectiveness of this planned privatization-in-place option; and (3) statutory requirements affecting transfers of depot maintenance workloads to the private sector. GAO found that: (1) privatization-in-place is not cost-effective given the excess capacity in the DOD depot maintenance system; (2) the Navy's privatization plan for the Louisville depot will not reduce excess capacity at the remaining depots or in the private sector and may be more costly than transferring the work to other depots; (3) DOD pays for the excess capacity whether it is in the public or private sector; (4) privatizing the facility may not comply with statutory requirements for public-private competitions, since the Navy plans to use noncompetitive procurement procedures; (5) the Navy overstated the cost of transferring the Louisville workload to other depots by at least $66 million and generally assumed that privatization would save 20 percent, which is not likely to be realized; (6) the Navy's projection is based on conditions that are not relevant for most depot maintenance workloads and does not reflect the cost of excess capacity in the public sector; (7) the Navy did not assess the risk associated with contracting the depot's core workload, since the majority of the workload is mission essential; and (8) in July 1996, the Navy awarded contracts to Hughes Missile Systems Company and United Defense Limited Partnership for work in progress, but it did not verify that the privatization plan conformed with statutory requirements for public-private competition.

As the nation's principal conservation agency, Interior has responsibility for managing most of our nationally owned public lands and natural resources. This includes fostering the wisest use of our land and water resources, protecting our fish and wildlife, and preserving the environmental and cultural values of our national parks and historic places. Interior employs about 70,000 full-time equivalent staff and delivers a wide range of services through its bureaus, services, and offices at over 2,000 field locations across the country. Three Interior bureaus--the Bureau of Land Management (BLM), the National Park Service, and the Fish and Wildlife Service (FWS)--and USDA's Forest Service share responsibilities for managing public lands. While all have separate missions, they manage adjacent lands in many areas throughout the country and have some responsibilities that overlap. Over the last several years, Interior and the Forest Service have collocated some offices or shared space with other federal agencies, and have pursued other means of streamlining, sharing resources, and saving rental costs. To carry out its broad missions, Interior and its bureaus spend more than $62 million each year on telecommunications resources that are used to provide a wide array of voice, data, radio, and video services. These include a variety of telecommunications services acquired under the General Services Administration's Federal Telecommunications System (FTS) 2000 contract as well as from local and long-distance telephone carriers and commercial vendors. Interior was unable to provide us with its total fiscal year 1996 telecommunications costs because commercial telecommunications costs and costs for some other services are paid directly by Interior bureaus; these costs are not aggregated or tracked at the Department level. However, for 1 year--fiscal year 1995--in response to a survey we conducted, Interior estimated that it spent about $62 million on telecommunications equipment and services. This included about $29 million for FTS 2000 services and about $33 million for commercial and other services. Estimated fiscal year 1995 costs for radio equipment and service are not included in these totals. The Forest Service, which employs more than 30,000 full-time staff, spent about $33 million for telecommunications in fiscal year 1996. The Forest Service and Interior expect to collectively spend up to several hundred millon dollars over the next 8 years acquiring new radio equipment and services to convert to narrowband requirements by 2005. As we previously reported at USDA, consolidating and optimizing telecommunications offers organizations a way to reduce costs by combining resources and services where sharing opportunities exist and by eliminating unnecessary services. For example, the cost to access FTS 2000 services can sometimes be greatly reduced where there are multiple FTS 2000 service delivery points that can be combined to increase the volume of communications traffic among fewer points, thereby, obtaining volume discounts. Additional savings can be achieved by selecting more efficient service and equipment alternatives. Because there can be additional equipment and transmission costs associated with implementing consolidation and optimization alternatives, such costs will offset some of the savings. The 1996 Clinger-Cohen Act and federal guidance highlight the need for federal organizations to acquire and use information technology in the most cost-effective way and identify and act on opportunities to reduce costs by sharing resources where possible. In so doing, federal organizations should identify areas of duplication and work together to best utilize telecommunications and other information technology that can reduce expenditures and redundant functions. Not taking steps that maximize use of telecommunications resources and achieve optimum service at the lowest possible cost can result in the needless waste of government dollars. Our 1995 report noted that USDA had hundreds of field office sites where multiple agencies, located within the same building or geographic area, obtained and used separate and often redundant telecommunications services. Because of this and because USDA had not acted on opportunities to consolidate and optimize telecommunications services, the Department wasted millions of dollars each year paying for redundant services it did not need. Interior's acting chief information officer (CIO) is responsible for advising and assisting the Secretary and other senior managers to ensure that the Department's information technology investments are acquired and managed consistent with federal law and the priorities of the Secretary. Under the direction and leadership of the acting CIO, Interior's Office of Information Resources Management (OIRM) is responsible for ensuring that the Department's telecommunications resources are cost effectively managed and for overseeing and guiding Interior bureaus in the acquisition, development, management, and use of such resources. In addition, heads of Interior bureaus are responsible for implementing a program that will ensure compliance with Interior policies and for designating telecommunications managers who plan, implement, and manage telecommunications activities within their respective organizations. The bureaus are also responsible for determining whether their telecommunications requirements can be satisfied through existing resources and for sharing telecommunications services and equipment with other bureaus and agencies to the maximum extent practical. As with Interior, the Forest Service delegates responsibility for telecommunications management and the sharing of these resources to its regional and field components. To address our objectives, we reviewed documentation reporting telecommunications usage and costs for Interior and USDA's Forest Service and we interviewed Interior and USDA officials to discuss consolidation and sharing activities. To review consolidation and sharing activities, we selected four locations where Interior officials told us offices were collocated and actions were underway to consolidate and optimize telecommunications resources and services. Specifically, we visited Interior bureau offices in Lakewood and Durango, Colorado; Farmington, New Mexico; and Cheyenne, Wyoming. In addition, we discussed sharing projects underway or planned with Interior and Forest Service officials at offices in Lakewood and Durango. We also reviewed reports and billing information showing FTS 2000 and commercial carrier costs to confirm our results. Appendix I provides further details on our scope and methodology. We conducted our review from August 1996 through March 1997, in accordance with generally accepted government auditing standards. We provided a draft of this report to Interior and USDA for comment. Interior's and USDA's comments are discussed in the report and are included in full in appendixes II and III, respectively. To its credit, Interior has undertaken a number of cost-saving initiatives to eliminate some unused telephone lines and unnecessary data services. While significant savings have been achieved in some cases, such efforts have generally been isolated and ad hoc rather than departmentwide. Savings are being missed because Interior is not systematically identifying and acting on opportunities to consolidate and share telecommunications resources within and among its bureaus or its 2,000-plus field locations. At just four of these field locations, we found that bureaus and offices were paying thousands of dollars annually for telecommunications services that were redundant and unnecessary. Interior does not know to what extent similar telecommunications savings may exist at its other offices because it lacks the basic information necessary to make such determinations. Interior is not systematically identifying opportunities among collocated bureau offices to consolidate and optimize telecommunications resources. Interior's multiple bureaus have numerous field office sites in the same building or geographic area, but they obtain and use telecommunications equipment and services independently. This can result in the use of redundant and/or more costly telecommunications services than necessary at these sites. Nevertheless, OIRM--which has responsibility for managing and overseeing Interior's telecommunications activities--has not exercised effective leadership by establishing a departmentwide program for systematically identifying telecommunications inefficiencies that may exist and achieving savings among bureaus and offices across the Department. Instead, OIRM relies on each of Interior's separate bureaus to identify and act on such opportunities. Yet, according to bureau telecommunications officials, this is rarely done and savings opportunities may be lost. Although we only visited a few of Interior's field sites during our review, we found that bureau offices in Lakewood, Durango, and Farmington spent thousands of dollars over the last several years for unnecessary commercial long-distance telephone and redundant FTS 2000 data services. In one case, billing records show that two bureau offices in the one building in Lakewood were spending about $4,400 annually for unnecessary FTS 2000 services because these services had not been consolidated and shared. In addition, we found bureau offices in Farmington located close by one another yet still using separate data connections to the same cities; opportunities to share these services in order to reduce costs had not been investigated. While many bureau telecommunications managers and staff told us they would like to take advantage of savings by consolidating and sharing resources at locations, given their other duties, it is not a priority. Specifically, these officials said that they spend most of their time maintaining current operations and providing their bureau field offices with technical assistance. As a result, they assert that they rarely have time to look for such consolidation opportunities among bureau offices. Even if pursuing consolidation opportunities was a priority, the bureaus do not have the information necessary to identify where Interior offices are collocated and determine whether telecommunications savings opportunities exist at these locations. Specifically, at the time of our review, neither OIRM nor the bureaus had determined which of the Department's 2,000-plus field sites are located within the same building or geographic area, and OIRM was unable to provide us with a current list of all Interior office sites. Following our exit briefing with Interior at the end of February 1997, the Department began to develop this information by extracting and analyzing data from several of its administrative management databases. These are positive steps that should help the Department begin to identify savings opportunities. Interior bureaus also lack information needed to adequately analyze cost-savings opportunities that may exist at collocated bureau sites. According to Interior policy, bureaus are required to maintain inventories of all of their telecommunications resources. However, at the time of our review, the bureaus did not maintain up-to-date and complete inventories of all their telecommunications resources and OIRM has not followed up to ensure that they do so. Without information such as this that describes types of telecommunications equipment and services at individual bureau offices, Interior cannot easily determine where it has opportunities to consolidate and optimize telecommunications resources among multiple bureau offices. In addition, neither OIRM nor the bureaus have used telecommunications tools such as USDA's network analysis model to help identify potential savings opportunities across the Department. USDA developed and successfully used this model to identify millions of dollars in cost-effective options for reducing telecommunications costs at the Department and at other agencies. USDA gave its model to Interior over a year ago, but Interior never used it. Until OIRM and the bureaus develop the basic information and use the tools available to systematically identify cost-reduction opportunities at collocated bureau offices, Interior will not be able to determine where and to what extent similar savings opportunities may exist in Washington, D.C., and at the Department's hundreds of offices across the country. Some bureau officials said that, through the normal course of their duties, they have sometimes become aware of opportunities to consolidate and share telecommunications resources. Even in such cases, however, savings opportunities may not be pursued because getting the separate Interior bureaus to agree to make changes in telecommunications arrangements is difficult and time-consuming. In one case, for example, three small bureau offices in Cheyenne, Wyoming, gave up trying to consolidate and share services because no one bureau was willing to spend the approximately $2,000 needed to purchase the required equipment, even though services would have been upgraded and overall bureau savings would have paid for this equipment in a few months. During our review, OIRM and the bureaus began identifying some cost-savings opportunities using available FTS 2000 reports and other information. For example, on October 21, 1996, OIRM and the bureaus initiated an agreement with American Telegraph and Telephone (AT&T) to take advantage of FTS 2000 intra-LATA (local access transport area) savings opportunities for local toll call telephone service. In November 1996, further positive steps were taken by OIRM and the bureaus to begin identifying opportunities where Interior bureaus could aggregate some of their FTS 2000 services to obtain volume discounts. As of the end of our review in March 1997, these efforts were still underway and no savings had yet been reported. Another effort by the Department that was designed to improve data communications by establishing a backbone communications network (DOInet) is also being used to help identify opportunities to reduce costs by eliminating some redundant data services. By building on existing networks and establishing common network node locations at high traffic sites, Interior is establishing DOInet to provide improved interconnectivity and interoperability among its bureaus. Under this initiative, OIRM recently began working with the bureaus to identify and try to eliminate data communications circuits that duplicate DOInet capabilities at high traffic sites. Also, as part of this effort, OIRM began to review FTS 2000 billing records to identify some opportunities for eliminating redundant and unnecessary data circuits in the bureaus themselves. However, OIRM has not acted to ensure that savings on all opportunities identified as part of the DOInet initiative will be realized. Consequently, some savings opportunities have been missed and others could not be confirmed. For example, after determining from FTS 2000 billing data during the months of August through November 1995 that Interior bureaus were paying over $1.1 million annually for over 100 duplicate data circuits, OIRM recommended that bureaus either disconnect these data lines or explain why they are needed. But OIRM did not follow up on all its recommendations and, near the end of our review in February 1997, documentation showed that only about $200,000 of the $1.1 million in potential savings identified had been achieved. In March, OIRM officials said that further action was underway to eliminate more of these unnecessary circuits and that 19 additional duplicate circuits with an annual cost of over $100,000 had been eliminated. OIRM did not, however, provide the billing data necessary to confirm any of these reported cost-savings. Some Interior bureaus have taken positive steps to reduce telecommunications costs within their own organizations and have achieved significant savings by doing so. For example, according to FWS telecommunications officials, they have reduced FTS 2000 usage costs throughout the bureau. In one example, FWS reported saving about $66,000 annually by moving some commercial telephone service to FTS 2000 Virtual On-Net service to achieve lower cost-per-minute charges at many of its office locations. However, in many cases, bureau efforts to reduce telecommunications costs were done ad hoc, not systematically applied throughout the bureau or replicated among other bureaus. For example, a BLM office in Cheyenne reviewed telecommunications services and associated charges 2 years ago, finding that it had paid an extra $90,000 because the local carrier had incorrectly applied tariff rates to some of its services. The office received a total reimbursement for these erroneous charges. However, according to the BLM official who completed the review, this was a onetime initiative undertaken after the office upgraded its telecommunications services, and no additional reviews had been performed. In another case, a Bureau of Reclamation telecommunications official who initiated a review of telephone lines at the office in Lakewood, in September 1995, found that it was paying as much as $20 per line in monthly charges for lines that were no longer being used. In this case, bureau officials found that the office had 2,656 telephone lines for 1,060 staff and that at least 1,405 of these lines were unnecessary. In July 1996, bureau officials completed work reducing the number of lines to 1,251 and reported annual savings totaling more than $320,000. Again, however, despite the significant cost-savings achieved by the Bureau of Reclamation, we were unable to find any cases during our review where other bureaus had undertaken similar attempts to identify and eliminate unused telephone lines. March 1997 records from AT&T show that, after downsizing, Interior bureaus currently have almost twice as many telephone lines as staff--about 137,000 lines for about 70,000 people.Until similar reviews are done throughout the Department, Interior will not know to what extent other headquarters, bureau, and field offices may be paying for lines they do not use. Because efforts to reduce costs, such as the ones discussed above, are not systematically applied and replicated throughout the Department, some bureaus and offices may also be paying for other telecommunications services that are not used, are uneconomical, or are otherwise not cost-effective. For example, two bureau offices we visited were spending several thousand dollars annually paying for redundant FTS 2000 services they did not need or know they had. In one case, billing records showed that one bureau office in Durango spent about $4,000 more than necessary during the past year paying for redundant FTS 2000 services that should have been consolidated with other services at that office. Office officials told us they were not aware of the redundant services because bills are not reviewed to identify this kind of problem. In another similar case, one bureau office in Cheyenne paid several thousand dollars annually for unnecessary local telephone services and redundant FTS 2000 services that should also have been consolidated. Interior and USDA may likewise be missing opportunities to save millions of dollars by not sharing telecommunications resources among Interior bureaus and the Forest Service. While the two departments have a 2-year old agreement to identify and act on sharing opportunities, they have taken little action on this agreement and accordingly, only limited savings have been realized. Moreover, while Interior and USDA's Forest Service plan to spend several hundred million dollars to acquire separate radio systems over the next 8 years, the Departments have not jointly determined the extent to which they can reduce these costs by sharing radio equipment and services. Interior's bureaus (e.g., BLM, FWS, and the Park Service) and USDA's Forest Service recognize that opportunities to share telecommunications resources among their offices exist. While these organizations acquire and use separate telecommunications resources and services to fulfill their individual missions, they work in many of the same geographic areas, overseeing adjacent public lands and natural resources. Because of this, savings may be achieved by sharing resources and services where opportunities exist among these agencies to do so. In recognition of such sharing opportunities, Interior and USDA established a memorandum of agreement in January 1995 to support interdepartmental cooperative efforts "to seek aggressively, opportunities for sharing telecommunications resources" and institute steps necessary to act on these opportunities. While Interior and USDA were to work together to identify potential candidate sites for aggregating and sharing telecommunications resources, they never did. In fact, they have not yet identified Interior bureaus and the Forest Service sites that are in common areas where it may be possible to share telecommunications resources to reduce costs. Senior Interior and USDA managers could not provide a valid basis for not implementing this sharing agreement. Despite inaction on the agreement, we found isolated cases in which Interior and Forest Service offices are reducing their telecommunications costs by sharing some resources. For example, as part of a National Performance Review (NPR) pilot called Trading Post, BLM and the Forest Service said they are achieving thousands of dollars in annual savings by sharing voice communications and local telephone services in Durango.In another case, Interior bureaus and the Forest Service have begun sharing common network and telecommunications resources at several Alaska sites under an NPR initiative known as ARTnet. According to initial results, three Interior bureaus and the Forest Service have said they reduced their annual telecommunications costs over 44 percent (from about $197,000 to $110,000). While such initiatives are positive, they so far involve only a few sites and are not being replicated across the country in other areas where Interior and USDA likely have similar kinds of sharing opportunities. Interior bureaus and USDA's Forest Service plan to collectively spend up to several hundred million dollars over the next 8 years to purchase new radio systems required under new federal narrowband standards. Under a directive from the National Telecommunications and Information Administration, all federal radio users are required to begin implementing new narrowband technologies to make additional radio channels available to federal agencies. These new narrowband capabilities are expected to be fully implemented governmentwide by January 1, 2005. Interior bureaus plan to spend about $270 million making this transition. While the Forest Service has not determined how much its actual transition to narrowband systems will cost, budget estimates show that it expects to spend tens of millions of dollars replacing radio equipment over the next several years. According to Interior documentation, its bureaus and the Forest Service run parallel radio systems in some areas, with opportunities to share portions of these systems. Further, Interior and Forest Service officials at headquarters and some field locations said they are interested in sharing radio communications; in some cases, Interior and Forest Service field locations have begun to share mountaintop maintenance, radio frequencies, and dispatch operations. Both agencies have also studied, to some degree, implications of sharing radio communications resources. In fact, Interior determined that sharing radio resources as part of the effort to transition to narrowband standards could reportedly bring about a 25 percent overall cost reduction (including equipment and personnel).However, at the time of our review, no decisions about this had been reached and Interior and the Forest Service are each proceeding with plans to acquire separate radio equipment and services that address their individual needs. While Interior has taken some positive steps to reduce telecommunications costs, it has not done what is necessary to take advantage of departmentwide opportunities to eliminate unnecessary services and maximize savings, and has no systematic approach for doing so. Until OIRM and the bureaus develop basic information and use the tools available to them to systematically identify cost-savings opportunities, Interior will not be able to determine where and to what extent sharing opportunities may exist throughout the Department and its hundreds of offices across the country. Similarly, until Interior and USDA follow their 1995 agreement to actively pursue opportunities for sharing telecommunications resources among bureaus and the Forest Service, millions of dollars in potential savings will not have a chance of being realized. In order to help bring about significant potential savings from consolidated and shared telecommunications resources, we recommend that the Secretary of the Interior direct--and hold accountable--the Department's acting CIO to immediately establish and fully implement among Interior's bureaus, a departmentwide program for systematically identifying and acting on all opportunities to consolidate and optimize telecommunications resources, including voice, data, video, and radio equipment and services, where it is cost-effective to do so. At a minimum, the acting CIO should: Determine and maintain a current list of Department field locations that are collocated and the extent to which telecommunications resources and services are shared. Direct and ensure that all Interior bureaus and offices establish and maintain up-to-date and complete inventories of their telecommunications resources and services at collocated sites. Direct and ensure that all Interior bureaus and offices review and analyze telecommunications bills at regular intervals, using a cost-effective approach to ensure that all charges are appropriate and services needed. Identify potential savings opportunities at these sites using inventories and telecommunications tools, such as USDA's network analysis model. Monitor these activities and follow up as needed to ensure that all identified savings opportunities are acted upon. In addition, we recommend that the Secretary of the Interior direct--and hold accountable--each of the Department's assistant secretaries to cooperate with the acting CIO and immediately establish and fully implement bureauwide programs for similarly identifying and acting on all opportunities to consolidate and optimize telecommunications resources within each bureau, using the steps discussed. We also recommend that the acting CIO report to the Secretary every 6 months on the progress of these efforts and savings achieved. We further recommend that the Secretary of the Interior and the Secretary of Agriculture ensure that their respective acting CIO's are responsible and accountable for implementing the 1995 joint sharing agreement. At a minimum, the acting CIOs should: Determine where Interior and USDA field sites are collocated and the extent to which services are shared. Identify potential savings opportunities for all telecommunications equipment and services at these sites using the information specified above and telecommunications tools such as USDA's network analysis model. Stop further radio system purchases, except those necessary for meeting immediate technology needs that are critical to ongoing operations, until both departments jointly determine and document where radio equipment and services can be cost-effectively shared and savings achieved. Monitor these activities and follow up where needed to ensure that all identified savings opportunities are acted upon. The Department of the Interior's Assistant Secretary for Policy, Management and Budget provided written comments on April 7, 1997, on a draft of this report. Written comments were also provided by USDA's acting CIO on April 8, 1997. These comments are summarized below, and are reproduced in appendixes II and III, respectively. Interior's Assistant Secretary for Policy, Management and Budget stated that the Department will use our report to focus additional efforts on eliminating unnecessary telecommunications services and to implement sharing opportunities. Specifically, the Assistant Secretary stated that Interior will use the results of our review to develop guidance and direction needed by bureau telecommunications managers to better manage their acquisition and sharing of telecommunications services and develop a telecommunications management improvement strategy for the Department. The Assistant Secretary also stated that Interior's strategy will be implemented by identifying projects, staffing them with Departmental and bureau managers, prioritizing actions, and monitoring results. She also said that actions have already begun on several of these improvement projects. We are encouraged by Interior's statements to better manage its acquisition and sharing of telecommunications services. It will now be important for the Department to develop specific actions it plans to take on each of our recommendations as it moves ahead on efforts to better manage and share telecommunications resources. Given Interior's decentralized telecommunications management structure and its reliance on bureaus to identify and act on savings opportunities, it is especially important for the Secretary to implement our recommendations to direct--and hold accountable--the Department's acting CIO and assistant secretaries for establishing and fully implementing, both among and within Interior's bureaus, programs for systematically identifying and acting on all opportunities to consolidate and optimize telecommunications resources--including voice, data, video, and radio equipment and services--where it is cost-effective to do so. Interior's Assistant Secretary and USDA's acting CIO stated that their departments plan to work together to share telecommunications resources and achieve savings. While these statements are encouraging, neither department responded to our specific recommendations relating to implementing the 1995 joint sharing agreement. Given the little action taken on this agreement, we believe it is especially important that the Secretary of the Interior and the Secretary of Agriculture ensure that their respective acting CIOs are both held responsible and accountable for fully implementing the 1995 agreement as well as our other recommendations for increasing levels of telecommunications resources sharing between the departments. Interior's Assistant Secretary stated that Interior did not agree with our recommendation to stop further radio purchases, except those necessary for meeting immediate technology needs that are critical to ongoing operation, until both departments jointly determine and document where radio equipment and services can be cost effectively shared and savings achieved. The Assistant Secretary did state, though, that Interior supports the goal of implementing shared radio systems, and will implement procedures within Interior and with the Forest Service to ensure that all land mobile radio systems designs are reviewed for sharing and other savings potential prior to radio purchase. USDA's acting CIO stated that additional work on sharing radio systems is needed by the Forest Service and Interior, but did not comment on our specific recommendation. We are also encouraged by Interior's and USDA's statements indicating their willingness to work toward increased levels of radio sharing. Nevertheless, we stand by our recommendation that Interior and USDA should stop further radio system purchases, except those necessary for meeting immediate technology needs that are critical to ongoing operations, until both Departments jointly determine and document where radio equipment and services can be cost effectively shared and savings achieved. Regarding the costs of Interior's transition to narrowband radio systems, Interior's Assistant Secretary also stated that the Department now plans to spend $270 million for the narrowband radio system transition; not the $200 million we were told during our review. We have amended the report to reflect Interior's revised estimate of $270 million. Interior's Assistant Secretary also provided several specific comments. Regarding use of USDA's network analysis model tool to identify cost savings opportunities, the Assistant Secretary stated that the Department had used USDA's model to eliminate $100,000 in addition to what is stated in the report and that the tool had also been used to identify $750,000 in redundant data circuits at the Bureau of Indian Affairs. Our information, however, continues to indicate otherwise. Specifically, in February 1997, and again on April 8, 1997, the official responsible for the network analysis model at USDA stated that while he had given Interior a copy of the model in September 1995, Interior had never used it. Even so, our report does recognize the more than $1.1 million in duplicate circuits that Interior said it identified by reviewing FTS 2000 billing records and this amount includes circuits at the Bureau of Indian Affairs. However, as the report also states, OIRM did not provide us with the billing records necessary to confirm that the Department had actually achieved any of these savings, despite several requests during our review for these records. The Assistant Secretary also commented that Interior believes AT&T's records include some telephone lines that are not active or being billed to the Department. However, the Assistant Secretary agreed with the report's premise that Interior may have unused telephone lines and, as a result, the Department will conduct a thorough review of AT&T's records to verify the number of telephone lines it has and take corrective action where necessary. We agree that AT&T's records may include inactive lines in some cases. However, as we discuss in our report, hundreds of thousands of dollars in savings have been achieved at one Bureau of Reclamation office where AT&T's records were used to identify and eliminate unnecessary telephone lines. Given this and the fact that Interior does not know to what extent it may be paying for unnecessary or inactive telephone lines, we believe that this action by Interior, if fully carried out across the Department, could achieve additional savings by helping to identify and eliminate further unnecessary telephone lines and services. Finally, Interior's Assistant Secretary named numerous examples that were not cited in our report in which radio service is being shared between Interior bureaus and USDA agencies. Our report recognizes that Interior and USDA have taken some steps to share radio services, but have done little to ensure that radio and other telecommunications resources are shared in all cases throughout the country where there are opportunities to do so. As agreed with your offices, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from the date of this letter. At that time we will send copies to the Secretary of the Interior; the Secretary of Agriculture; the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs, the Senate and House Committees on Appropriations, and the House Committee on Government Reform and Oversight; the Director of the Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. Please contact me at (202) 512-6408 if you or your staff have any questions concerning this report. I can also be reached by e-mail at [email protected]. Major contributors to this report are listed in appendix IV. To address our objectives, we reviewed Interior policies on telecommunications management, various memoranda and reports discussing telecommunications management activities at the Department, vendor billing data showing Interior telecommunications usage and costs, and other materials outlining plans and efforts by OIRM and the bureaus to identify opportunities to consolidate and optimize telecommunications resources and services and implement cost-savings solutions. To identify Interior's overall telecommunications costs, we obtained the Department's estimated costs for fiscal year 1995, as it does not track costs for voice, data, video, and other services. We also reviewed documentation relating to interagency efforts by Interior and USDA's Forest Service to combine and share resources and obtained current estimated radio replacement costs for Interior bureaus and the Forest Service. To determine whether Interior had consolidated and optimized telecommunications resources to eliminate unnecessary services and maximize savings, we interviewed OIRM officials responsible for Departmentwide telecommunications management activities as well as telecommunications managers and/or staff in Interior's major bureaus. In addition, we reviewed internal correspondence and other documents describing actions taken to identify Departmentwide opportunities to consolidate and optimize telecommunications services. Because Interior did not have a current list of sites where its bureau offices are collocated with one another and with Forest Service offices, we attempted to develop this information by contacting USDA's National Information Technology Center in Fort Collins, Colorado, which assists the General Services Administration in managing the government's FTS 2000 billing database. Because all Interior bureaus and the Forest Service obtain services under the government's FTS 2000 contract, in September 1996, we asked the National Information Technology Center to develop information from the FTS 2000 billing database showing addresses for Interior and Forest Service offices, from which collocated sites could be identified. Initial lists were provided to us in November 1996, but programming problems that caused some data irregularities precluded us from using this information. To review consolidation and sharing activities, we selected four locations where OIRM and bureau officials told us bureau offices were collocated and where some actions had been taken to consolidate and optimize telecommunications resources and services. Specifically, we visited Interior bureau offices in Lakewood and Durango, Colorado; Farmington, New Mexico; and Cheyenne, Wyoming. To determine the extent to which telecommunications resources and services had been consolidated at these locations, we interviewed bureau officials and observed ongoing operations. At our site visits, we found cases in which Interior and the bureaus had additional opportunities to consolidate and optimize telecommunications services and had lost savings because no one had identified and acted on these opportunities. However, we were unable to identify precise dollar amounts for these lost savings because up-to-date, comprehensive information describing telecommunications services and costs were generally not available at these offices. Therefore, in the absence of this information, we attempted to estimate the lost savings by analyzing Interior telecommunications usage and cost data that we had also obtained from USDA's National Information Technology Center and commercial telephone company vendors. To determine whether Interior and the Forest Service were sharing telecommunications services where possible, we interviewed telecommunications managers involved in these activities and reviewed the status of plans intended to expand sharing. In addition, we discussed sharing projects underway or planned with Interior and Forest Service officials at offices in Lakewood and Durango and opportunities for sharing voice, data, and radio equipment and services. We also reviewed telecommunications usage and cost data obtained from USDA's National Information Technology Center and commercial telephone company vendors to determine the extent to which telecommunications resources had been consolidated and optimized. We performed our audit work from August 1996 through March 1997, in accordance with generally accepted government auditing standards. Our work was primarily done at Interior and USDA headquarters offices in Washington, D.C. We also worked at Interior offices for the National Park Service, the Bureau of Reclamation, and the Office of Surface Mining Reclamation and Enforcement in Washington, D.C.; the Bureau of Land Management, the Bureau of Reclamation, and the U.S. Fish and Wildlife Service in Lakewood; the Minerals Management Service in Herndon, Virginia; and the U.S. Geological Survey in Reston, Virginia. Our work also included visits to selected Interior bureau offices in Farmington and Cheyenne; Interior and USDA Forest Service offices in Durango; and Forest Service offices in Lakewood. Stephen A. Schwartz, Senior Assistant Director William D. Hadesty, Technical Director Mark D. Shaw, Assistant Director Mirko J. Dolak, Technical Assistant Director Patricia Macauley, Senior Information Systems Analyst Michael P. Fruitman, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO reviewed efforts by the Department of the Interior and the Forest Service to reduce costs by consolidating their telecommunications services, focusing on whether Interior: (1) has consolidated and optimized telecommunications services to eliminate unnecessary services and maximize savings; and (2) and the Forest Service are sharing telecommunications services where they can. GAO noted that: (1) to its credit, Interior has undertaken a number of telecommunications cost-savings initiatives that have produced significant financial savings and helped reduce the Department's more than $62-million annual telecommunications investment; (2) however, Interior is not systematically identifying and acting on other opportunities to consolidate and optimize telecommunications resources within and among its bureaus or its 2,000-plus field locations; (3) the cost-savings initiatives that have been undertaken have generally been done on an isolated and ad hoc basis, and have not been replicated throughout the Department; (4) GAO did not review consolidation and sharing opportunities at all of Interior's field locations; (5) however, at the four sites GAO visited, GAO found that telecommunications resources were often not consolidated or shared, and bureaus and offices were paying thousands of dollars annually for unnecessary services; (6) Interior does not know to what extent similar telecommunications savings may exist at its other offices because it lacks the basic information necessary to make such determinations; (7) Interior and the Department of Agriculture (USDA) may also be missing opportunities to save millions of dollars by not sharing telecommunications resources; (8) even though the Departments have a 2-year old agreement to identify and act on sharing opportunities, little has been done to implement this agreement and, accordingly, only limited savings have been realized; and (9) moreover, while Interior and the Forest Service currently plan to collectively spend up to several hundred million dollars to acquire separate radio systems over the next 8 years, the Departments have not jointly determined the extent to which they can reduce these costs by sharing radio equipment and services.

The Missile Defense Agency's mission is to develop an integrated and layered BMDS to defend the United States, its deployed forces, allies, and friends. In order to meet this mission, MDA is developing a highly complex system of systems--land, sea and space based sensors, interceptors and battle management. Since its initiation in 2002, MDA has been given a significant amount of flexibility in executing the development and fielding of the BMDS. To enable MDA to field and enhance a missile defense system quickly, the Secretary of Defense in 2002 delayed the entry of the BMDS program into the Department of Defense's traditional acquisition process until a mature capability was ready to be handed over to a military service for production and operation. Therefore, the program concurrently develops, tests and fields assets. This approach helped MDA rapidly deploy an initial capability. On the other hand, because MDA can field assets before all testing is completed, it has fielded some assets whose capability is uncertain. Because MDA develops and fields assets continuously, it combines developmental testing with operational testing. In general, developmental testing is aimed at determining whether the system design will satisfy the desired capabilities; operational testing determines whether the system is effective, survivable, and suitable in the hands of the user. MDA conducts testing both on the ground and in flight. The most complex of these is an end-to-end flight test that involves a test of all phases of an engagement including detecting, tracking and destroying a target with an interceptor missile. An end-to-end intercept involves more than one MDA element. For example, a recent intercept test involved a target flown out of Kodiak, Alaska, tracked by the AN/TPY-2 radar located in Alaska, and the Beale upgraded early warning radar located in California, the Sea-based X-band radar and an Aegis radar located at different points in the Pacific. All of the radars communicated with fire control centers in Alaska to guide an interceptor launched from California to hit the target over the Pacific Ocean. Due to the complexity, scale, safety constraints, and cost involved, MDA is unable to conduct a sufficient number of flight tests to fully understand the performance of the system. Therefore, MDA utilizes models and simulations, anchored by flight tests, to understand both the developmental and operational performance of the system. To ensure confidence in the accuracy of modeling and simulation the program goes through a process called accreditation. The models are validated individually using flight and other test data and accredited for their intended use. Models and simulations are used prior to a flight test to predict performance, the flight test is then run to gather data and verify the models, and then data is analyzed after the flight and reconstructed using the models and simulations to confirm their accuracy. MDA intends to group these models into system-level representations according to user needs. One such grouping is the annual performance assessment, a system-level end-to-end simulation that assesses the performance of the BMDS configuration as it exists in the field. The performance assessment integrates element-specific models into a coherent representation of the BMDS. Fundamentally, performance assessments anchored by flight tests are a comprehensive means to fully understand the performance capabilities and limitations of the BMDS. In addition to testing, modeling and simulation, and performance assessments, MDA also has a formal process for determining when a newly fielded asset or group of assets can be declared operational--that is, cleared for use by the warfighter in operational situations. MDA uses a variety of information as a basis to assess a new capability for declaration. For example, MDA will define in advance tests, models, and simulations it will use to base a specific decision on whether an asset or capability can be declared ready for fielding. Each capability designation so designated represents upgraded capacity to support the overall function of BMDS in its mission as well as the level of MDA confidence in the system's performance. To assess testing related progress in fiscal year 2008, we examined the accomplishments of ten BMDS elements that MDA is developing and fielding. Our work included examining documents such as Program Execution Reviews, test plans and reports, and production plans. We also interviewed officials within each element program office and within MDA functional directorates. In addition, we discussed each element's test program and its results with DOD's Office of the Director, Operational Test and Evaluation. We also interviewed officials from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics. MDA continues to experience difficulties achieving its goals for testing. During fiscal year 2008, while several tests showed progress in individual elements and some system level capabilities, all BMDS elements experienced test delays or shortfalls. Most were unable to accomplish all objectives and performance challenges continued for many. Table 1 summarizes test results and target performance for the BMDS elements during the year. Because of delays in flight test and a key ground test, MDA was unable to achieve any of the six knowledge points the MDA Director had scheduled for fiscal year 2008. In May 2007, the MDA Director established key system-level and element-level knowledge points, each based on an event that was to provide critical information--or knowledge--for a decision requiring his approval. For example, two knowledge points that MDA had to defer because of testing problems were confirmation of a new target's performance and assessment of the SM-3 Block 1A missile's ability to engage and intercept a long range target. GMD in particular continues to experience testing problems and delays. Based on its September 2006 plan, MDA had expected to conduct 7 GMD interceptor flight tests from the start of fiscal year 2007 through the first quarter of fiscal year 2009. MDA however was only able to conduct two, as shown in figure 1. GMD was unable to conduct either of its planned intercept attempts during fiscal year 2008 - FTG-04 and FTG-05. MDA first delayed and then later cancelled the FTG-04 test in May 2008 due to a problem with a telemetry component in the interceptor's Exoatmospheric Kill Vehicle. The cancellation of FTG-04 removed an important opportunity to obtain end-game performance data needed to develop GMD models and to verify the capability of the fielded Capability Enhancement I (CE-I) EKV. Moreover, MDA planned to test the CE-I EKV against a dynamic target scene with countermeasures in both the FTG-04 and FTG-05 flight tests. However, since FTG-04 was cancelled and the target failed to release the countermeasure in FTG-05, the fielded CE-I's ability against countermeasures still has not been verified. According to MDA no more CE-I EKV flight tests have been approved. The test delays led MDA to restructure its flight test plan for fiscal year 2009, increasing the number of tests, compressing the amount of time to analyze and prepare for subsequent tests, and increasing the scope of individual tests. For example, MDA plans to conduct 14 of 18 flight tests in the third and fourth quarter of fiscal year 2009. Past testing performance raises questions about whether this is realistic. In fiscal year 2008, MDA had planned to conduct 18 flight tests, but it only accomplished 10, and delayed several flight tests into 2009. In the next GMD end-to-end flight test--FTG-06 in fourth quarter fiscal year 2009 to first quarter fiscal year 2010 --MDA is accepting a higher level of risk than it previously expected in conducting this first test of an enhanced configuration of the Kill Vehicle called the Capability Enhancement II (CE-II) because it will include several objectives that had planned to be previously tested, but have not been. For example, the FTG-06 flight test will be the first GMD test assessing both a CE-II EKV and a complex target scene. Adding to the risk, it will be only the second test using a newly developed FTF LV-2 target. Moreover, MDA in January 2008 had merged FTG-06 and FTG-07, thereby eliminating an additional opportunity to gather important information from an intercept. FTG-07 will instead be an intercept test of the two-stage interceptor intended for the European site. Problems with the reliability and availability of targets (which are themselves ballistic missiles) have increasingly affected BMDS development and testing since 2006. As MDA recently acknowledged, target availability became, in some cases, a pacing item for the overall test program. As was noted in Table 1, problems with targets have reduced testing of GMD, Sensors, and THAAD during 2008. Repeated target problems and test cancellations have particularly reduced opportunities to demonstrate the ability of sensors to discriminate the real target from countermeasures. In the mid-course of flight, a more sophisticated threat missile could use countermeasures in an attempt to deceive BMDS radars and interceptor sensors as to which is the actual reentry vehicle. In order to improve the effectiveness of the BMDS against evolving threats, MDA elements are developing advanced discrimination software in their component's sensors to distinguish the threat reentry vehicle from countermeasures and debris. The cancellation of FTG-04 and subsequent target problems during FTX-03 and FTG-05 prevented opportunities to gather data to test how well discrimination software performs in an operational environment. The current fielded configuration of the GMD kill vehicle has not been tested against countermeasures. To address the growing need for more sophisticated and reliable targets for the future BMDS test program, MDA has been developing a new set of targets called the Flexible Target Family (FTF), which was intended to provide new short, medium, and long-range targets with ground, air, and sea launch capabilities. It was viewed as a family in the sense that the different target sizes and the variants within those sizes would use common components. MDA embarked on this major development without estimating the cost to develop the family of target missiles. MDA proceeded to develop and even to produce some FTF targets without a sound business case and, consequently, their acquisition has not gone as planned. The funds required for the FTF were spent sooner than expected and were insufficient for the development. Development of all FTF sizes and variants has been discontinued except for the 72-inch diameter ground-launched target, referred to as the LV-2. With guidance from the Missile Defense Executive Board, MDA is currently conducting a comprehensive review of the targets program to determine the best acquisition strategy for future BMDS targets. It is expected to be completed in mid-2009. Whether or not MDA decides to restart the acquisition of the 52-inch diameter targets, or other FTF variants, depends on the results of this review. The process of qualifying FTF target components for the LV-2 was more difficult than expected. While many of the LV-2's components are found on existing systems, their form, fit, function, and the environment they must fly in are different. Consequently, many critical components initially failed shock and vibration testing and other qualification tests and had to be redesigned. MDA has acknowledged that the component qualification effort ran in parallel with design completion and initial manufacturing. So far, the resultant delays in the LV-2 target have had two consequences. First, a planned test flight of the LV-2 itself for the Space Tracking and Space Surveillance program was delayed and instead its first flight will be as an actual target for an Aegis BMD intercept. Second, because the LV-2 was not ready, that Aegis intercept test was deferred from fiscal year 2008 to third quarter fiscal year 2009. In addition to delaying progress on individual elements, testing problems have had other consequences for BMDS. Specifically, the reduced productivity of testing has delayed understanding the overall performance of BMDS, production and fielding have in some cases gotten ahead of testing, and declarations of capabilities ready for fielding have been made based on fewer tests and less modeling and simulation than planned. The overall performance of the BMDS cannot yet be assessed because MDA lacks a fully accredited end-to-end model and simulation capability and, according to the BMDS Operational Test Agency, it will not have that capability until 2011 at the earliest. The lack of sufficient flight test data has inhibited the validation of the models and simulations needed for the ground tests and the simulation. MDA's modeling and simulation program enables it to assess the capabilities and limitations of how BMDS performs under a wider variety of conditions than can be accomplished through the limited number of flight tests conducted. Flight tests alone are insufficient because they only demonstrate a single collection data point of element and system performance. Flight tests are, however, an essential tool used to both validate performance of the BMDS and to anchor the models and simulations to ensure they accurately reflect real performance. Computer models of individual elements replicate how those elements function. These models are then aggregated into various combinations that simulate the BMDS engagement of enemy ballistic missiles. Developing an end-to-end system-level model and simulation has been difficult. MDA's first effort to bring together different element models and simulations to produce a fully accredited, end-to-end model and simulation was for the first annual performance assessment of the fielded BMDS configuration in 2007. Performance Assessment 2007 was unsuccessful primarily because of inadequate data, particularly flight test data, for verification and validation to support accreditation. Instead, Performance Assessment 2007 used several models and simulations that represented different aspects of the BMD system and were not fully integrated. Consequently, acting on a joint recommendation between MDA and the Operational Test Agency, MDA officials cancelled the 2008 performance assessment in April 2008 because of developmental risks associated with modeling and simulations, focusing instead on testing and models for Performance Assessment 2009. According to the BMDS Operational Test Agency's January 2009 Modeling and Simulation accreditation report, confidence in MDA's Modeling and Simulation efforts remains low although progress was made during the year. Out of 40 models, the BMDS Operational Test Agency recommended in January 2009 full accreditation for only 6 models, partial accreditation for 9 models, and no accreditation for 25 models. MDA is now exercising stronger central leadership to provide guidance and resources as they coordinate the development of verified and validated models and simulations. MDA intends to verify and validate models and simulations by December 2009 for Performance Assessment 2009. However, BMDS Operational Test Agency officials stated that there is a high risk that the performance assessment 2009 analysis will be delayed because of remaining challenges and MDA's delayed progress in accreditation. MDA does not expect to have a single end-to-end simulation for use in performance assessments until 2010. Testing problems have contributed to a concurrent development, manufacturing and fielding strategy in which assets are produced and fielded before they are fully demonstrated through testing and modeling. For example, although a test of the ability of the SM-3 Block 1A missile to engage and intercept a long range ballistic target was delayed until the third quarter of fiscal year 2009, MDA purchased 20 of the missiles in fiscal year 2008 ahead of schedule. While the GMD program has only been able to conduct two intercepts since 2006 for assessing the fielded configuration, the production of interceptors has continued. From the beginning of fiscal year 2007 through the first quarter of fiscal year 2009, MDA planned to conduct 7 flight tests and field 16 new ground-based interceptors. The plan included a test that would utilize two ground-based interceptors against a single target, known as a salvo test. By January 2009, GMD had conducted only 2 flight tests and dropped the salvo test; yet it fielded 13 ground-based interceptors. Moreover, the GMD program had planned to conduct an intercept test to assess the enhanced version of the EKV called the Capability Enhancement II (CE-II) in the first quarter of fiscal year 2008, months before emplacing any interceptors with this configuration. However, developmental problems with the new configuration's inertial measurement unit and the target delayed the first flight test with the CE-II configuration--FTG-06--until at least fourth quarter fiscal year 2009. Despite these delays, emplacements will proceed; MDA expects to have emplaced five CE-II interceptors before this flight test. More importantly, GMD projects that the contractor will have manufactured and delivered 10 CE-II EKVs before that first flight test demonstrates the CE-II capability. This amounts to over half of the CE-II EKV deliveries that are currently under contract. When MDA determines that a capability can be considered for operational use it does so through a formal declaration. MDA bases its declarations on, among other things, a combination of models and simulations--such as end-to-end performance assessments (from missile launch to attempted intercept)--and ground tests all anchored to flight test data. In fiscal year 2008, MDA declared it had fielded 7 of 17 BMDS capabilities planned for 2008 (postponing 10). In doing so MDA largely reduced the basis for the declarations due in part to test problems and delays. Specifically, MDA had intended to use a GMD flight test that was cancelled, a key ground test that was delayed and a performance assessment that was cancelled. MDA had to shift the basis of the 7 declarations to previous flight and ground tests. MDA has undertaken a three-phase review of the entire BMDS modeling, simulation, and test program. According to MDA, the three phases involve identifying critical variables that have not been proven to date, determining what test scenarios are needed to collect the data, and developing an affordable and prioritized schedule of flight and ground tests. MDA intends to complete all three phases of the review by May 2009. At this point, our knowledge of the review is limited, as we have only had an introductory briefing on it. Nonetheless, the review appears to offer a sound approach for closing the gaps that exist between testing, modeling, and simulation. Further, the involvement of test and evaluation organizations is encouraging. While sound, the success of this approach hinges on providing sufficient resources, ensuring robustness, and anticipating contingencies. In addition to linking the critical modeling and simulation variables with test events, the review will have to address the factors that have limited the productivity of the current test approach, such as the availability and performance of targets. MDA's current approach to testing could be characterized as a just-in-time approach to having the test assets, such as targets, ready. This left little margin to solve issues that arise leading up to the tests. Accordingly, the third phase of MDA's new approach--properly resourcing the tests with sufficient time, funding and reliable targets--will be key. MDA has indicated that its revision will result in a more robust test plan, providing more margin to conduct the tests through, for example, having spare interceptors and targets available. Other contingencies that a new approach to modeling, simulation, and testing should anticipate include unexpected or incomplete test results, and problems in accrediting the models that are needed for aggregated simulations, such as performance assessments. An important consideration in this regard is for modeling, simulation, and testing events to be re-synchronized so that they properly inform decisions on producing, fielding, and declaring assets operational. Contingency plans could then be formed for adjusting the pace of these decisions should shortfalls occur in modeling, simulation, or testing. MDA has indicated that this new approach to testing will take time to implement, with partial implementation in fiscal year 2010 and full implementation not occurring until fiscal year 2011. Therefore, MDA must manage the transition to the new testing approach. In particular, the ambitious fiscal year 2009 flight test plan may need to be reassessed with the goal of establishing a robust series of tests that can withstand some delays without causing wholesale changes to the test plan during the transition. In the mean time, MDA will have to be prudent in making decisions to produce and field additional assets. Our annual report on missile defense is in draft and with DOD for comment. It will be issued in final by March 13, 2009. In that report, we are recommending additional steps to further improve the transparency, accountability, and oversight of the missile defense program. Our recommendations include actions to improve cost reporting as well as testing and evaluation. DOD is in the process of preparing a formal response to the report and its recommendations. Madame Chairman, this concludes my statement. I would be pleased to respond to any questions you or members of the subcommittee may have. For questions about this statement, please contact me at (202) 512-4841 or [email protected]. Individuals making key contributions to this statement include David B. Best, Assistant Director; Steven B. Stern; LaTonya D. Miller; Thomas Mahalek; Ivy Hubler; Meredith Allen Kimmett; Kenneth E. Patton; and Alyssa Weir. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Missile Defense Agency (MDA) has spent about $56 billion and will spend about $50 billion more through 2013 to develop a Ballistic Missile Defense System (BMDS). This testimony is based on two reviews GAO was directed to conduct in 2008. In addition to our annual review assessing the annual cost, testing, schedule, and performance progress MDA made in developing BMDS, we have also reported on MDA's targets program. In this testimony we discuss (1) the productivity of MDA's recent test program, (2) the consequences of the testing shortfalls, and (3) key factors that should be considered as MDA revises its approach to testing. GAO assessed contractor cost, schedule, and performance; tests completed; and the assets fielded during 2008. GAO also reviewed pertinent sections of the U.S. Code, acquisition policy, and the activities of a new missile defense board. The scale, complexity, cost and safety associated with testing the missile defense system constitute a unique challenge for MDA, test agencies and other oversight organizations. This challenge is heightened by the fact that missile defense assets are developed, produced, and fielded concurrently. Overall, during fiscal year 2008, testing has been less productive than planned. While MDA completed several key tests that demonstrated enhanced performance of BMDS, all elements of the system had test delays and shortfalls, in part due to problems with the availability and performance of target missiles. GMD in particular was unable to conduct either of its two planned intercept attempts in fiscal year 2008. While it did subsequently conduct one in December 2008, it was not able to achieve all primary objectives because the target failed to release its countermeasures. As a result, aspects of the fielded ground-launched kill vehicles may not be demonstrated since no more flight tests have been approved. Target missiles continue as a persistent problem in fiscal year 2008 as poor target performance caused several tests to either fail in part or in whole. Testing shortfalls have had several consequences. First, they have delayed the validation of models and simulations, which are needed to assess the system's overall performance. As a result, the performance of the fielded BMDS as a whole cannot yet be determined. Second, the production and fielding of assets has continued and in some cases has gotten ahead of testing. For example, enhanced Exoatmospheric Kill Vehicles will now be produced and delivered before they are flight tested. Third, MDA has relied on a reduced basis--fewer test, model, and simulation results--to declare capabilities as operational in the field. MDA has undertaken a three-phase review of the entire BMDS test program that involves identifying critical variables that have not been proven to date, determining what test scenarios are needed to collect the data, and developing an affordable, prioritized schedule of flight and ground tests. This review, as long as it continues to involve test and evaluation organizations, appears to offer a sound approach for closing the gaps that exist between testing, modeling, and simulation. Critical to being able to implement the approach will be addressing the factors that have limited the productivity of the current test approach, such as the availability and performance of targets. An additional consideration in a new testing approach must be to ensure that assets are sufficiently tested before they are produced and fielded. An important consideration in this regard is for modeling, simulation, and testing events to be re-synchronized so that they properly inform decisions on producing, fielding, and declaring assets operational. Contingency plans could then be formed for adjusting the pace of these decisions should shortfalls occur in modeling, simulation, or testing. Because MDA has indicated implementation will take time, managing the transition may need to include reassessing the ambitious fiscal year 2009 test plan. In the mean time, MDA will have to be prudent in making decisions to produce and field assets.

The Buy Indian Act of 1910 authorizes the Secretary of the Interior to employ Indian labor and to purchase the products of Indian-owned firms without using the normal competitive process. As implemented, Interior's BIA may use the Buy Indian Act procurement authority. In addition, effective in 1955, Congress transferred authority over functions relating to the maintenance and operation of hospitals and health facilities for Indians, and the conservation of the health of Indians from Interior to HHS--formerly the Department of Health, Education, and Welfare. As a result, HHS' IHS may use the Buy Indian Act procurement authority for acquisitions in connection with those functions. BIA and IHS may use the Buy Indian Act to give preference to Indian-owned businesses when acquiring supplies and services to meet agency needs and requirements. The Buy Indian Act itself is brief and contains little detail. The key to implementing the Act is in both agencies' regulations. The two agencies have broad discretion over whether and how to utilize the Buy Indian Act and have issued agency regulations governing their use of the authority. BIA provides services to approximately 1.9 million American Indians and Alaska Natives to enhance quality of life, promote economic opportunity, and carry out the responsibility to protect and improve the trust assets of American Indians and Alaska Natives. IHS is responsible for providing health care for American Indians and Alaska Natives. To provide for these services, both agencies contract for a variety of items and services such as administrative and custodial services, maintenance projects, and office supplies. BIA and IHS are divided into twelve largely similar geographic areas across the United States, which they refer to as regional offices and area offices respectively.director. BIA and IHS headquarters set policies and oversee the regional offices. Each regional office employs contracting officers responsible for awarding contracts, including Buy Indian Act contracts. Each agency also awards some contracts through their headquarters offices. See figures 1 and 2 below for information on the regional structure of each of the agencies. BIA and IHS have policies and procedures in place to implement the Buy Indian Act and to help ensure contractors' compliance with key requirements. However, both agencies' headquarters have limited insight into implementation of the Act at regional offices. BIA and IHS both implement the Buy Indian Act authority through a combination of regulations, agency policy, and guidance. BIA officials told us they prioritize the use of the Buy Indian Act over other set-aside authorities. Conversely, IHS officials reported prioritizing awards through other set- asides over the use of the Act so as to meet federally mandated small business goals. However, these priorities are not documented in regulations or policies. Both agencies have regulations to help ensure contractors comply with key requirements, such as maintaining the minimum proportion of Indian ownership, not subcontracting more than half of the contracted work to other than Indian firms, and providing a preference to Indians in employment, training, and subcontracting. Although these regulations are in place, headquarters officials at both agencies reported limited insight into implementation of these regulations at their regional offices because they do not collect data concerning the Buy Indian Act from regional offices, nor does either agency have a specific review of Buy Indian Act contracts included in its regular procurement review process. Both agencies have regulations and policies in place to implement the Buy Indian Act, codified in formal rules and agency guidance. In 2013, Interior finalized regulations implementing the Buy Indian Act in the Department of the Interior Acquisition Regulation, over 30 years after they had been initially promulgated. The rule solidified the processes to be used for implementation and provided a consistent policy to be used throughout BIA. BIA began promulgation of the regulations back in October 1982 with proposed rules published in the Federal Register. BIA made additional efforts to establish regulations over the next 30 years until the final regulation took effect in 2013. BIA officials could not identify a specific reason as to why finalization of the regulations took so long. Prior to issuing a rule, BIA issued an internal policy manual to govern the program and provided guidance to its employees through a series of policy memoranda. BIA cited creating a more uniform process and applying it more consistently as the main reasons for pursuing a formal regulation. HHS, which at the time was the Department of Health, Education, and Welfare, enacted Buy Indian Act regulations in 1975. A modified version of these regulations was later incorporated into the Department of Health and Human Services Acquisition Regulation. IHS also issued the Indian Health Manual to provide additional guidance to its employees regarding the IHS procurement process, including specific policies regarding the Buy Indian Act. The chapter of the Indian Health Manual that contains requirements related to the Buy Indian Act is currently under revision. BIA and IHS define the term "Indian" in their regulations somewhat differently. BIA regulations define "Indian" as a person who is a member of an Indian Tribe, or "Native" as defined in the Alaska Native Claims Settlement Act. IHS, however, defines "Indian" as a member of any tribe, pueblo, band, group, village, or community that is recognized by the Secretary of the Interior as being Indian or any individual or group of individuals recognized by the Secretary of the Interior or the Secretary of HHS. Both agencies' implementing regulations impose key requirements on contractors. First, both agencies require eligible firms to be 51 percent Indian-owned. Second, firms awarded a contract under the Buy Indian Act must give preference to Indians in employment and training opportunities under the contract, and to Indian firms in the award of any subcontracts. Third, firms awarded a contract under the Buy Indian Act must not subcontract more than 50 percent of the work to other than Indian firms. BIA officials stated contracting officers must consider the Buy Indian Act first when awarding every contract, and if they are unable to award a contract using the Buy Indian Act, they must provide justification as to why not. However, this policy is not currently documented. According to BIA officials, policy documentation was recently rescinded because it was confusing and not fully in-line with the intent to award Buy Indian first. BIA is working on revising its policy on the use of the Buy Indian Act. Officials were uncertain exactly when the new guidance would be issued. At IHS, use of the Buy Indian Act versus other set-aside programs is unclear and also not sufficiently documented. IHS officials told us that, because of difficulties meeting small business goals, the agency prioritizes awarding contracts to vendors that help the agency meet its federally mandated small business goals, and that awarding contracts under the Buy Indian Act is secondary to those goals. They also stated that since June 2005, there has been an effort within the agency to encourage Indian-owned firms to seek status under set-asides other than the Buy Indian Act, such as women-owned or veteran-owned small businesses. IHS was unable to provide documentation related to this practice, and was only able to produce a 1995 policy that, contrary to what we were told, indicated that the Buy Indian Act takes precedence over other set-asides. The lack of documented policy at BIA and IHS is not consistent with federal internal control standards, which provide that formally documented policies and procedures help to ensure that staff performs Without documented policies in activities consistently across an agency.place BIA and IHS are at risk for inconsistent application of the Buy Indian Act across the agency. Both agencies' regulations provide for mechanisms to help enforce key requirements of the Buy Indian Act as implemented. Specifically, both agencies' regulations require that firms awarded a contract under the Buy Indian Act be at least 51 percent Indian owned, provide a preference to Indians in employment, training, and subcontracting, and not subcontract more than 50 percent of the work to other than Indian firms. These key requirements are implemented through mechanisms such as self- certification procedures and, in some cases, specific contract clauses. Both agencies rely on firms to self-certify their status as Indian-owned. BIA requires firms to represent their Indian-owned status by checking a box when submitting a proposal for a contract that indicates that they meet the relevant regulatory definitions. are included in all BIA Buy Indian Act contracts that require firms to report any change in Indian-owned status. According to IHS officials, bidders on IHS Buy Indian Act contracts must submit a certificate of degree of Indian blood or other form of tribal membership documentation as part of an application packet in order to be considered eligible for a Buy Indian contract. According to agency officials at both BIA and IHS, under self- certification, contracting officers may request more information from a bidding firm to confirm its Indian-owned status, though officials report this is rarely done. At BIA, the contracting officer may ask an attorney in the appropriate regional office to review a firm's representation. In addition, after receipt of offers, the contracting officer may question the representation of any bidder by filing a formal objection with the chief of the contracting office. See 48 C.F.R. SS 1452.280-4 for the Indian economic enterprise representation provision included in Buy Indian solicitations. the Buy Indian Act specific challenge process at BIA. IHS handles challenges according to the protest procedures set out in the Federal Acquisition Regulation. To deter intentional misrepresentations of Indian- owned status, both agencies rely on the suspension and debarment process, and prosecution under the federal false statement statute. Both agencies' regulations require firms that are awarded a contract under the Buy Indian Act to give preference to Indians in employment, training, and subcontracting. Contracts awarded under the Buy Indian Act, and all resulting subcontracts, are required to contain the Indian Preference Clause, which specifically requires the contractor to provide a preference to Indians in employment, training, and subcontracting opportunities under the contract. The clause further requires the contractor to maintain sufficient records indicating compliance. Agency officials at both BIA and IHS told us they have regulations limiting subcontracting with other than Indian-owned firms to no more than 50 percent of the work, although only BIA implements this requirement through the inclusion of a contract clause. Violations of contract clauses can have serious consequences such as contract termination. This approach is similar to how limitations on subcontracting might be handled for some small business contracts. For example, when awarding an 8(a) contract, the Federal Acquisition Regulation directs contracting officers to include the Limitations on Subcontracting clause, under which the contractor agrees that the 8(a) firm will perform a certain percentage of the work. According to BIA and IHS officials, neither agency employs systematic monitoring or compliance protocols--such as systematic reporting on specific Buy Indian requirements--to ensure that contractors comply with key requirements and contract clauses beyond regular contracting officer oversight. The Buy Indian Act is not necessarily unique in this regard. The Small Business Administration's women-owned small business and economically disadvantaged women-owned small business programs generally rely on self-certification and oversight by the contracting officer as well. Certain contracts or types of work involve more stringent, and more specific, monitoring requirements. For example, for contracts over $50,000, BIA requires contractors to appoint a liaison officer in charge of keeping records for its Indian preference program and to issue semi- annual reports. IHS monitors compliance in a similar fashion, requiring a liaison officer for non-construction contracts equal to or over $50,000 and construction contracts equal to or over $100,000. Federal internal control standards state that, for an entity to run and control its operations, it must have relevant, reliable, and timely communications, and that information is needed throughout the agency to achieve all of its objectives. The standards further state that operating information is needed to determine whether an agency is complying with various laws and regulations. We found that BIA and IHS headquarters officials have limited insight into the Buy Indian Act implementation in the regional offices. Specifically, both BIA's and IHS's headquarters-level procurement managers stated that they had little knowledge about challenges to a firm's self-certification of Indian-owned status that might have occurred in the regional offices. When asked about how frequently challenges occurred or how they were resolved, BIA and IHS officials told us they would have to consult with regional offices to provide this information. Also, officials at both agencies told us they do not aggregate data relating to challenges. More broadly, these officials reported they do not require regional offices to collect, retain, or aggregate data about compliance with Buy Indian requirements in a systematic fashion. Given this lack of insight, it is difficult for BIA and IHS officials to know whether the Buy Indian Act is being consistently applied among the regions, or for the agencies to determine the extent to which mechanisms to implement key requirements are working as intended. Both agencies also identified a specific process in place for reviewing procurements awarded at their regional offices, but these reviews have not historically included an examination of contracts awarded using the Buy Indian Act. For example, Interior requires BIA to conduct bi-annual acquisition reviews at each of its regional offices, but officials told us these reviews have not previously examined the use of the Buy Indian Act in particular. Following a series of informal, region-by-region reviews starting in mid-2015, BIA plans to include Buy Indian Act requirements in future formal acquisition reviews. Similarly, IHS officials reported that they recently completed a periodic procurement management review of contracts awarded at its regional offices, but officials stated they were not aware of any reviews, past or planned, specifically focused on the use of the Buy Indian Act. By not reviewing Buy Indian Act contracts as part of the procurement review process, both agencies are missing opportunities to ensure effective oversight of these contract awards. Use of the Buy Indian Act comprises a small percentage of BIA and IHS contract obligations. However, both agencies also award contracts to Indian-owned firms using other authorities, thus increasing the percentage of obligations awarded to Indian-owned firms. During the period covered by our review, both agencies awarded contracts using the Buy Indian Act authority to more than 300 different Indian-owned firms. The types of goods and services purchased under the Act varied, and included maintenance, medical, custodial, administrative support, and office supplies. Use of the Buy Indian Act represents a small percentage of both BIA's and IHS's annual contract obligations. However, both agencies can and do use other procurement authorities to award contracts to Indian-owned firms, thus increasing the overall percentage of contracts awarded to such firms. Officials from both agencies noted that it would be difficult to have all contract obligations be set aside for award under the Buy Indian Act, noting that some requirements, such as those for utilities, may not be suitable for award using the Act. Figures 3 and 4 show the annual percentage of obligations under the Buy Indian Act, Indian-owned obligations awarded through other procurement authorities, and non Indian-owned obligations for BIA and IHS respectively. We also found that BIA and IHS were awarding contracts using the Buy Indian Act authority to a number of different Indian-owned firms. Specifically, in fiscal years 2010 through 2014, BIA awarded 732 contracts to 269 vendors and IHS awarded 131 contracts to 84 vendors. Use of the Buy Indian Act at both agencies' offices varies. Based on data from FPDS-NG from fiscal years 2010 through 2014, most of the agencies' offices awarded contracts under the Buy Indian Act, although some used it more than others. For example at BIA, while almost half of the total Buy Indian Act obligations across this time frame were awarded by the agency's central office, a headquarters office, these obligations decreased from about two-thirds of the agency's Buy Indian Act obligations in 2010 to about one-third in 2014. Other offices with relatively high percentages of use included the Navajo and Western regional offices. At IHS the majority of the Buy Indian Act obligations were awarded through its Albuquerque, Phoenix, and California area offices. See figures 5 and 6 for more details about the offices' contract obligations using the Act. BIA and IHS have used the Buy Indian Act to purchase a variety of goods and services in areas such as maintenance, medical, custodial, administrative support, and office supplies.and services purchased are more varied, with architecture and At BIA, the types of goods engineering related goods and services being the most common (see figure 7). Based on our analysis, IHS primarily uses the Buy Indian Act to purchase goods and services in three areas: professional and administrative support services, medically related goods and services, and custodial or housekeeping goods and services (see figure 8). The use of the Buy Indian Act is intended to promote growth and development of Indian industries and, like any set-aside program, is important in helping these businesses in the marketplace. Interior and HHS issued regulations and other guidance to guide implementation of the Act, but reported differing priorities in terms of use of the Act. While it is within each agency's discretion to establish these priorities, it is important that these priorities be clearly documented. Both agencies lack current documentation of these stated priorities. Without clear and documented guidance on their priorities, BIA and IHS are at risk of inconsistent implementation. We also found that BIA and IHS have limited insight into how key requirements, such as self certification and potential challenges to those certifications, are being implemented at their regional offices where the contracts are being awarded. Both agencies would benefit from collecting data on use of the Buy Indian Act from regional offices as well as including a review of contracts awarded using the Act in their oversight reviews. Without knowledge of how the regions are implementing requirements related to the Act, both agencies may be missing opportunities to improve use of the Act. Information about the number of challenges, for instance, or detailed reporting on how contractors are meeting their Indian preference requirements, could point to issues in need of attention. Conversely, such information might also highlight regional innovations that, if implemented more broadly, could improve the use of the Buy Indian Act across each agency. Such information could help ensure that both agencies are maximizing the benefits intended in terms of the growth and development of Indian industries. To ensure consistent implementation of the Buy Indian Act procurement authority across the agencies and to enhance oversight of implementation of the Act at regional offices, we recommend that the Secretaries of the Interior and Health and Human Services direct the Bureau of Indian Affairs and Indian Health Service respectively, to take the following three actions: (1) clarify and codify their policies related to the priority for use of the Buy Indian Act, including whether the Buy Indian Act should be used before other set-aside programs; (2) collect data on regional offices' implementation of key requirements, such as challenges to self-certification; and (3) include Buy Indian Act contracts as a part of their regular procurement review process. We provided a draft of this report to Interior and HHS for review and comment. Both agencies concurred with our recommendations and identified actions they are taking or plan to take to address the recommendations. HHS also provided technical comments which we incorporated as appropriate. Interior indicated it is in the process of updating policy that will more clearly define the priority of the use of the Buy Indian Act authority. Interior also indicated it would develop policy and procedure requirements for collecting data bureau-wide--including from all Indian Affairs offices that initiate procurement actions-on the Act's key requirements, including self-certification, verification, and validation. Additionally, Interior indicated it plans to incorporate information related to Buy Indian Act contracts into its checklist for its annual reviews. HHS plans to clarify and codify policies related to the priority for use of the Buy Indian Act in the Indian Health Manual. HHS also plans to conduct a review of contracts awarded under the Buy Indian Act as part of its internal procurement oversight reviews and to require all acquisition offices to conduct regular Buy Indian Act procurement reviews. Additionally, HHS stated it plans to continue oversight to ensure that contractors comply with key requirements and that the agency will collect data on contracts defined in FPDS-NG as American Indian/Alaska Native owned, but did not specify the extent to which data would be collected on the regional offices' implementation of key requirements. As HHS implements our recommendations, we continue to emphasize the importance of oversight and data collection at the regional office level and encourage HHS to take the necessary steps in collecting data from these offices. Interior and HHS's written comments are reprinted in appendix I and appendix II, respectively. We are sending copies of this report to interested congressional committees; the Secretary of the Interior; and the Secretary of Health and Human Services. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please call 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. GAO staff that made major contributions to this report are listed in appendix III. In addition to the contact named above, Janet McKelvey, Assistant Director; Julie C. Hadley, Analyst-in-Charge; Matthew J. Ambrose, Danielle R. Greene, Kristine R. Hassinger, Julia M. Kennon, Jeffery D. Malcolm, and Roxanna T. Sun made key contributions to this report.

The Buy Indian Act of 1910 and agencies' implementing regulations allow Interior's BIA and the Department of Health and Human Services' IHS to award federal contracts to Indian-owned businesses without using the standard competitive process. Among other requirements, eligible firms must be at least 51 percent Indian-owned and give preference to Indians in employment, training, and subcontracting. GAO was asked to review the implementation of the Buy Indian Act. This report identifies (1) the policies and procedures at BIA and IHS to implement the Act; and (2) the funds obligated by BIA and IHS using the Buy Indian Act procurement authority. GAO reviewed the Buy Indian Act, the Federal Acquisition Regulation, and agency policies and regulations. GAO also analyzed data from the Federal Procurement Data System-Next Generation on BIA and IHS's contract obligations under the Act between fiscal years 2010 and 2014 and met with agency officials. The Department of the Interior's (Interior) Bureau of Indian Affairs (BIA) and the Department of Health and Human Services' Indian Health Service (IHS) have requirements in place to implement the Buy Indian Act. Through supplements to the Federal Acquisition Regulation, both BIA and IHS have policies and procedures to implement key requirements: Indian-owned status . Eligible firms must be 51 percent Indian-owned. The agencies rely on firms to self certify that they are Indian-owned and interested parties may challenge a firm's self-certification. Indian preference . The agencies require that contractors give preference to Indians in employment and training opportunities, and use a contract clause to implement this requirement. Subcontracting . The agencies require contractors to give preference to Indian firms in the award of any subcontracts. However, BIA and IHS have limited insight into implementation of the Buy Indian Act at their regional offices, where the contracts are generally awarded. For example, officials at both agencies' headquarters had little knowledge as to how often challenges to self-certifications of Indian-owned status occur on contracts awarded at the regional offices. Neither agency collects data from regional offices on use of the Buy Indian Act, and neither agency includes a specific review of Buy Indian Act contracts in its regular procurement review process. Therefore, the agencies may be missing opportunities to maximize the intended benefits of the Act in terms of growth and development of Indian firms. Use of the Buy Indian Act comprises a small percentage of the two agencies' annual contract obligations. However, these agencies also award contracts to Indian-owned firms using other authorities, thus increasing the percentage of obligations awarded to Indian-owned firms. GAO recommends, among other things, that Interior and Health and Human Services enhance their oversight of execution of the Act at regional offices by collecting additional data on key requirements and including Buy Indian Act contracts in procurement reviews. Interior and Health and Human Services agreed with GAO's recommendations.

A U.S. passport is not only a travel document but also an official verification of the bearer's origin, identity, and nationality. Under U.S. law, the Secretary of State has the authority to issue passports. Only U.S. nationals may obtain a U.S. passport, and evidence of citizenship or nationality is required with every passport application. Federal regulations list those who do not qualify for a U.S. passport, including those who are subjects of a federal felony warrant. The Deputy Assistant Secretary for Passport Services oversees the Passport Services Office, the largest component of State's Consular Affairs Bureau. Passport Services consists of three headquarters offices: Policy Planning and Legal Advisory Services; Field Operations; and Information Management and Liaison. Also within Consular Affairs is the Office of Consular Fraud Prevention, which addresses passport, visa, and other types of consular fraud; the Consular Systems Division, responsible for the computer systems involved in passport services and other consular operations; and the Office for American Citizens Services, which handles most issues relating to passport cases at overseas posts. The Bureau of Diplomatic Security is responsible for investigating individual cases of suspected passport and visa fraud. The State Department Office of the Inspector General (OIG) also has some authority to investigate passport fraud. State operates 16 domestic passport-issuing offices, which employ approximately 480 passport examiners who approve and issue most U.S. passports that are printed each year. The number of passports issued by domestic passport offices has risen steadily in recent years, increasing from about 7.3 million in fiscal year 2000 to 8.8 million in fiscal year 2004. Overseas posts deal with a much lower volume of passports by comparison, handling about 300,000 worldwide in fiscal year 2004. The majority of passport applications are submitted by mail or in-person at one of almost 7,000 passport application acceptance facilities nationwide. The passport acceptance agents at these facilities are responsible for, among other things, verifying whether an applicant's identification document (such as a driver's license) actually matches the applicant. Then, through a process called adjudication, passport examiners determine whether they should issue each applicant a passport. Adjudication requires the examiner to scrutinize identification and citizenship documents presented by applicants to verify their identity and U.S. citizenship. The passport adjudication process is facilitated by computer systems, including the Travel Document Issuance System, which appears on passport examiners' screens when the adjudication begins and automatically checks the applicant's name against several databases. Figure 1 identifies the key computer databases available to help examiners adjudicate passport applications and detect potential fraud. In addition, examiners scrutinize paper documents and other relevant information during the fraud detection process, watch for suspicious behavior and travel plans, and request additional identification when they feel the documents presented are insufficient. When examiners detect potentially fraudulent passport applications, they send the applications to their local fraud prevention office for review and potential referral to State's Bureau of Diplomatic Security for further investigation. State's Bureau of Diplomatic Security investigators stated that imposters' use of assumed identities, supported by genuine but fraudulently obtained identification documents, was a common and successful way to fraudulently obtain a U.S. passport. This method accounted for 69 percent of passport fraud detected in fiscal year 2004. Investigators found numerous examples of aliens and U.S. citizens obtaining U.S. passports using a false identity or the documentation of others to hide their true identity. In one example, in 1997, a naturalized U.S. citizen born in Cuba stole a Lear jet and transported it to Nicaragua. At the time of his arrest in 2003, he was using an assumed identity and possessed both false and legitimate but fraudulently obtained identification documents, including a U.S. passport in the name he used while posing as a certified pilot and illegally providing flight instruction. Seized at his residence when he was arrested were two Social Security cards, four driver's licenses, three Puerto Rican birth certificates, one U.S. passport, one pilot identification card, numerous credit cards and checking account cards, and items used to make fraudulent documents. In October 2004, he pled guilty to knowingly possessing five or more "authentication devices" and false identification documents, for which he was sentenced to 8 months confinement. In another case, a man wanted for murdering his wife obtained a Colorado driver's license and a passport using a friend's Social Security number and date and place of birth. Three and four years later he obtained renewal and replacement passports, respectively, in the same assumed identity. He was later arrested and pled guilty to making a false statement in an application for a passport. He was sentenced to about 7 months time served and returned to California to stand trial for murdering his wife. Applicants commit passport fraud through other means, including submitting false claims of lost, stolen, or mutilated passports; child substitution; and counterfeit citizenship documents. Some fraudulently obtain new passports by claiming to have lost their passport or had it stolen or damaged. For example, one individual who used another person's Social Security number and Ohio driver's license to report a lost passport obtained a replacement passport through the one-day expedited service. This fraudulently obtained passport was used to obtain entry into the United States 14 times in less than three years. Diplomatic Security officials told us that another means of passport fraud is when individuals obtain replacement passports by using expired passports containing photographs of individuals they closely resemble. This method of fraud is more easily and commonly committed with children, with false applications based on photographs of children who look similar to the child applicant. Assuming the identity of a deceased person is another means of fraudulently applying for a passport. According to State Bureau of Diplomatic Security documents, passport fraud is often commited in connection with other crimes, including narcotics trafficking, organized crime, money laundering, and alien smuggling. According to Diplomatic Security officials, concerns exist within the law enforcement and intelligence communities that passport fraud could also be used to help facilitate acts of terrorism. Using a passport with a false identity helps enable criminals to conceal their movements and activities, and U.S. passports provide their holders free passage into our country with much less scrutiny than is given to foreign citizens. U.S. passports also allow visa-free passage into many countries around the world, providing obvious benefits to criminals operating on an international scale. According to State officials, the most common crime associated with passport fraud is illegal immigration. For example, one woman was recently convicted for organizing and leading a large-scale passport fraud ring that involved recruiting American women to sell their children's identities, so that foreign nationals could fraudulently obtain passports and enter the United States illegally. According to the Department of State, the woman targeted drug-dependent women and their children, paying them about $300 for each identity and then using the identities to apply for passports. The woman then sold the fraudulently obtained passports to illegal aliens for as much as $6,000 each. One of the key challenges to State's fraud detection efforts is limited interagency information sharing. Specifically, State currently lacks access to the Terrorist Screening Center's consolidated terrorist watch list database, which was created in 2003 to improve information sharing among government agencies. By consolidating terrorist watch lists, TSC is intended to enable federal agencies to access critical information quickly when a suspected terrorist is encountered or stopped within the United States, at the country's borders, or at embassies overseas. However, because State's CLASS name-check database does not contain the TSC information, U.S. citizens with possible ties to terrorism could potentially obtain passports and travel internationally without the knowledge of appropriate authorities. Although TSC has been operational since December 2003, State and TSC did not begin exploring the possibility of uploading data from the TSC database into passport CLASS until December 2004. State and TSC have not reached an agreement about information-sharing, though State sent an official proposal to TSC in January 2005. A TSC official told us that she does not foresee any technical limitations, and added that TSC agrees that it is important to work out an agreement with State. We recommended that State and other parties expedite such arrangements, and State said that it and the TSC are actively working to do so. Because the FBI and other law enforcement agencies do not currently provide State with the names of all individuals wanted by federal law enforcement authorities, State's CLASS name-check system does not contain the names of many federal fugitives, some wanted for murder and other violent crimes; these fugitives could therefore obtain passports and potentially flee the country. The subjects of federal felony arrest warrants are not entitled to a U.S. passport. According to FBI officials, FBI databases contain the names of approximately 37,000 individuals wanted on federal charges. State Department officials acknowledge that many of these individuals are not listed in CLASS. We tested the names of 43 different federal fugitives and found that just 23 were in CLASS; therefore, passport examiners would not be alerted about the individuals' wanted status if any of the other 20 not in CLASS applied for a passport. In fact, one of these 20 did obtain an updated U.S. passport 17 months after the FBI had listed the individual in its database as wanted. A number of the 20 federal fugitives who were included in our test and were found not to be in CLASS were suspected of serious crimes, including murder. One was on the FBI's Ten Most Wanted list. Table 1 lists the crimes suspected of the federal fugitives in our test. State officials told us that they had not initiated efforts to improve information sharing with the FBI on passport-related matters until the summer of 2004 because they had previously been under the impression that the U.S. Marshals Service was already sending to CLASS the names of all fugitives wanted by federal law enforcement authorities. State officials were not aware that the information in the U.S. Marshal's database was not as comprehensive as that contained in the FBI-operated National Crime Information Center database. State officials became aware of this situation when the union representing passport examiners brought to their attention that a number of individuals on the FBI's Ten Most Wanted list were not in CLASS. In the summer of 2004, the FBI agreed to State's request to provide the names from the FBI's Ten Most Wanted list. As part of these discussions, State and the FBI explored other information-sharing opportunities as well, and FBI headquarters officials sent a message instructing agents in its field offices how to provide names of U.S. citizens who are FBI fugitives to State on a case-by-case basis. Additionally, State began discussions with the FBI about receiving information on individuals with FBI warrants on a more routine and comprehensive basis. According to FBI officials, State requested that the FBI provide only the names of FBI fugitives and not those of individuals wanted by other federal law enforcement entities. However, the FBI is the only law enforcement agency that systematically compiles comprehensive information on individuals wanted by all federal law enforcement agencies, and, according to FBI officials, it is the logical agency to provide such comprehensive information to State. We recommended that State expedite arrangements to enhance interagency information sharing with the FBI to ensure that the CLASS system contains a more comprehensive list of federal fugitives. According to State, it sent a written request on this issue to the FBI in April 2005. State also noted that it had reached agreement in principal with the FBI on information sharing efforts related to FBI fugitives. In addition to its role in compiling information on federal fugitives, the FBI is also the only law enforcement agency that compiles comprehensive information on individuals wanted by state and local authorities. According to FBI officials, FBI databases contain the names of approximately 1.2 million individuals wanted on state and local charges nationwide. FBI officials told us that some of the most serious crimes committed often involve only state and local charges. We tested the names of 24 different state fugitives and found that just 7 were in CLASS; therefore, the CLASS system would not flag any of the other 17, were they to apply for a passport. Table 2 lists the crimes suspected of the 17 tested state fugitives not in CLASS who were included in our test. During our review, State Department officials told us that having a comprehensive list of names that included both federal and state fugitives could "clog" State's CLASS system and slow the passport adjudication process. They also expressed concern that the course of action required of State would not always be clear for cases involving passport applicants wanted on state charges. We recommended that State work with the FBI to ensure that the CLASS system contains a more comprehensive list of state fugitives. In commenting on a draft of our report, State said that it now intends to work with the FBI and U.S. Marshals Service to establish an automated mechanism for integrating information on state warrants into CLASS. State does not maintain a centralized and up-to-date electronic fraud prevention library, which would enable passport-issuing office personnel to efficiently share fraud prevention information and tools. As a result, fraud prevention information is provided inconsistently to examiners among the 16 domestic offices. For example, at some offices, examiners maintain individual sets of fraud prevention materials. Some print out individual fraud alerts and other related documents and file them in binders. Others archive individual e-mails and other documents electronically. Some examiners told us that the sheer volume of fraud- related materials they receive makes it impossible to maintain and use these resources in an organized and systematic way. Other information sharing tools have not been effectively maintained. Consular Affairs' Office of Consular Fraud Prevention maintains a Web site and "e-room" with some information on fraud alerts, lost and stolen state birth documents, and other resources related to fraud detection, though fraud prevention officials told us the Web site is not kept up to date, is poorly organized, and is difficult to navigate. We directly observed information available on this Web site during separate visits to State's passport-issuing offices and noted that some of the material was outdated by as much as more than a year. The issuing office in Seattle developed its own online fraud library that included information such as the specific serial numbers of blank birth certificates that were stolen, false driver's licenses, fraud prevention training materials, and a host of other fraud prevention information resources and links. However, this library is no longer updated. Most of the 16 fraud prevention managers we talked to believed that the Bureau of Consular Affairs should maintain a centralized library of this nature for offices nationwide. We recommended that State establish and maintain a centralized and up- to-date electronic fraud prevention library that would enable passport agency personnel at different locations across the United States to efficiently access and share fraud prevention information and tools. Commenting on our draft report, State said that it now intends to design a centralized online passport "knowledgebase" that will include extensive sections on fraud prevention resources. In January 2004, State eliminated the assistant fraud prevention manager position that had existed at most of its domestic passport-issuing offices, and most Fraud Prevention Managers believe that this action was harmful to their fraud detection program. State eliminated the position primarily to enable more senior passport examiners to serve in that role on a rotational basis to gain deeper knowledge of the subject matter and enhance overall fraud detection efforts when they returned to adjudicating passport applications. However, managers at 10 of the 12 offices that previously had permanent assistants told us that the loss of this position had been harmful to their fraud detection program. In particular, managers indicated that the loss of their assistant impacted their own ability to concentrate on fraud detection by adding to their workload significant additional training, administrative, and networking responsibilities, while also diverting from their fraud trend analysis and preparation of reports and case referrals. Fraud Prevention Managers and other State officials have linked declining fraud referrals to the loss of the assistant fraud prevention manager position. In the 12 offices that previously had permanent assistants, fraud referral rates from the managers to Diplomatic Security decreased overall by almost 25 percent from fiscal year 2003 through 2004, the period during which the position was eliminated, and this percentage was much higher in some offices. Without their assistants helping them screen fraud referrals, check applicant information, and assist with other duties related to the process, managers said they are making fewer fraud referrals to Diplomatic Security because they lack the time and do not believe they can fully rely on new rotational staff to take on these responsibilities. We recommended that State consider designating additional positions for fraud prevention coordination and training in domestic passport-issuing offices. Passport Services management told us they were not planning to re-establish the permanent assistant role, but that they are in the process of filling one to two additional fraud prevention manager positions at each of the 2 offices with the largest workloads nationwide. State also plans to establish one additional fraud prevention manager position at another issuing office with a large workload. Commenting on our draft report, State said that it would now also consider rotating GS-12 Adjudication Supervisors through local fraud prevention offices to relieve Fraud Prevention Managers of some of their training responsibilities. State routinely transfers adjudication cases among the different offices to balance workloads, and Fraud Prevention Managers at a number of issuing offices said they had noticed a lower percentage of fraud referrals returned to them from the 3 offices that were assigned a bulk of the workload transfers. In fiscal year 2004, 28 percent of passport applications were transferred to 1 of these 3 offices for adjudication, while other issuing offices adjudicated 72 percent. Although these 3 offices received 28 percent of the applications, they provided only 11 percent of total fraud referrals to the originating agencies. For fiscal year 2003, the 3 processing centers adjudicated 26 percent of the applications but provided only 8 percent of the fraud referrals. In 2004, 1 of the issuing offices transferred out to processing centers 63 percent of its applications (about 287,000) but received back from the processing centers only 2 percent of the fraud referrals it generated that year. In 2003, this office transferred out 66 percent of its workload while receiving back only 8 percent of its total fraud referrals. Fraud Prevention Managers and other officials told us that one reason fewer fraud referrals return from these 3 offices is that passport examiners handling workload transfers from a number of different regions are not as familiar with the demographics, neighborhoods, and other local characteristics of a particular region as are the examiners who live and work there. For example, some officials noted that, in instances when they suspect fraud, they might telephone the applicants to ask for additional information so they can engage in polite conversation and ask casual questions, such as where they grew up, what school they attended, and other information. The officials noted that, due to their familiarity with the area, applicants' answers to such questions may quickly indicate whether or not their application is likely to be fraudulent. One examiner in an office that handled workload transfers from areas with large Spanish- speaking populations said that the office had an insufficient number of Spanish-speaking examiners, emphasizing the usefulness of that skill in detecting dialects, accents, handwriting, and cultural references that conflict with information provided in passport applications. We recommended that State assess the extent to which and reasons why workload transfers from one domestic passport issuing office to another were, in some cases, associated with fewer fraud referrals and to take any corrective action that may be necessary. In its official comments on our draft report, State did not address this recommendation. State has not established a core curriculum and ongoing training requirements for experienced passport examiners, and thus such training is provided unevenly at different passport-issuing offices. While State recently developed a standardized training program for new hires that was first given in August 2004, we reviewed the training programs and materials at all 7 issuing offices we visited and discussed the programs and materials at other offices with the remaining nine Fraud Prevention Managers by telephone and found that the topics covered and the amount and depth of training varied widely by office. Some had developed region- specific materials; others relied more heavily on materials that had been developed by passport officials in Washington, D.C., and were largely outdated. Some scheduled more regular training sessions, and others did so more sporadically. Several examiners told us they had not received any formal, interactive fraud prevention training in at least 4 years. Some Fraud Prevention Managers hold brief discussions on specific fraud cases and trends at monthly staff meetings, and they rely on these discussions to serve as refresher training. Some Fraud Prevention Managers occasionally invite officials from other government agencies, such as the Secret Service or DHS, to share their fraud expertise. However, these meetings take place only when time is available. For example, officials at one issuing office said the monthly meetings had not been held for several months because of high workload; another manager said he rarely has time for any monthly meetings; and two others said they do not hold such discussions but e-mail to examiners recent fraud trend alerts and information. We recommended that State establish a core curriculum and ongoing fraud prevention training requirements for all passport examiners. State said that it is implementing a standardized national training program for new passport examiners but that it is still providing training to existing passport examiners on a decentralized basis. State officials told us that they intend to develop a national training program for experienced examiners, after certain organizational changes are made in State's headquarters passport operation. Numerous passport-issuing agency officials and Diplomatic Security investigators told us that the acceptance agent program is a significant fraud vulnerability. Examples of acceptance agent problems that were brought to our attention include important information missing from documentation and identification photos that did not match the applicant presenting the documentation. Officials at one issuing office said that their office often sees the same mistakes multiple times from the same acceptance facility. These officials attributed problems with applications received through acceptance agents to the sporadic training provided for and limited oversight of acceptance agents. State has almost 7,000 passport acceptance agency offices, and none of the 16 issuing offices provide comprehensive annual training or oversight to all acceptance agency offices in their area. Instead, the issuing offices concentrate their training and oversight visits on agency offices geographically nearest to the issuing offices, or in large population centers, or where examiners and Fraud Prevention Managers had reported problems, or in high fraud areas. Larger issuing offices in particular have trouble reaching acceptance agency staff. At one larger issuing office with about 1,700 acceptance facilities, the Fraud Prevention Manager said he does not have time to provide acceptance agent training and that it is difficult for issuing office staff to visit many agencies. A manager at another large issuing office that covers an area including 11 states said she does not have time to visit some agencies in less populated areas. While State officials told us all acceptance agency staff must be U.S. citizens, issuing agency officials told us they have no way of verifying that all of them are. Management officials at one passport-issuing office told us that, while their region included more than 1,000 acceptance facilities, the office did not maintain records of the names of individuals accepting passport applications at those facilities. We recommended that State strengthen its fraud prevention training efforts and oversight of passport acceptance agents. In commenting on a draft of our report, State said that it is adapting and expanding computer- based training for U.S. Postal Service acceptance facilities for more widespread use among acceptance agents nationwide. State also indicated that it would institute a nationwide quality review program for its acceptance facilities. However, State officials recently told us that the quality reviews would focus only on new acceptance facilities and existing facilities with reported problems. It is unclear whether State will perform quality reviews for the rest of its nearly 7,000 facilities. Although State's Bureau of Diplomatic Security has provided additional resources for investigating passport fraud in recent years, its agents must still divide their time among a number of competing demands, some of which are considered a higher priority than investigating passport fraud. A Diplomatic Security official told us that, after the September 11th terrorist attacks, the bureau hired about 300 additional agents, at least partially to reduce investigative backlogs. Diplomatic Security and passport officials told us that, while the increased staff resources had helped reduce backlogs to some degree, agents assigned to passport fraud investigations are still routinely pulled away for other assignments. At most of the offices we visited, few of the agents responsible for investigating passport fraud were actually there. At one office, all of the agents responsible for investigating passport fraud were on temporary duty elsewhere, and the one agent covering the office in their absence had left his assignment at the local Joint Terrorism Task Force to do so. Agents at one office said that five of the eight agents involved in passport fraud investigations there were being sent for temporary duty in Iraq, as were many of their colleagues at other offices. Agents at all but 2 of the 7 bureau field offices we visited said they are unable to devote adequate time and continuity to investigating passport fraud. We noted that the number of new passport fraud investigations had declined by more than 25 percent over the last five years, though Diplomatic Security officials attributed this trend, among other factors, to refined targeting of cases that merit investigation. The Special-Agent-in- Charge of a large Diplomatic Security field office in a high fraud region expressed serious concern that, in 2002, the Bureau of Diplomatic Security began requiring, to reduce backlog of old cases, that most cases be closed after 12 months, whether or not the investigations were complete. The agent said that about 400 incomplete cases at his office were closed. A Diplomatic Security official in Washington, D.C., told us that, while field offices had been encouraged to close old cases that were not likely to be resolved, there had not been a formal requirement to do so. State officials agreed that Diplomatic Security agents are not able to devote adequate attention to investigating passport fraud, and told us that the Bureau of Diplomatic Security plans to hire 56 new investigative agents over the next few years. According to State officials, these new investigators will be solely dedicated to investigating passport and visa fraud and will not be pulled away for other duty. Although State's approach to developing new nationwide passport examiner production standards, implemented in January 2004, raises methodological concerns, subsequent changes to the standards make an assessment of their impact on fraud detection premature. State developed new nationwide passport examiner production standards in an effort to make performance expectations and work processes more uniform among its 16 issuing offices. However, State tested examiner production before standardizing the passport examination process; differences in work processes across offices at the time of the test limited the validity of the test results. State then used the results in conjunction with old standards to set new nationwide standards. The new standards put additional emphasis on achieving quantitative targets. Responding to concerns about their fairness due to changes that may have slowed the examination process, as well concerns that the new standards led examiners to take "shortcuts" in the examination process to meet their number targets, State made a number of modifications to the production standards during the year. The various modifications have made it unclear what impact the standards have had on passport fraud detection. Madam Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. If you or your staff have any questions about this testimony, please contact Jess Ford at (202) 512-4128 or [email protected], or Michael Courts at (202) 512-8980 or [email protected]. Individuals making key contributions to this testimony included Jeffrey Baldwin-Bott, Joseph Carney, Paul Desaulniers, Edward Kennedy, and Mary Moutsos. 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Maintaining the integrity of the U.S. passport is essential to the State Department's efforts to protect U.S. citizens from terrorists, criminals, and others. State issued about 8.8 million passports in 2004. During the same year, State's Bureau of Diplomatic Security arrested about 500 individuals for passport fraud, and about 300 persons were convicted. Passport fraud is often intended to facilitate other crimes, including illegal immigration, drug trafficking, and alien smuggling. GAO examined (1) how passport fraud is committed, (2) what key fraud detection challenges State faces, and (3) what effect new passport examiner performance standards could have on fraud detection. Using the stolen identities of U.S. citizens is the primary method of those fraudulently applying for U.S. passports. False claims of lost, stolen, or damaged passports and child substitution are among the other tactics used. Fraudulently obtained passports can help criminals conceal their activities and travel with less scrutiny. Concerns exist that they could also be used to help facilitate terrorism. State faces a number of challenges to its passport fraud detection efforts, and these challenges make it more difficult to protect U.S. citizens from terrorists, criminals, and others. Information on U.S. citizens listed in the federal government's consolidated terrorist watch list is not systematically provided to State. Moreover, State does not routinely obtain from the Federal Bureau of Investigation (FBI) the names of other individuals wanted by federal and state law enforcement authorities. We tested the names of 67 federal and state fugitives and found that 37, over half, were not in State's Consular Lookout and Support System (CLASS) database for passports. One of those not included was on the FBI's Ten Most Wanted list. State does not maintain a centralized and up-to-date fraud prevention library, hindering information sharing within State. Fraud prevention staffing reductions and interoffice workload transfers resulted in fewer fraud referrals at some offices, and insufficient training, oversight, and investigative resources also hinder fraud detection efforts. Any effect that new passport examiner performance standards may have on State's fraud detection efforts is unclear because State continues to adjust the standards. State began implementing the new standards in January 2004 to make work processes and performance expectations more uniform nationwide. Passport examiner union representatives expressed concern that new numerical production quotas may require examiners to "shortcut" fraud detection efforts. However, in response to union and examiner concerns, State eased the production standards during 2004 and made a number of other modifications and compromises.

The estimated costs of planned airport capital development vary depending on which projects are included in the estimates. According to FAA's estimate, which includes only projects that are eligible for Airport Improvement Program (AIP) grants, the total cost of airport development will be about $46 billion, or about $9 billion per year, for 2001 through 2005. FAA's estimate is based on the agency's National Plan of Integrated Airport Systems, which FAA published in August 2002. ACI's estimate includes all of the projects in FAA's estimate, plus other planned airport capital projects that may or may not be eligible for AIP grants. ACI estimates a total cost of almost $75 billion, or nearly $15 billion per year for 2002 through 2006. Projects that are eligible for AIP grants include runways, taxiways, and noise mitigation and noise reduction efforts; projects that are not eligible for AIP funding include parking garages, hangars, and expansions of commercial space in terminals. Both FAA's and ACI's estimates cover projects for every type of airport. As table 1 indicates, the estimates are identical for all but the large- and medium-hub airports, which are responsible for transporting about 90 percent of the traveling public. For these airports, ACI's estimate of planned development costs is about twice as large as FAA's. According to FAA's analysis of the planned capital development for 2001 through 2005, airports will use 61 percent of the $46 billion for capacity enhancement, reconstruction, and modifications to bring airports up to the agency's design standards and 39 percent to fund safety, security, environmental, and other projects. See figure 1. Neither ACI's nor FAA's estimate includes funding for the terminal modification projects that are needed to accommodate the new explosives detection systems required to screen checked baggage. ACI estimates that these projects will cost a total of about $3 billion to $5 billion over the next 5 years. A key reauthorization issue facing the Congress is how these terminal modification projects will be funded. In 2001, the Congress allowed FAA to use AIP funds to help pay for some new security projects; however, this use of AIP funds affected the amount of funding that was available for some development projects. Specifically, in fiscal year 2002, FAA used $561 million in AIP grant funds for security projects, or about 17 percent of the $3.3 billion available. The use of AIP grant funds for new security projects in fiscal year 2002 reduced the funding available for other airport development projects, such as projects to bring airports up to FAA's design standards and reconstruction projects. The use of AIP grant funds for security also caused FAA to defer three letter-of-intent payments totaling $28 million to three airports until fiscal year 2003 or later. From 1999 through 2001, the 3,364 airports that make up the national airport system received an average of about $12 billion per year for planned capital development. The single largest source of these funds was bonds, followed by AIP grants and passenger facility charges. (See table 2.) It is important to note that the authorized AIP funding for fiscal years 2002 and 2003 totaled $3.3 billion and $3.4 billion, respectively. However, because data for funding from other sources were not available for these years, we used the figures from 1999 through 2001, the most recent years for which consistent data were available. The amount and type of funding vary depending on the airport's size. For example, as shown in figure 2, the large- and medium-hub airports depend primarily on bonds, while the smaller airports rely principally on AIP grants. Passenger facility charges are a more important source of revenue for the large- and medium-hub airports because they have the majority of commercial-service passengers. If the funding for airport capital development remains at about $12 billion a year over the next 5 years, it would cover all of the projects in FAA's estimate. However, it would be about $3 billion less per year than ACI's estimate. Figure 3 compares the average annual funding airports received from 1999 through 2001 with FAA's and ACI's estimated annual planned development costs for 2001 through 2006. This difference is not an absolute predictor of future funding shortfalls; both funding and planned development may change in the future. However, it does provide a useful indication of where funding differences may be the greatest. In percentage terms, the difference between recent funding levels and ACI's estimate of planned capital development is somewhat greater for smaller airports than it is for large- and medium-hub airports. From 1999 through 2001, smaller airports received an average of about $2.4 billion a year for planned capital development while large- and medium-hub airports received an average of about $9.4 billion. If these funding levels continued, smaller airports would not be able to fund about 27 percent of their planned development, while large- and medium-hub airports would not be able to fund about 20 percent of their planned development. Figures 4 and 5 illustrate the differences between recent funding levels and the costs of planned capital development projected for smaller and for large- and medium-hub airports. The difference between past funding and planned development has declined over the past 5 years, and, at recent funding levels, airports would be able to fund a higher percentage of their planned capital development than they could fund in 1998. At that time, we reported that smaller airports could fund about 52 percent of their planned capital development, compared with about 73 percent today, which represents an increase of 21 percent. We also reported that large- and medium-hub airports were able to fund about 80 percent of their development and are able to fund the same amount today. See figure 6. The primary reason why smaller airports can fund more of their planned capital development today than they could in 1998 is that AIR-21 increased both the total amount of funding for AIP grants and the proportion of AIP funding that went to smaller airports. Specifically, AIR-21 increased the funding for two AIP funds that primarily or exclusively benefit smaller airports--the state apportionment fund and the small airport fund--and it created general aviation entitlement grants, which also benefit smaller airports. As a result of these changes, smaller airports received almost 63 percent of the $2.4 billion in AIP grant funds that airports received each year, on average, from 1999 through 2001. Large- and medium-hub airports can also fund more of their planned development today than they could in 1998 primarily because they are able to issue more bonds and to charge a higher passenger facility fee. Options are available to increase airport funding or to make better use of the existing funding. These options, some of which were authorized or implemented as part of AIR-21, include increasing the AIP grant funding for smaller airports, increasing passenger facility charges, creating a separate fund for new security projects, and using innovative financing approaches. The various options would benefit different types of airports to varying degrees. It is also important to note that even though the airlines may be experiencing financial problems, most large airports have very solid credit ratings and could, if necessary, issue more debt without facing exorbitant interest rates. To help address the difference between funding and planned development, AIR-21 provided that up to $150,000 a year in AIP grant funds be made available to all general aviation airports for up to 3 years for airfield capital projects, such as runways, taxiways, and airfield construction and maintenance projects. On February 11, 2003, we reported that since the program's inception in fiscal year 2001, general aviation airports have received about $325 million, which they have used primarily to help build runways, purchase navigational aids, and maintain pavements and airfield lighting. Most of the state aviation officials and general aviation airport managers we surveyed said the grants were useful in meeting their needs, and some suggested that the $150,000 grant limit be increased so that general aviation airports could undertake larger projects. However, a number of state officials cautioned that an increase in the general aviation entitlement grant could cause a decrease in the state apportionment fund that states use to address their aviation priorities. Another option would be to increase or eliminate the cap on passenger facility charges. This option would primarily benefit larger airports, because passenger facility charges are a function of the volume of passenger traffic. However, under AIP, large- and medium-hub airports that collect passenger facility charges must forfeit a certain percentage of their AIP formula funds. These forfeited funds are subsequently divided between the small airport fund, which is to receive 87.5 percent, and the discretionary fund, which is to receive 12.5 percent. Thus, smaller airports would benefit indirectly from any increase in passenger facility charges. In our 1999 report on passenger facility charges, we estimated that a small increase in these charges would have a modest effect on passenger traffic. At that time, we estimated that each $1 increase would reduce passenger levels by about 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent. Since AIR-21 raised the cap on passenger facility charges from $3.00 to $4.50, the full effect of the increase has not been realized because only 17 of the 31 large-hub airports (55 percent) and 11 of the 37 medium-hub airports (30 percent) have increased their rates to $4.50. Additionally, 3 large-hub airports and 6 medium-hub airports do not charge a passenger facility fee. The reluctance to raise passenger facility charges is likely the result of several factors, including the views of airlines, which are opposed to any increase in passenger facility charges because such an increase would raise passenger costs and reduce passenger traffic. Nonetheless, if all airports were to increase passenger facility charges to the current ceiling, additional revenue could be generated. Recently, the head of the Transportation Security Administration suggested setting up a separate fund for security projects. Such a fund might be comparable to AIP, which receives revenue from various aviation-related taxes through the Airport and Airway Trust Fund. Having a separate fund would be consistent with the recent separation of aviation safety and security responsibilities. FAA has introduced other mechanisms to make better use of existing funding sources, the most successful of which has been letters of intent, a tool that has effectively leveraged private sources of funding. As noted, letters of intent represents a nonbinding commitment from FAA to provide multiyear funding to an airport beyond the current AIP authorization period. Thus, the letter allows the airport to proceed with a project without waiting for a future AIP grant because the airport and investors know that allowable costs are likely to be reimbursed. A letter of intent may also enable an airport to receive a more favorable interest rate on bonds that are sold to refinance a project because the federal government has indicated its support for the project. FAA has issued 64 letters of intent with a total commitment of about $3 billion; large- and medium-hub airports account for the majority of the total. Other approaches to making better use of existing funding resources were authorized under AIR-21. Specifically, the act authorized FAA to continue its innovative finance demonstration program, which is designed to test the ability of innovative financing approaches to make more efficient use of AIP funding. Under this program, FAA enabled airports to leverage additional funds or lower development costs by (1) permitting flexible local matching on some projects, (2) purchasing commercial bond insurance, (3) paying interest costs on debt, and (4) paying principal and interest debt service on terminal development costs incurred before the enactment of AIR-21. FAA has provided about $31 million for smaller airports to test these innovative uses of AIP funding. According to FAA officials, the results of the program have been mixed. The most popular option for airports has been flexible matching, which has resulted in several creative loan arrangements. In conclusion, Mr. Chairman, the aviation industry and the national economy are still struggling to recover their health. Analysts nonetheless expect the demand for air travel to rebound, and the nation's aviation system must be ready to accommodate the projected growth safely and securely. As the Congress moves forward with reauthorizing FAA, it will have to decide on several key issues, including how it wants to consider the airports' estimate of $15 billion a year for planned capital development over the next 5 years, how terminal modification projects will be funded, and what priorities it wants to set, both for development and security. Sustaining recent funding levels would allow the majority of planned airport capital development to move forward, but it would not cover all of the airports' estimated costs, and it would not address the costly terminal modifications needed to accommodate explosives detection systems. Options such as additional AIP grant funds, increases in passenger facility charges, or the creation of a separate fund for new security projects could make more funding available for airport improvements. However, the growing competition for federal budget dollars and concerns about the impact of higher charges on airline ticket sales may limit the practicality of these options. To determine how much planned development would cost over the next 5 years, we obtained planned development data from FAA and ACI. ACI provided its estimate to us in January 2003, and we are still analyzing the data on which the estimate is based. To determine the sources of airport funding, we obtained capital funding data from FAA, the National Association of State Aviation Officials, Thomson Financial, and our survey of 400 general aviation and reliever airports. We obtained funding data from 1999 through 2001 because these were the most recent years for which consistent data were available. We screened the planned development and funding data for accuracy and compared funding streams across databases where possible. We also clarified ambiguous development or funding source information directly with airports. We did not, however, audit how the databases were compiled, except for our own survey. However, we have not finished analyzing the results of our survey, and the results presented in this testimony are still preliminary. We have been performing our ongoing work from May 2002 through February 2003 in accordance with generally accepted government auditing standards. This concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee might have.

Since Congress enacted the Wendell H. Ford Aviation Investment and Reform Act for the 21 Century (AIR-21) 3 years ago, much has changed. At that time, the focus was on reducing congestion and flight delays. Today, flights are being canceled for lack of business, two major air carriers are in bankruptcy, and attention has shifted from increasing the capacity of the national airspace system to enhancing aviation security. Furthermore, as the federal budget deficit has increased, competition for federal resources has intensified, and the costs of airport capital development are growing, especially with the new requirements for security. Nonetheless, analysts expect the demand for air traffic services to rebound. Until that time, the unexpected slump in air traffic creates a window of opportunity to improve the safety and efficiency of the national airport system. Although there is general consensus among stakeholders that maintaining the integrity of the national airport system requires continual capital investment, estimates vary as to the type and cost of planned airport capital development required to ensure a safe and efficient system. For 2001 through 2005, the Federal Aviation Administration (FAA) has estimated annual planned capital development costs of about $9 billion, while the Airport Council International (ACI), a key organization representing the airport industry, has estimated annual costs of about $15 billion for 2002 through 2006. The estimates differ primarily because FAA's includes only projects that are eligible for federal funding, whereas ACI's includes projects that may or may not be eligible for federal funding. Neither FAA's nor ACI's estimate covers the airport terminal modifications needed to accommodate the new explosives detection systems required to screen checked baggage. According to ACI, the total cost of these modifications could be $3 billion to $5 billion over the next 5 years. From 1999 through 2001, airports received an average of about $12 billion a year for planned capital development. The primary source of this funding was bonds, which accounted for almost $7 billion, followed by federal grants and passenger facility charges, which accounted for $2.4 billion and $1.6 billion, respectively. The amounts and types of funding also varied by airport type. Of the $12 billion, large- and medium-hub airports received over $9 billion, and smaller airports received over $2 billion. If airports continue to receive about $12 billion a year for planned capital development, they would be able to fund all of the projects included in FAA's estimate, but they would not be able to fund about $3 billion in planned development estimated by ACI. While this projected shortfall could change with revisions in future funding, planned development, or both, it nevertheless indicates where funding differences may be the greatest. Options are available to increase or make better use of the funding for airport development, and these options would benefit different types of airports to varying degrees. For example, raising the current cap on passenger facility charges would primarily benefit larger airports, while increasing or redistributing Airport Improvement Program grant funds would be more likely to help smaller airports.

In March 2002, we reported that SEC's workload and staffing imbalances had challenged SEC's ability to protect investors and maintain the integrity of securities markets. Appendix I graphically depicts SEC's workload and staffing imbalance from 1990 through 2000 as reported in our 2002 report and appendix II updates this graphic using SEC budget documents including its 2003 and 2004 workload and staffing estimates. As reported in March 2002, we found that SEC generally managed to bridge the gap between its workload and staff by determining which of its statutorily mandated duties it could accomplish with existing resources or only marginally increased resource levels. This approach, while practical, forced SEC to be largely reactive rather than proactive. We also reported that SEC tended to develop its annual budget request based on the previous year's appropriation rather than on what it would actually need to fulfill its mission. In 2003, this practice resulted in a modest increase over the previous year's request. But several high-profile corporate failures and accounting scandals, plus concerns that public companies should be held more accountable for information they report to investors, led Congress to pass the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act). The act addresses a number of concerns involving corporate governance, auditor independence, regulation and oversight of the accounting profession, and SEC's resource limitations. In part because of the level authorized in the Sarbanes-Oxley Act, SEC increased its initial 2003 budget request of $466 million to $769 million. Ultimately, Congress appropriated $716 million. For 2004, SEC requested a budget of almost $842 million reflecting a supplemental carryover, annualization of new 2003 positions, inflation (pay and nonpay), and merit pay increases less one-time 2003 information technology costs. SEC's planned allocations appear to be consistent with the Sarbanes-Oxley Act, which mandated that the $776 million authorization be used to: fund pay parity, allowing SEC to set salaries for certain staff positions at levels comparable to those at other federal financial regulators; fund information technology, security enhancements, and recovery and mitigation activities in light of the terrorist attacks of September 11, 2001; and fund no fewer than 200 additional professional staff to increase oversight of auditors and audit services in order to improve SEC's investigative and disciplinary efforts as well as additional professional support staff necessary to strengthen existing program areas. SEC's allocations were also apparently influenced by its internal review of operations and resource needs and on justifications made by each division and office. SEC determined that most of the planned increase would be used to hire an additional 842 staff, primarily accountants, attorneys, and examiners, and to upgrade its technological resources over the next few years. Table 1 provides information on SEC's staff allocation as of July 1, 2003, by program area. The 2002 numbers include 125 new positions that were authorized by a supplemental appropriation to SEC's 2002 budget to deal with the increasing workload from financial fraud and reporting cases, to improve and expedite the review of periodic filings, and to deal with new programmatic needs and policy. According to an SEC official, the current and proposed budgets factor in the increased workload resulting from SEC's new responsibilities under various new laws including the Sarbanes- Oxley Act, Gramm-Leach-Bliley Act, and Commodity Futures Modernization Act. For example, between 2002 and 2004, the full disclosure program is slated to receive the largest percentage increase in positions 39 percent. This program includes the Division of Corporation Finance and the Office of the Chief Accountant, which are responsible for reviewing the financial statement filings for over 17,000 reporting public companies and providing rule-making and interpretive advice. In this area, staffing is driven in part by the Sarbanes-Oxley Act, which requires SEC to review the financial statements of each reporting company every 3 years. In 2002 SEC's average translated into a review once every 6 years. The area slated to receive the next largest percentage increase (35 percent) is the supervision and regulation of securities markets. This program includes the Division of Market Regulation and part of the Office of Compliance, Inspections and Examinations and is responsible for establishing and maintaining policies for fair, orderly, and efficient markets and conducting examinations and inspections of 9 registered securities exchanges and an estimated 8,000 brokerage firms among others. The prevention and suppression of fraud program, which includes the Division of Enforcement, is slated to receive a 21 percent increase, which SEC said would help with the increasing number of investigations into possible violations of securities laws. SEC's staff allocations appear consistent with legislative requirements and what is currently known about its operating environment. However, because SEC's staff positions were allocated without the benefit of a strategic plan, we are unable to fully assess the appropriateness or effectiveness of this use of its budget increase. Given that staff salaries and benefits average about 70 percent of SEC's budget, we would expect the spending allocations to roughly correlate to its staffing allocations. However, SEC was unable to provide us information to analyze SEC's budgetary allocation across each program area. At the time of this study, SEC was in the process of completing its 2005 budget request for OMB, which will include its allocation of its budgetary resources for its 2004 budget estimate by program area. SEC expects to have these estimates completed by sometime in late August or early September. In 2002, we reported the difficulty SEC faced in hiring accountants for the 125 positions authorized by its 2002 supplemental appropriation. SEC had identified the existing competitive service hiring requirements as hampering its ability to fill these and other positions because of the length of time involved. SEC subsequently asked for and received relief from competitive hiring requirements under the Accountant, Compliance and Enforcement Staffing Act of 2003, which was enacted in July 2003. This new legislation is designed to enable SEC to expedite the hiring of accountants, economists, and examiners so that the agency can more quickly fill the 842 positions created. As of July 1, 2003, SEC has only filled a few of the vacancies for the allocated positions but is now better positioned to hire under its new authority. It is too soon to determine whether this new authority will enable SEC to quickly fill the hundreds of vacancies it needs to fill by the end of 2004. Information technology was another area identified in our 2002 report as having funding gaps that had contributed to existing inefficiencies. Like the rest of the government, SEC's needs in the area of information technology continue to increase, and SEC staff must have the necessary tools to successfully meet the agency's increasing demands. SEC maintains a list of technology improvement projects that have not been funded due to budgetary constraints, which SEC officials said include applications to improve the manipulation and connectivity of various SEC data systems and computerized reports. The budget increase has allowed SEC to begin improving its information technology capabilities. SEC's Office of Information Technology, which supports the agency's information systems and computer users, received an increase in its 2003 operating budget of more than 100 percent, from around $44 million to $100 million. Our understanding is that SEC plans to undertake a few small projects each year such as system upgrades and software purchases, to enhance its systems and will implement larger long-term projects over time. SEC began developing an enterprise architecture a strategic approach to information technology planning in 2001. This architecture is designed to allow SEC to fund and develop information technology initiatives based on agencywide needs by strategically identifying and organizing technology projects. In 2002, SEC continued to develop its enterprise architecture in order to identify and document relationships between agency business functions and supporting technologies. SEC management also began incorporating the enterprise architecture into its information technology capital planning process. Although most of SEC's long-term projects are in the developmental stages, we are cautiously optimistic that, if properly implemented, they can improve SEC's operational efficiencies. Some of these longer-term projects include Converting SEC's Electronic Data Gathering Analysis and Retrieval (EDGAR) system into a searchable database that would help SEC conduct various types of industry and trend analyses. EDGAR is the database system that public companies use to file registration statements, periodic reports, and other forms electronically. Currently, EDGAR receives and archives data, but staff cannot immediately and easily analyze it. The goal is to create filings that will allow anyone to extract relevant data. Implementing a document management and imaging initiative, intended to eventually eliminate paper documents and allow SEC staff to review and electronically file the large volumes of information that are part of litigation, examination, and enforcement activities. Staff told us that the planned system will provide an agencywide electronic capture, search, and retrieval mechanism for all investigative and examination materials. Implementing a disaster recovery program that is being designed to store and move large amounts of data among regional or district offices without first going through Washington, D.C. The current project, when completed, will allow the agency to back up critical information and data on a daily basis at multiple locations. In 2002, we found that SEC had not engaged in a comprehensive agencywide strategic planning process and little has changed in this regard in 2003. As we have previously reported in earlier reports, high-performing organizations identify their current and future human capital needs-- including the appropriate number of employees, the key competencies needed, and plans for deploying staff across the organization--and then create strategies to fill any gaps. Given the SEC's role in the securities industry's self-regulatory structure, a critical element of SEC's strategic planning process is an evaluation of the external environment in which the agency operates. SEC's budget increase has heightened the need for strategic planning and the significance of the process, as SEC's spending plan will have to withstand considerable scrutiny. SEC's lack of a current strategic plan may also affect other aspects of SEC's operations as strategic plans are the starting point for each agency's performance measurement efforts and should provide the basis for strategic human capital planning. In 2002, SEC took a critical step toward developing a strategic plan when it conducted an internal study of SEC's current operations, workload, resource allocations, methods for assigning and managing work, and measures of performance, productivity and quality of effort. The study, which was facilitated by a consulting firm (McKinsey & Company) and includes discussions of staffing and resource allocation issues, appears to have been a factor in SEC's allocation of many of the 842 new positions. But this confidential study has not been widely distributed within SEC, and it is unclear whether it will be in the near future. This study serves as a useful framework for SEC as it begins developing a dynamic comprehensive strategic plan that will better enable it to identify its mission and staffing needs. More immediately, such an effort is vital as it determines how best to use its additional resources. We acknowledge that over the past year and a half, SEC has had to deal with a considerable amount of change, which has limited its ability to focus on a new strategic plan. SEC has had to acclimate itself to two new chairmen and adjust to new management teams, manage a 45 percent budget increase, negotiate its first agreement with its newly organized union, implement and manage a new fee rate structure, prepare for its first financial statement audit, and respond to dozens of new requirements under the Sarbanes-Oxley Act. However, since SEC issued its existing plan in September 2000, the financial world has changed significantly. Although SEC's Government Performance and Results Act (GPRA) annual reports attempt to provide a tactical focus, a new long-range planning effort is long overdo. As stated in SEC's 2000 plan, "Our strategic plan is a living document, one that must be continually reexamined and modified to assure it remains responsive and relevant in an ever-changing environment." In addition to the changing external environment, a number of internal processes and organizational efforts within SEC hinge on SEC completing a new strategic plan, including developing more outcome- oriented performance measures to gauge the effectiveness of its regulatory operations in fulfilling its statutory mission and formalizing its strategic human capital plan. Rather than measuring outputs, SEC is working to develop measures for how effectively its actions achieve its goals and fulfill its mission. SEC is also beginning to take steps that will improve its ability to leverage its technological capabilities. Consistent with the findings in our March 2002 report, SEC's subsequent GPRA 2002 annual performance report continued to use measures of outputs rather than outcomes. For example, under the goal of protecting investors by improving public awareness and educating investors, SEC tracks the number of investor education events organized by senior Commission staff in a given year. Within the goal of maintaining fair, honest, and efficient markets SEC uses the number self-regulatory organization rule changes reviewed as a measure of performance. As we reported, performance measures can help to provide detailed information SEC needs to make informed workforce decisions, including (1) the relationship between its budget request for full-time equivalent staff years and the agency's plans and ability to meet individual strategic goals and (2) any excesses or shortages in needed competencies. In late June, SEC began to take steps to transform its annual plan into a management tool aimed at helping SEC move to a more outcome-oriented approach to measuring the performance of its regulatory activities--an important part of strategic planning. To achieve this end, each program area is to develop a "performance dashboard"--a collection of measures identifying those key performance measures that will allow each program area manager to track performance. This movement to a performance dashboard, also involves managing the budget at the program level with each division head being held accountable for managing its individual budgetary resources. While this outcome-oriented approach is promising, we are concerned that SEC is developing new performance measures before it has completed or even started its new agencywide strategic plan. By identifying performance measures before it develops a new strategic plan, SEC runs the risk of having to redo any measures that are inconsistent with its newly defined strategic vision or allowing the existing measures to constrain its planning so that the new plan is consistent with them. We see this approach as analogous to a commuter rail company exploring the most efficient way to expand rail service to a new location before deciding whether that location is the best place for the new line. We are also reviewing the status of SEC's strategic human capital planning. As you may recall, in our September 2001 report, we examined SEC's strategies for managing its human capital and found that its human capital practices were driven by its need to confront its growing staffing crisis. This crisis was evidenced in a turnover rate that was almost twice the government average for attorneys, accountants, and examiners; hundreds of vacant positions; and the average tenure for examiners and attorneys had fallen below 3 years. We found that to counter its compensation challenge, SEC--more than the rest of the government-- was aggressively using special pay rates and retention allowances to improve staff compensation. However, such actions were not stemming their turnover problems. We also identified a number of nonpay issues that threatened to impair SEC's ability to carry out its mission and thus warranted SEC management's attention. As we have reported, strategic planning is a key part of human capital management. Strategic human capital planning focuses on developing long-term strategies for acquiring, developing, and retaining an organization's employees and for implementing human capital approaches that are clearly linked to achieving programmatic goals. In our 2001 human capital report, we found that SEC had begun to take key steps toward developing a strategic human capital plan but lacked adequate succession planning because of its high turnover rate. Moreover, we found that SEC had not articulated the details of its plans for carrying out its recruiting and retention efforts. SEC also lacked any formal mechanism to evaluate the effectiveness of its recruiting efforts and ways to gauge the effectiveness of its worklife programs. We also found that SEC had not created a culture that ensured ongoing attention to human capital issues, that human capital management was still focused on traditional personnel functions, and that it was not a priority for senior management in decisionmaking. We made a number of recommendations to SEC aimed at improving its human capital management, including a recommendation that it expand its annual performance plan into a comprehensive human capital plan that includes all program areas. We are looking into SEC's progress in the above identified areas. However, we have found that SEC has not yet developed a formal strategic human capital plan that articulates how it intends to align its human capital approaches with its organizational goals. While it has yet to do this, we have found that SEC continues to take important steps to improve its strategic human capital management. First, as previously discussed, SEC has taken steps to improve its recruiting/hiring process. Second, SEC has begun to take steps to develop its people and has announced plans for an agencywide training program. One key training component that is currently in the early stages of development is targeted training for supervisors--which was an area identified in our 2001 human capital report as warranting management's attention. However, it is too soon to determine the effectiveness of this new training effort. Third, SEC has taken actions to retain its human capital and address its staffing crisis. Most significantly, SEC has negotiated an agreement with the union, which outlines a uniform program for various worklife programs, such as flextime, flexiplace, and tuition reimbursement, among others, and has standardized various of these human capital policies. Historically, many of these programs have varied by division and office. SEC has just begun to review the use and effectiveness of these programs, therefore, it is too soon to determine what effect, if any, they will have on employee retention and morale. In our 2001 report we found that the single largest retention issue among attorneys, accountants, and examiners involved compensation. To enhance SEC's ability to adequately compensate its employees, Congress enacted legislation that allows SEC to create a new pay system. In May 2002, acting on its new compensation authority, SEC implemented a new system, which established a pay structure more comparable with other federal financial regulators. This new pay structure increased base pay for attorneys, accountants, and examiners similar to that of other federal financial services regulators. More specifically, this new system structure consists of 20 grade levels, some with up to 31 steps. This new system has also provided additional compensation based on performance and has established new pay categories to compensate staff in supervisory positions. In conjunction with this new merit-based compensation system, SEC has also implemented a new performance management system, which is also an important part of the human capital planning process. Since our 2001 human capital report, we found that at least one symptom of SEC's staffing crisis has improved. SEC's turnover rate for attorneys, accountants, and examiners has decreased from 9 percent in 2001 to 6 percent on average in 2002, which in part may be attributed to pay parity. To date SEC reports that its average turnover rate is about 4 percent. However, the declining turnover rate may also reflect the state of the economy and resulting changes in the job market. SEC's dynamic regulatory environment and tumultuous past year has made focusing on a strategic direction and vision for the agency difficult. Moreover, because SEC operated under its 2002 allocation for five months of the year, and had difficulty hiring needed expertise, it has been unable to fully implement its 2003 spending plan. Although SEC has begun to take a number of important steps aimed at addressing its operational and human capital challenges, additional work is needed to ensure that it has appropriately positioned itself to operate more efficiently and effectively in the 21st century. First, it is critical that SEC complete its strategic planning effort, which includes the systematic reevaluation of all of its current approaches, efforts, goals and activities in light of its current regulatory environment. An important part of any such effort would include working with the industry to ensure that SEC has accurately established priorities that reflect the current environment. For example, SEC would be benefited by reevaluating its existing rules, regulations, and regulatory approaches to ensure that they continue to reflect the realities of today's financial markets and are consistent with the mission and goals established by SEC. Second, a critical step involves identifying ways to leverage existing resources, be it through better technology or regulatory processes. For example, SEC needs to fully fund and follow through on technology initiatives that offer the greatest opportunities to increase its effectiveness. SEC's technology evolution could perhaps be one of the most important aspects in improving the efficiency of SEC's operations and will likely require a sustained and ongoing resource commitment. SEC could also reevaluate its historical focus in areas such as small businesses and initial public offerings to ensure that it continues to meet the needs of the securities markets. Finally, aligning SEC's human capital with its strategic plan is an important part of strategic human capital planning. To date, SEC has taken important steps aimed at establishing a coordinated human capital management approach but still lacks a formal plan. Thank you for your attention to SEC's operations and planning processes. The leadership this subcommittee has shown, by holding this hearing should help to maintain the momentum needed for change at SEC. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or other members of the subcommittee may have at this time. For further information regarding this testimony, please contact Orice M. Williams at (202) 512-8678. Individuals making key contributions to this testimony include Toayoa Aldridge, Joe E. Hunter, Jose Martinez-Fabre, and David Tarosky. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In February 2003, the Securities and Exchange Commission (SEC) received the largest budget increase in the history of the agency. The increased funding was designed to better position SEC to address serious issues identified in the Sarbanes-Oxley Act and to better enable SEC to address numerous operational and human capital management challenges discussed in the GAO report entitled SEC Operations: Increased Workload Creates Challenges (GAO-02-302). To help ensure that SEC spends its budgetary resources in an efficient and effective manner, GAO was asked to review the SEC's efforts to address the issues raised in the 2002 report and to report on how SEC intends to utilize its new budgetary resources. GAO's final report on these matters is expected to be completed this Fall. This testimony provides requested information on the status of SEC's current spending plan and preliminary observations on SEC's strategic and human capital planning efforts. In GAO's 2002 operations report, GAO identified a number of operational challenges facing SEC stemming from an increasing workload (e.g., filings, applications, and examinations) and staffing imbalances that threatened to impair SEC's ability to fulfill its mission. SEC's workload had grown at a much higher rate than its staffing since the mid- 1990s. In response to congressional concerns involving a number of highprofile corporate failures and accounting scandals, SEC's funding was increased 45 percent in 2003. SEC plans to spend most of its 2003 and 2004 budget increases to fund 842 new staff positions and double its information technology budget. However, given the late appropriation and hiring challenges, SEC has to date filled few of these positions, and it is unlikely that SEC will be able to utilize all of its 2003 funds. GAO also found that SEC recognizes the need to develop a new strategic plan and that such a plan is a vital component of its staff allocation and human capital planning processes. A new strategic plan is also vital to SEC's ability to develop performance-oriented, outcome-based performance measures. GAO found that while SEC has not updated its strategic plan, it has begun efforts to overhaul its performance measures to make them more outcome-oriented. This effort seems premature given its lack of a new strategic plan. Moreover, while GAO found that SEC has completed certain aspects of a strategic human capital plan, including development of a new pay structure comparable to other federal financial regulators, greater flexibility to expedite the hiring of certain critically needed professions, plans for more training, and implementation of agencywide-worklife programs, the lack of a new strategic plan inhibits SEC's ability to develop a formal human capital plan.

AIS technology, which has been under development worldwide since the early 1990s to improve navigation safety, helps prevent collisions by enabling ships to electronically "see" and track the movements of similarly equipped ships and to receive pertinent navigational information from shore. Like other wireless technologies, AIS uses a portion of the radio frequency spectrum to carry information. In the United States, specific frequencies within the radio spectrum are allocated primarily by two agencies: FCC--an independent agency that regulates spectrum use for nonfederal users, including commercial, private, and state and local government users--and the National Telecommunications and Information Administration (NTIA), an agency within the Department of Commerce that regulates spectrum for federal government users. These agencies (1) decide how various frequencies are used and (2) assign the frequencies to specific users. FCC makes these assignments by issuing licenses to nongovernmental parties; NTIA does so by assigning specific frequencies to federal agencies that have radio communication needs. AIS is designed to improve upon information available through vessel- monitoring systems already in use. Existing VTS systems apply radar, closed-circuit television, radios, and other devices to monitor and manage vessel traffic from a central onshore location, much as an air traffic control tower does (see fig. 1). An AIS unit consists of a global navigation satellite system; computer hardware and software; three radio receivers; and one radio transmitter-receiver, or transceiver. The unit gathers vessel information--including the vessel's name, identification number, dimensions, position, course and speed, destination, and cargo--from shipboard instruments or from manual input and transmits it to receiving AIS stations installed on other ships or on shore. Radio frequencies, or channels, carry the information. AIS also requires considerable infrastructure on shore--including antennas and base stations equipped with electric power, transceivers, computers, and displays--to monitor vessel activity and transmit information or instructions back to vessels. In the United States, such infrastructure now exists only in areas where VTS systems operate. MTSA and Coast Guard regulations require that certain vessels on U.S. navigable waterways install AIS equipment between January 1, 2003, and December 31, 2004. Coast Guard regulations implementing the law provide that vessels include (1) commercial vessels 65 feet long or more on international voyages, including all tankers regardless of tonnage; (2) passenger vessels of 150 tons or more; and (3) commercial vessels on strictly domestic U.S. voyages in the 10 VTS areas, which encompass approximately 10 percent of the U.S. ports recognized by the Department of Transportation's Maritime Administration (see fig. 2). Currently excluded from Coast Guard regulations are fishing vessels and passenger vessels certified to carry 150 or fewer passengers. Regardless of itinerary, any private vessels not in commercial service, such as a pleasure craft, less than 300 gross tons are not required by Coast Guard regulations to carry AIS equipment. Conflict over the frequencies used for transmitting AIS signals in the United States has been developing for several years. In 1998, to promote flexibility in the use of maritime radio frequencies and to encourage development of competitive new services, FCC created and auctioned licenses to the remaining unassigned U.S. radio frequencies in the very high frequency (VHF) band reserved for maritime public correspondence communications. For approximately $7 million, MariTEL won the bid for these licenses. The announcements for the auction stated that potential bidders should be aware of international agreements and other issues that might affect the ability to use the licenses on the two specific internationally designated AIS frequencies, known as channels 87B and 88B. Issues that could affect the licenses were not explicitly laid out in the announcements, but potential bidders were directed to a prior FCC document and specific federal regulations for assistance in evaluating the degree to which such issues may affect spectrum availability. Different interpretations of issues such as these may have contributed to the conflict that continues to exist between MariTEL and the Coast Guard. This conflict extends to the use of both frequencies. FCC regulations required the winning bidder to negotiate with the Coast Guard for the use of frequencies for AIS but did not specify any particular frequency. In March 2001, in response to FCC's auction requirements, MariTEL and the Coast Guard signed a memorandum of agreement (MOA) that allowed the use of channel 87B for AIS in U.S. waters. MariTEL terminated the MOA in May 2003, however, after disagreements arose over interpretations of the MOA's provisions, including technical properties of the frequencies that the Coast Guard could use for AIS. After termination of the MOA, MariTEL asserted that the Coast Guard had no authority to use channel 87B for AIS, but the Coast Guard maintains that an FCC announcement still gives it that authority. With respect to channel 88B, MariTEL asserts, in general, that it obtained through the FCC auction the exclusive rights to channel 88B in certain areas within approximately 75 miles of the U.S.-Canadian border, and it has petitioned FCC for a declaratory ruling to that effect. The Coast Guard, NTIA, and the Department of Transportation disagree and assert, in general, that channel 88B has already been allocated on a primary basis to the federal government. The total cost and time frame for the development of a nationwide AIS remain uncertain. As of June 2004, the Coast Guard's efforts to install AIS equipment nationwide had followed two tracks: first, installing AIS quickly in the 10 VTS areas and, second, launching a widespread planning effort for the rest of the nation's navigable waters. Having taken advantage of existing facilities, electronic systems, and plans for AIS development to enhance safety in the 10 VTS areas, the Coast Guard plans to complete AIS implementation in those areas by December 2004. At the same time, the Coast Guard has begun to plan for U.S. waters outside the VTS areas, defining the goals, technical requirements, and waterways and vessels to be covered under a nationwide AIS. The Coast Guard expects planning for the technical requirements to be completed between December 2004 and February 2005. The Coast Guard also estimates that the nationwide system could cost between $62 million and $165 million. According to the Coast Guard, the cost estimate is preliminary, because geographic and other factors are expected to significantly affect the cost of installation at different locations, and the impacts are yet to be determined. The first effort in the Coast Guard's two-track AIS development has involved installing, testing, and operating AIS equipment in the 10 VTS areas. To enable monitoring of vessels carrying AIS, the Coast Guard accelerated onshore AIS installation under way in its navigation safety program. A combination of existing facilities, equipment, plans, and funding has allowed rapid establishment of AIS in the VTS areas. Since much of the AIS infrastructure for conventional safety monitoring (e.g., to avert collisions) is the same for security monitoring (e.g., to avert acts of terrorism), bringing AIS into service involved primarily adapting and modifying existing systems to accommodate their additional security purpose. AIS facilities are completely operational at Berwick Bay, Louisiana; Los Angeles-Long Beach, California; Prince William Sound, Alaska; and St. Marys River, Michigan. AIS is being tested along the lower Mississippi River in Louisiana, and it is partially operational at Houston- Galveston, Texas, and New York, New York. The facilities at Port Arthur, Texas; Puget Sound, Washington; and San Francisco, California, are under construction. The Coast Guard expects AIS installations at the VTS areas to be completed by December 2004. To enhance safety and efficiency at the ports of Los Angeles and Long Beach, the Marine Exchange of Southern California, a nonprofit corporation formed to provide vessel arrival and departure information to the local maritime industry, took the initiative to install and pay for AIS on its own. The total cost to the Coast Guard for the installation of AIS equipment at the other 9 VTS areas comes to approximately $20.5 million. Bringing AIS into service in the 10 VTS areas should improve vessel- monitoring capability at these locations. Before AIS, VTS facilities relied on such means as radar, closed-circuit television, ship-to-shore voice communications via radio, and people with binoculars. Signals and other information from the monitoring equipment went to a central vessel traffic center (VTC), where the information was collated and where staff tracked ships' movements. With AIS, for a vessel equipped with a properly operating AIS transceiver, VTC staff have access to so-called static information, which rarely changes, such as dimensions, vessel name, and identification number; dynamic information, which changes continuously, such as course and speed; and voyage-specific information such as cargo type, destination, and estimated time of arrival (see fig. 3). This detail allows VTC staff to immediately identify any transmitting ship, particularly if it is on a collision course with another ship or if it is headed toward a hazardous or restricted area. In some VTS areas, AIS also extends monitoring coverage over a wider radius than originally covered by VTS. On the lower Mississippi River, for example, AIS will cover more than 240 miles along the river--from its mouth to Baton Rouge, Louisiana--rather than the 8 miles around New Orleans covered by the original VTS system. In New York, AIS equipment will allow vessels to be monitored farther out to sea than possible with radar monitoring. From installing AIS shore facilities in the VTS areas, the Coast Guard has learned that the two primary drivers of installation cost are port geography and vessel traffic. Specifically, because AIS radio signals transmit in straight lines, installation can be complicated by the amount of water to be covered, as well as by terrain features such as islands, bays, and peninsulas. In addition, secondary features at a site have an impact, including availability of electrical power, previous presence or absence of communications links, availability of antenna towers, and costs to lease or buy land for antenna towers. For example, after completing site surveys of the area, the Coast Guard estimated that installing AIS in Puget Sound-- an arm of the Pacific Ocean extending into Washington State that features many bays and islands and is surrounded by mountains--would likely cost $6.6 million. In contrast, the AIS installation at Berwick Bay, Louisiana, one of the first AIS installations completed by the Coast Guard, generally monitors a roughly 5-mile radius around a short stretch of the Atchafalaya River and surrounding waterways; this installation cost approximately $1 million. On the basis of its experience installing AIS in the VTS areas, the Coast Guard estimates that installing AIS equipment nationwide could cost between $62 million and $165 million--a preliminary estimate that one Coast Guard official responsible for reviewing such programs characterizes as "ballpark." At the same time the Coast Guard is completing installation of AIS equipment in the 10 VTS areas, it is also planning for nationwide AIS installation, in waters where most of the needed infrastructure is not now available. This planning consists of two primary components: The Coast Guard will soon be defining the technical requirements of the system needed to meet both the safety and security missions of AIS, including how elaborate it will be. For example, will the system need to involve satellites to receive AIS signals beyond the range of stations on land, or will an installation that can receive signals only along the shore be adequate? The Coast Guard will also investigate whether AIS can share shore infrastructure, such as antenna towers, with systems in place or under development, such as its search-and-rescue communications system called Rescue 21. As of June 2004, the Coast Guard estimated it will be able to complete this planning sometime between December 2004 and February 2005. The Coast Guard is also determining the extent of AIS coverage needed in its overall AIS strategy, including a reexamination of which vessels should carry AIS in U.S. waters outside of VTS areas. This process includes selecting which waterways will be covered (e.g., deciding whether relatively small rivers and lakes will be covered); setting priorities for which waterways will be covered first (e.g., deciding whether large ports will receive coverage before open coastline); and identifying which additional vessels will be required to carry and operate AIS equipment (e.g., whether noncommercial, pleasure craft will still be outside AIS requirements). The Coast Guard has held public meetings and requested public comment on these issues and expects to complete its review of these comments by July 2004. Even after these planning efforts are completed, the Coast Guard will not be able to install AIS equipment outside VTS areas immediately. The factors that shape the cost of an AIS installation also shape the equipment requirements. For example, the more obstructions, such as mountains or tall buildings, that could block AIS signals, the more antennas will be required. At every location where the Coast Guard decides to install AIS equipment, it will have to evaluate the presence or absence of such design factors. Site surveys that detail local terrain and the volume and variety of vessel traffic will have to be carried out before the Coast Guard can determine a location's precise equipment needs. As of June 2004, the continuing dispute between MariTEL and the Coast Guard over various frequency issues was in the hands of FCC, which expected to respond in summer 2004. At issue are competing views over the use of the internationally designated AIS frequencies. The commission's response could involve any number of actions or conditions regarding the internationally designated AIS frequencies, especially on access to frequencies needed to carry AIS information. FCC's specific findings could lead to varied technical, cost, and legal implications for AIS installation and operation, including potential delay. Depending on how FCC responds, and any subsequent actions by the interested parties, one factor that offers an opportunity to lower the federal government's costs is the demonstrated or expressed willingness of certain local port entities to shoulder the expense and responsibility for AIS installation if they, along with the Coast Guard, can use AIS data for their own purposes. Since 2003, there have been a number of petitions, proposals, and other actions put before FCC on who may and should use channels 87B and 88B and for what purposes. In October 2003, for example, MariTEL petitioned FCC seeking a ruling that would prohibit transmission on channels 87B and 88B by entities other than those authorized by MariTEL. In this petition MariTEL asserts, among other things, that the termination of the memorandum of agreement ended the Coast Guard's right to use channels for which MariTEL holds licensing rights. The company further contends that transmissions by entities other than those authorized by MariTEL would interfere with its other maritime frequency licenses and prevent its benefiting from the investment it made at the auction. On behalf of the Coast Guard and the Department of Transportation, NTIA also petitioned FCC in October 2003, opposing MariTEL's petition and proposing instead that FCC allocate channels 87B and 88B exclusively to AIS for government and nongovernment use. The government's position was that navigation safety and homeland security would be compromised if the United States and the maritime industry did not have unrestricted access to the frequencies designated by the International Telecommunication Union for AIS use worldwide. Then in February 2004, citing a desire to protect its licensed rights and to reach a quick "resolution to the AIS frequency controversy," MariTEL submitted a proposal to FCC, "to share its licensed rights to channels 87B and 88B for use by ship stations and by the USCG at no cost." In this proposal, MariTEL generally agreed with NTIA's proposal to use channels 87B and 88B only for AIS, but unlike NTIA, it sought to limit access to the signals to ships, MariTEL, the Coast Guard, and the St. Lawrence Seaway Development Corporation. In other words, under this proposal, unless authorized by MariTEL, the Coast Guard and the St. Lawrence Seaway Development Corporation would be the only entities allowed to use AIS information received by a shore station. In effect, under this proposal, the transmission and receipt of AIS signals by other entities, such as marine exchanges, port authorities, or state and local government agencies, would require MariTEL's consent. FCC has been gathering public comment from groups representing vessel pilots, port authorities, ship and barge operators, and others on these competing proposals, and a response is expected in summer 2004. The implications of this response for nationwide AIS development will depend on just how the commission resolves the competing proposals. If FCC allocates the internationally designated frequencies exclusively to AIS use but limits access to ships, MariTEL, the Coast Guard, and the St. Lawrence Seaway Development Corporation, other organizations will no longer be able to use the signals and would therefore have no incentive to pay for installing AIS infrastructure. Such loss of incentive would likely mean the loss of federal cost-sharing opportunities, potentially closing off a possible long-term cost-reduction strategy in the development of AIS nationwide. For example, an official of the Merchants Exchange of Portland told us that the exchange would not be willing to pay for AIS facilities unless access to AIS data is unrestricted. In addition, according to an AIS consultant, enforcing a ban on parties other than MariTEL and the federal government to receive AIS signals at shore stations, as MariTEL has requested, could prove impossible, because an AIS receiver that is only receiving signals cannot be detected by an enforcement authority. For its part, MariTEL maintains that it should be able to protect its investors and to profit from the licenses it won and that AIS can be operated as required by FCC's preauction rules. The company also maintains that even if FCC grants MariTEL's proposal for shared access to the internationally designated AIS frequencies, technical issues could still harm the company's ability to use other frequencies for which it holds licenses. In its February 2004 proposal, MariTEL contends that FCC rules now permit an AIS transmission technology that causes interference with maritime communications on channels adjacent to 87B and 88B. The company's proposal asserts that such interference impairs non-AIS shore- to-ship communications, with significant impact to MariTEL's ability to use its licensed spectrum, including its construction of a wide-area radio system for maritime services. The Coast Guard argues that transmitting AIS signals on frequencies other than those internationally designated could compromise navigation safety and homeland security and complicate nationwide AIS development already under way using channels 87B and 88B. The Coast Guard cites examples such as the following: A ship traveling near or in U.S. waters may have to decide between broadcasting and receiving signals on the international frequencies--to "see" foreign vessels operating under international frequency requirements--and United States-specific frequencies--to "see" domestic vessels operating under U.S. frequency requirements. The inability of vessels to broadcast and monitor the U.S frequencies and the internationally designated AIS frequencies simultaneously heightens the risk of collisions. Until a fully automated frequency management system has been established nationwide, the use of frequencies other than channels 87B and 88B would require transmitting foreign ships to manually change frequencies when approaching U.S. shores. According to the Coast Guard, such so-called manual channel switching is cumbersome and vulnerable to human errors and, if a ship's crew fails to change to the U.S. channel when necessary, could leave the ship "invisible" to ships in the same waters broadcasting on the U.S. frequency. Any U.S. channel management plans that become necessary would, the Coast Guard believes, impair existing operations in the border regions with Canada and Mexico, as well as AIS communications with international vessels operating within or near U.S. waters. For example, the St. Lawrence Seaway AIS system, jointly operated by the United States and Canada, is viewed by the Coast Guard as a complement to its nationwide AIS. The Seaway system, however, operates on channels 87B and 88B, and any U.S.-specific frequencies would reduce the efficiency of this international shipping thoroughfare. Transmissions on channels 87B and 88B from vessels operating outside U.S. jurisdiction would interfere with the effective use of channels 87B and 88B within the United States. According to the Coast Guard, such interference would encumber four frequencies in U.S. coastal areas instead of just the two internationally designated frequencies. Finally, any additional actions by the interested parties stemming from specifics of FCC's response could slow or otherwise affect nationwide AIS development. An opportunity that may help the Coast Guard speed AIS installation at lower cost to the federal government is potential partnerships between the Coast Guard and local port entities. For projects like AIS whose costs and benefits extend 3 or more years, the Office of Management and Budget instructs federal agencies, including the Coast Guard, to consider alternative means of achieving program objectives, such as different methods of providing services and different degrees of federal involvement. Similarly, in 1996 a congressional conference committee report directed the Coast Guard to review user fee options and public- private partnerships for its VTS program. In carrying out these directives, the Coast Guard learned of potential partnership opportunities. The initiative for the actual partnerships has come mainly from the local port entities following their interactions with the Coast Guard on navigation safety issues. As a part of the VTS program, the Coast Guard has been performing a series of safety assessments at U.S. ports to help determine if additional VTS areas are warranted. In a number of cases, when the Coast Guard determined that a federal VTS was not warranted, local entities approached the Coast Guard for assistance in setting up their own vessel-monitoring system. Coast Guard assistance has ranged from full partnerships on vessel traffic management systems, to memorandums of understanding regarding uses of local vessel-monitoring systems, to advice and counsel on possible local efforts. The offers from port entities have come at a number of locations and reflect a realization that vessel monitoring can provide a range of benefits. Entities have explored partnership with the Coast Guard at ports including Baltimore, Maryland; Charleston, South Carolina; Corpus Christi, Texas; Delaware Bay, Delaware, Pennsylvania, and New Jersey; Hampton Roads, Virginia; Los Angeles-Long Beach, California; Portland, Oregon; San Diego, California; and Tampa, Florida. Given the level of interest, these partnerships offer an alternative to exclusive federal involvement in nationwide AIS development. Entities at some of the listed locations have used, or want to use, AIS data about incoming vessels to improve port efficiency, for example, by helping schedule tugs or dock workers; to improve safety by mitigating risks uncovered during the Coast Guard's safety assessments; and to increase their own security by monitoring vessels as they approach the port. Some of these entities have installed AIS or similar systems and have offered to share their information with the Coast Guard. Such work relieves the Coast Guard from having to carry out its own installation of AIS shore stations in certain locations, thus accelerating and facilitating nationwide AIS implementation. As of June 2004, some of the port entities that either used AIS or planned to do so included the following: The Marine Exchange of Southern California, which provides vessel information at the ports of Los Angeles and Long Beach, California, to support port safety and the efficient movement of commerce. As a part of that support, the marine exchange financed, with port pilots, and built the VTS system at Los Angeles-Long Beach and purchased and installed AIS equipment to that system. The Marine Exchange and the Coast Guard share information received on the AIS equipment. The Coast Guard estimated that the cost of installation at Los Angeles-Long Beach was comparable to the Coast Guard's installation at San Francisco, which the Coast Guard estimates at $2.2 million. The Tampa (Florida) Port Authority, which currently operates a vessel traffic advisory service. In 1997 the authority installed an earlier version of AIS that did not meet current international or Coast Guard standards but was designed to help the harbor pilots and vessel masters as they navigated in the Tampa Bay channels. The port authority recently requested a grant from the state of Florida to upgrade its AIS equipment to international and Coast Guard standards so as to improve security at the port of Tampa. The port authority has expressed willingness to share AIS information with the Coast Guard when its system becomes operational. Merchants Exchange of Portland, Oregon, which has expressed a desire to build an AIS system around Portland and the Columbia River as a means of supplying information on vessel movements to interested port entities. The goal is again to improve the efficiency of port operations. According to an exchange official, Merchant Exchange would be willing to share AIS information with the Coast Guard but would not build the facility until the conflict over AIS transmission frequencies is settled. In all three cases, the local port entity has already paid, or is willing to pay, for AIS installation, but the port entities' ability to use AIS information depends on the coming FCC response. Although the local entities are building systems for their own purposes, all are sharing, or are planning to share, AIS information with the Coast Guard when the systems are complete. For example, the initiative taken by the Marine Exchange of Southern California alone likely saved the federal government $2.2 million for AIS installation. The more local port organizations that are willing to pay for the purchase and installation of AIS facilities, the more the Coast Guard can save on nationwide AIS installation. If the FCC response does not allow these entities to make unrestricted use of AIS information, they are likely to be less willing to invest in such facilities. The development of AIS nationwide is an important step in the overall effort to increase port safety and security. The Coast Guard has made an expeditious start with its installations at VTS areas and its continued planning for additional coverage, but before the system can be fully implemented, the Coast Guard faces a number of challenges. It must make some key decisions to determine AIS's technical requirements, waterway coverage, and vessels to be equipped with AIS. The dispute with MariTEL must be resolved, and the Coast Guard must obtain financing for installation nationwide. Pending the outcome of FCC's response, financing is one area where the Coast Guard may find help in meeting its challenges. Although the Coast Guard did not actively pursue cost-sharing options under the VTS program, by actively doing so now, it could potentially accomplish its nationwide AIS installation goals more quickly and reduce installation costs to the federal government. To help reduce federal costs and speed development of AIS nationwide, we recommend that, depending on the outcome of the expected FCC response, the Secretary of Homeland Security direct the Commandant of the Coast Guard to seek and take advantage of opportunities to partner with organizations willing to develop AIS systems at their own expense. We provided a draft of this report to the Department of Homeland Security, the Coast Guard, and FCC for their review and comment. The Coast Guard and FCC generally agreed with the facts presented in the report and offered technical comments that were incorporated into the report where applicable. While agreeing with our recommendation, the Coast Guard also said that developing partnerships would face challenges such as ensuring that locally built systems meet all Coast Guard requirements, dealing with reluctant partners, or developing partnerships that maximize savings to the federal government. Given our assumption that the Coast Guard would not sacrifice AIS capability or standards in developing partnerships, we agree that developing partnerships will not necessarily be easy. We continue to believe, however, that doing so with willing local entities is in the public interest, and we continue to be encouraged in this regard by the level of interest in partnering with the Coast Guard that we found in the VTS program. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after its issue date. At that time, we will send copies of this report to the Department of Homeland Security and the Federal Communications Commission. We will also make copies available to others upon request. In addition, this report will also be available at no charge at GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (415) 904-2200 or at [email protected] or Steve Calvo, Assistant Director, (206) 287-4800 or at [email protected]. Key contributors to this report are listed in appendix I. In addition to those named above, Jonathan Bachman, Chuck Bausell, Ellen W. Chu, Mathew Coco, Geoffrey Hamilton, Anne Laffoon, and Jeffrey Larson made key contributions to this report.

As part of international efforts to ensure maritime safety and security--and to carry out its mandates under the Maritime Transportation Security Act of 2002--the U.S. Coast Guard is developing an automatic identification system (AIS) that should enable it to monitor ships traveling to and through U.S. waters. For AIS to operate nationwide, ships need equipment to transmit and receive AIS signals, and the Coast Guard needs shore stations and designated radio frequencies to keep track of the ships' identities and movements. Yet unresolved frequency issues between the Coast Guard and a private company, MariTEL, have come before the Federal Communications Commission (FCC). GAO reviewed federal agencies' progress in developing AIS nationwide and identified certain challenges and opportunities in completing the work. Because the Coast Guard is in the early stages of progress toward nationwide AIS development, the total cost and completion time are uncertain. The Coast Guard has taken advantage of opportunities to bring AIS into service quickly in 10 areas where vessel-monitoring technology already exists, and it is simultaneously defining and planning for full nationwide coverage. The Coast Guard has only preliminary cost estimates for a nationwide system, because geographic and other factors will affect installation at different locations. The Coast Guard estimates that planning and testing will be completed, and a request for proposals from potential contractors issued, between December 2004 and February 2005. The Coast Guard faces both challenges and potential opportunities in its development of a nationwide AIS. Nationwide development depends in part on how FCC resolves a continuing dispute between federal agencies and MariTEL over issues including who should have access to the internationally designated AIS frequencies and for what uses. To help protect its licensed rights to certain frequencies, MariTEL generally seeks either sole control over the international standard AIS frequencies or shared control with ships and the federal government. The federal government seeks a resolution that will reserve the internationally designated frequencies for AIS use by government and nongovernment entities. FCC expects to respond in summer 2004. This response--and whether it leads to any additional actions on the part of the interested parties--could affect the overall cost and pace of nationwide AIS development. Depending on FCC's response, one factor that offers an opportunity to reduce federal costs is that some local port entities are willing to assume the expense and responsibility for AIS construction if they can use AIS data, along with the Coast Guard, for their own purposes.

FAA's Aircraft Certification Service (Aircraft Certification) and Flight Standards Service (Flight Standards) issue certificates and approvals for the operators and aviation products used in the national airspace system based on standards set forth in federal aviation regulations. FAA inspectors and engineers working in Aircraft Certification and Flight Standards interpret and implement the regulations governing certificates and approvals via FAA policies and guidance, such as orders, notices, and advisory circulars. (See fig. 1.) Aircraft Certification's approximately 950 engineers and inspectors in 42 field offices issue approvals to the designers and manufacturers of aircraft and aircraft engines, propellers, parts, and equipment. Since 2005, Aircraft Certification has used project sequencing to prioritize certification submissions on the basis of available resources. Projects are evaluated against several criteria, including safety attributes and their impact on the air transportation system. Figure 2 outlines the key phases in Aircraft Certification's approval process. In Flight Standards, approximately 4,000 inspectors issue certificates allowing individuals and entities to operate in the National Airspace System (NAS). These include certificates to commercial air carriers, operators of smaller commercial aircraft, repair stations, and pilot schools and training centers. Flight Standards also issues approvals for programs, such as training. Flight Standards field office managers in over 100 field offices use the Certification Services Oversight Process to initiate certification projects within their offices. Delays occur when FAA wait-lists certification submissions because it does not have the resources to begin work on them. Once FAA determines that it has the resources to oversee an additional new certificate holder, accepted projects are processed on a first-in, first-out basis within each office. Figure 3 illustrates the key steps in the Flight Standards certification process. Responsibility for the continued operational safety of the NAS is shared by Aircraft Certification and Flight Standards, which oversee certificate holders, monitor operators' and air agencies' operation and maintenance of aircraft, and oversee designees and delegated organizations (known as organization designation authorizations or ODA). In 2010, we reported that many of FAA's certification and approval processes contribute positively to the safety of the NAS, according to industry stakeholders and experts.and approval processes work well most of the time because of FAA's long-standing collaboration with industry, flexibility within the processes, and committed, competent FAA staff. Industry stakeholders and experts noted that negative certification and approval experiences, such as duplication of approvals, although infrequent, can result in costly delays for them, which can disproportionately affect smaller operators. We made two recommendations to improve the efficiency of the certification and approval processes. FAA addressed one recommendation and partially addressed the other. We found that while FAA had taken actions to improve the efficiency of its certification and approval processes, it lacked outcome-based performance measures and a continuous evaluative process to determine if these actions were having the intended effects. To address these issues, we recommended that FAA develop a continuous evaluative process and use it to create measurable performance goals for the actions, track performance toward those goals, and determine appropriate process changes. To the extent that this evaluation of agency actions identifies effective practices, we further recommended that FAA consider instituting those practices agency wide, i.e., in Aircraft Certification and Flight Standards. In response to our recommendation, FAA implemented new metrics that provide the ability to track process performance and product conformity to standards. These metrics would allow FAA to set measurable performance goals necessary to determine the effectiveness of the certification and approval processes and assist FAA in deciding on necessary and appropriate actions to address systemic issues that could negatively impact agency processes and their outcomes. These actions addressed the intent of our recommendation. We also recommended that FAA develop and implement a process in They also noted that the certification Flight Standards to track how long certification and approval submissions are wait-listed, the reasons for wait-listing them, and the factors that eventually allowed initiation of the certification process. As of October 2013, FAA had partially addressed this recommendation by altering the software in its Flight Standards' Certification Service Oversight Process database to designate when certification submissions are wait-listed. The database now tracks how long certification submissions are wait-listed. As a result, FAA now has the capability to track how long certification submissions are wait-listed and reallocate resources, if appropriate, to better meet demand. In April 2012, as required by Section 312 of the Act, FAA established the Aircraft Certification Process Review and Reform Aviation Rulemaking Committee (certification process committee). Its role is to make recommendations to the director of FAA's Aircraft Certification Service to streamline and reengineer the certification process. The committee considered guidance and current certification issues--including methods for enhancing the use of delegation and the training of FAA staff in safety management systems--and assessed the certification process. It developed six recommendations, which called for FAA to develop comprehensive implementation plans for certification process improvement initiatives, including measuring the effectiveness of the implementation and benefits of improvements as well as developing a means to track and monitor initiatives and programs; continue to improve the effectiveness of delegation programs; develop an integrated, overarching vision of the future state for certification procedures; update Part 21 certification procedures to reflect a systems approach develop and implement a comprehensive change management plan to prepare the workforce for its new responsibilities in a systems safety approach to certification and oversight; and review continued operational safety and rulemaking processes and implement reforms to improve efficiency. We found these recommendations to be relevant, clear, and actionable. In response to the committee's recommendations, FAA developed a plan that includes 14 initiatives to implement the committee's recommendations and publicly reported the plan in July 2013. We believe that the committee took a reasonable approach in assessing FAA's aircraft certification process and developing recommendations by assessing the status of previous recommendations from 19 reports related to the certification process, reviewing certification guidance and processes as well as major initiatives, and reviewing other areas that it believed required consideration when making recommendations for improving efficiencies in the certification process. FAA has many initiatives and programs underway that it believes will respond to the committee's recommendations to improve efficiency and reduce costs related to certifications. For example, FAA and two industry groups had already developed an ODA action plan to address the effectiveness of the ODA process. We found these initiatives were generally relevant to the recommendations and clear and measurable. However, FAA's initiatives and programs to implement the recommendations do not contain some of the elements essential to a performance measurement process. For example, the certification process committee recommended that FAA develop an integrated roadmap and vision for certification process reforms, including an integrated overarching vision of the future state for certification procedures. While FAA has outlined a vision in AIR: 2018, it has not yet developed a roadmap. FAA is planning to roll out its roadmap, which is to include information on major change initiatives and a scaled change management process, concurrently with or following implementation of many of its certification process improvement initiatives. This calls into question FAA's ability to use the roadmap to guide the initiatives. FAA has developed milestones for each initiative and deployed a tracking system to track and monitor the implementation of all certification-related initiatives. However, FAA has not yet developed performance measures to track the success of most of the initiatives and programs. The agency plans to develop these measures of effectiveness after it has implemented its initiatives. Without early performance measures, FAA will not be able to gather the appropriate data to evaluate the success of current and future initiatives and programs. In addition, in response to the certification process committee's recommendation to review rulemaking processes and implement reforms to improve efficiency, FAA plans to expedite the rulemaking process by implementing a new rulemaking prioritization model. However, this model will have no effect on the duration of the rulemaking process since it only prioritizes potential rulemaking projects for submission to the rulemaking process and makes no changes to the rulemaking process per se. In 2010, we reported that variation in FAA's interpretation of standards for certification and approval decisions is a long-standing issue that can result in delays and higher costs for industry. For example, a 1996 study found that, for air carriers and other operators, FAA's regulations are often ambiguous; subject to variation in interpretation by FAA inspectors, supervisors, or policy managers; and in need of simplification and consistent implementation.officials we interviewed for our 2010 report indicated that although variation in decisions is a long-standing, widespread problem, it has rarely led to serious certification and approval process problems, and experts on our panel generally noted that serious problems occur less than 10 Experts on our panel and most industry percent of the time. Nonetheless, when such occasions occur, experts on our panel ranked inconsistent interpretation of regulations, which can lead to variation in decisions, as the most significant problem for Flight Standards and as the second most significant problem for Aircraft Certification. Panelists' concerns about variation in decisions included instances in which approvals are reevaluated and sometimes revised or revoked in FAA jurisdictions other than those in which they were originally granted. Such situations can result in delays and higher costs for industry but also may catch legitimate safety concerns. According to industry stakeholders we spoke with, variation in FAA's interpretation of standards for certification and approval decisions is a result of factors related to performance-based regulations, which allow for multiple avenues of compliance, and the use of professional judgment by FAA staff. FAA's Deputy Associate Administrator for Aviation Safety and union officials representing FAA inspectors and engineers acknowledged that variation in certification and approval decisions occurs and that FAA has taken actions to address the issue, including the establishment of a quality management system to standardize processes across offices. A second FAA-industry committee--the Consistency of Regulatory Interpretation Aviation Rulemaking Committee (regulatory consistency committee)--established to respond to Section 313 of the Act, identified three root causes of inconsistent interpretation of regulations--(1) unclear regulatory requirements; (2) inadequate and nonstandard FAA and industry training in developing regulations, applying standards, and resolving disputes; and (3) a culture that includes a general reluctance by both industry and FAA to work issues of inconsistent regulatory application through to a final resolution and a "fear of retribution." The root causes are consistent with issues raised in our 2010 review and those raised by industry during that review. To address the root causes, the committee made six recommendations to promote clearer regulations and guidance, more standardized application of rules, a consolidation and cross-reference of guidance and rules, and improved communication between FAA and industry. In priority order, those recommendations called for developing a single master source for guidance organized by Title 14 of the Code of Federal Regulations (which covers commercial aviation); developing instructions for FAA staff with policy development responsibilities; reviewing FAA and industry training priorities and curriculums; setting up a board to provide clarification to industry and FAA on improving the clarity in final rules issued by FAA; and creating a communications center to act as a central clearinghouse to assist FAA staff with queries about interpretation of regulations. We found that the committee took a reasonable approach in identifying these root causes and developing its recommendations. It compiled and reviewed case studies involving issues of regulatory application, obtained additional information by surveying industry stakeholders, and reviewed FAA regulatory guidance material. The recommendations are relevant to the root causes, actionable, and clear. The committee also considered the feasibility of the recommendations by identifying modifications to existing efforts and programs and prioritizing the recommendations. FAA reported on July 19, 2013, that it is determining the feasibility of implementing these recommendations. The agency told us that it expected to develop an action plan to address the recommendations and metrics to measure implementation by December 2013. We note that measuring implementation may provide useful information, however, FAA is not intending to measure outcomes. Measuring outcomes can help in understanding if an action is having the intended effect. FAA's certification and approval processes generally work well. However, when the certification and approval processes do not work well, the result can be costly for industry and FAA. Inconsistent interpretation of regulations can lead to rework by FAA and industry. Likewise, inefficient processes can require extra time and resources. FAA faces challenges in implementing the committees' recommendations and further improving its certification and approval processes. FAA's certification and approval workload is expected to grow over the next 10 years because of activities such as the introduction of new technologies and materials, such as composite materials used in airplanes, according to one industry committee report. Additional work will be needed to establish new means of compliance and establish new standards. In addition, FAA's certification and approval workload is likely to increase substantially as the Next Generation Air Transportation System (NextGen) progresses and operators will need to install additional equipment on their aircraft to take full advantage of NextGen capabilities. Having certification and approval processes that work well will allow FAA to better meet these increasing workload demands and better ensure aviation safety in an era of limited resources. To its credit, FAA has taken steps toward improving the efficiency of its certification and approval processes. It will be critical for FAA to follow through with its plans for implementing the key recommendations to achieve the intended efficiencies and streamlining. However, making fundamental changes to the certification and approval processes can require a cultural change by its workforce and resistance to change can cause delays. Some improvements to the processes, such as those requiring new rulemakings, will likely take years to implement and, therefore, will require a sustained commitment as well as congressional oversight. Chairman LoBiondo, Ranking Member Larsen, 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 Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Teresa Spisak (Assistant Director), Pamela Vines, Melissa Bodeau, David Hooper, Sara Ann Moessbauer, Josh Ormond, and Jessica Wintfeld. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Among the agency's responsibilities for aviation safety, FAA issues certificates for new aircraft and parts and grants approvals for changes to air operations and aircraft. In 2010, GAO made recommendations to improve FAA's certification and approval processes. Subsequently, the Act required FAA to work with industry to assess the certification process and address some of the findings in GAO's report. In July 2013, FAA issued reports on its efforts, including those in response to committee recommendations and FAA's implementation plans. This testimony addresses FAA's responses to the recommendations made by GAO in 2010 and the two joint FAA-industry committees concerning (1) the certification and approval processes and (2) the consistency of regulatory interpretation. It also discusses future challenges facing FAA's certification and approval processes. This statement is based in part on GAO's 2010 report. More detailed information on the objectives, scope, and methodology for that work can be found in that report. In addition, for this statement, GAO interviewed industry representatives, reviewed the methodologies used to develop the committees' recommendations, and assessed the recommendations and FAA's planned responses to those recommendations in terms of whether they were relevant, clear, actionable, and feasible. GAO is not making any new recommendations in this testimony. In 2010, GAO reported that industry stakeholders and experts believed that the Federal Aviation Administration's (FAA) certification and approval processes contribute positively to the safety of the national airspace system. However, stakeholders and experts also noted that negative certification and approval experiences--such as duplication of approvals--although infrequent, can result in delays that industry says are costly. GAO made two recommendations requiring, among other things, that FAA develop a continuous evaluative process and a method to track submission approvals. FAA addressed one recommendation and partially addressed the other. An FAA-industry committee established in response to the FAA Modernization and Reform Act of 2012 (the Act) made six recommendations to improve the certification and approval processes, including establishing a performance measurement process. In response to recommendations from the certification process committee, FAA developed an implementation plan with 14 initiatives, but the initiatives do not contain some elements essential to a performance measurement process, such as performance measures. Without performance measures, FAA will be unable to evaluate current and future programs. GAO also reported in 2010 that variation in FAA's interpretation of standards for certification and approval decisions is a long-standing problem. A second FAA-industry committee, established in response to the Act, made recommendations concerning the consistency of regulatory interpretation. FAA reported that it is determining the feasibility of implementing the recommendations and expected to develop an action plan by December 2013. Further, FAA reported it would measure implementation, but not outcomes; measuring outcomes helps to understand if the action is having the intended effect. Among the challenges facing FAA, its certification and approval workload is expected to grow due to the introduction of new technologies and materials and expected progress in the deployment of the Next Generation Air Transportation System. Having efficient and consistent certification and approval processes would allow FAA to better use its resources to meet these increasing workload demands and better ensure aviation safety in an era of limited resources.

The TANF block grant was created by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) and was designed to give states the flexibility to provide both traditional welfare cash assistance benefits as well as a variety of other benefits and services to meet the needs of low-income families and children. States have responsibility for designing, implementing, and administering their welfare programs to comply with federal guidelines, as defined by federal law and HHS that oversees state TANF programs at the federal level. Importantly, with the fixed federal funding stream, states assume greater fiscal risks in the event of a recession or increased program costs. However, in acknowledgment of these risks, PRWORA also created a TANF Contingency Fund that states could access in times of economic distress. Similarly, during the recent economic recession, Congress created a $5 billion Emergency Contingency Fund for state TANF programs through the American Recovery and Reinvestment Act of 2009, available in fiscal years 2009 and 2010. The story of TANF's early years is well known. During a strong economy, increased federal support for work supports like child care, and the new TANF program's emphasis on work, welfare rolls were cut by more than half. Many former welfare recipients increased their income through employment, and employment rates among single parents increased. At the same time that some families worked more and had higher incomes, others had income that left them still eligible for TANF cash assistance. However, many of these eligible families were not participating in the program. According to our estimates in a previous report, the vast majority--87 percent--of the caseload decline can be explained by the decline in eligible families participating in the program, in part because of changes to state welfare programs. These changes include mandatory work requirements, changes to application procedures, lower benefits, and policies such as lifetime limits on assistance, diversion policies, and sanctions for non-compliance, according to a review of the research. Among eligible families who did not participate, 11 percent did not work, did not receive means-tested disability benefits, and had very low incomes. While we have not updated this analysis, some research shows that this potentially vulnerable group may be growing. Despite the decrease in the cash assistance caseload overall, the number of cases in which aid was provided only for the children in the household increased slightly, amounting to about half the cash assistance caseload. For these households, the adult is not included in the benefit calculation, generally either because: (1) the parent is receiving cash support through the Supplemental Security Income program; (2) the parent is an immigrant who is ineligible; (3) the child is living with a nonparent caregiver; or (4) the parent has been sanctioned and removed from cash assistance for failing to comply with program requirements. Nationally, about one-third of these "child only" households are children living with non-parent caregivers. We also know that during and after this recent significant recession, while caseloads increased in most states, the overall national increase totaled about 13 percent from fiscal years 2008 to 2011. This has been the first test of TANF--with its capped block grant structure--during severe economic times. This relatively modest increase--and decreases in some states--has raised questions about the responsiveness of TANF to changing economic conditions. We recently completed work on what was happening to people who had exhausted their unemployment insurance While almost 40 percent of benefits after losing a job in the recession.near-poor households with children that had exhausted UI received aid through the Supplemental Nutrition Assistance Program (formerly known as food stamps), we estimated that less than 10 percent received TANF cash assistance. A key TANF goal is helping parents prepare for and find jobs. The primary means to measure state efforts in this area has been TANF's work participation requirements. Generally, states are held accountable for ensuring that at least 50 percent of all families receiving TANF cash assistance and considered work-eligible participate in one or more of the federally defined allowable activities for the required number of hours each week. However, over the years, states have not typically engaged that many recipients in work activities on an annual basis--instead, states have engaged about one third of families in allowable work activities nationwide. Most states have relied on a combination of factors, including various policy and funding options in federal law and regulations, to meet the work participation requirements without reaching the specified 50 percent. Factors that influenced states' work participation rates included not only the number of families receiving TANF cash assistance who participated in work activities, but also: decreases in the number of families receiving TANF cash assistance (not due to program eligibility changes) that provide a state credit toward meeting its rates , state spending on TANF-related services beyond what is required that also provides a state credit toward meeting its rates, state policies that allow working families to continue receiving TANF cash assistance, helping a state to increase its rate, and state policies that provide nonworking families cash assistance outside of the TANF program. For example, some states serve families with work barriers outside of state TANF because of concerns that they will not be able to meet work requirements. Many states have cited challenges in meeting TANF work participation rates, such as requirements to verify participants' actual activity hours and certain limitations on the types and timing of activities that count toward meeting the requirements. Because of the various factors that affect the calculation of states' work participation rates, the rate's usefulness as an indicator of a state's effort to help participants achieve self-sufficiency is limited. Further, the TANF work participation rates, as enacted, in combination with the flexibility provided, may not serve as an incentive for states to engage more families or to work with families with complex needs. While the focus is often on TANF's role in cash assistance, it plays a significant role in states' budgets for other programs and services for low- income families, as allowed under TANF. The substantial decline in traditional cash assistance caseloads combined with state spending flexibilities under the TANF block grant allowed states to broaden their use of TANF funds. As a result, TANF and state TANF-related dollars played an increasing role in state budgets outside of traditional cash assistance payments. In our 2006 report that reviewed state budgets in nine states, we found that in the decade after Congress created TANF, the states used their federal and state TANF-related funds to support a wide range of state priorities, such as child welfare services, mental health services, substance abuse services, prekindergarten, and refundable state earned income credits for the working poor, among others. While some of this spending, such as that for child care assistance, relates directly to helping cash assistance recipients leave and stay off the welfare rolls, other spending is directed to a broader population that did not necessarily ever receive welfare payments. This is in keeping with the broad purposes of TANF specified in the law: providing assistance to needy families so that children could be cared for in their own homes or in the homes of relatives; ending needy families' dependence on government benefits by promoting job preparation, work, and marriage; preventing and reducing the incidence of out-of-wedlock pregnancies; encouraging the formation and maintenance of two-parent families. This trend away from cash assistance has continued. In fact, in fiscal year 2011, federal TANF and state expenditures for purposes other than cash assistance totaled 71 percent of all expenditures. This stands in sharp contrast with 27 percent spent for purposes other than cash assistance in fiscal year 1997, when states first implemented TANF. Beyond the cash assistance rolls, the total number of families assisted is not known, as we have noted in our previous work. TANF funds can play an important role in some states' child welfare budgets. In our previous work, Texas state officials told us that 30 percent of the child welfare agency's budget was funded with TANF dollars in state fiscal year 2010. Many states have used TANF to fund child welfare services because, although TANF funding is a capped block grant, it is a relatively flexible funding source. However, some states may not be able to continue relying on TANF to fund child welfare services because they need to use TANF funds to address other program goals, such as promoting work. For example, Tennessee officials told us that they previously used some of their TANF grant to fund enhanced payments for children's relative caregivers and their Relative Caregiver Program, but that the state recently discontinued this practice due to budget constraints. While states have devoted significant amounts of the block grant as well as state funds to these and other activities, little is known about the use of these funds. Existing TANF oversight mechanisms focus more on the cash assistance and welfare-to-work components of the block grant. For example, when states use TANF funds for some purposes, they are not required to report on funding levels for specific services and how those services fit into a strategy or approach for meeting TANF goals. In effect, there is little information on the numbers of people served by TANF- funded programs other than cash assistance, and there is no real measure of workload or of how services supported by TANF and state TANF-related funds meet the goals of welfare reform. This information gap hinders decision makers in considering the success of TANF and what trade offs might be involved in any changes to TANF when it is authorized. The federal-state TANF partnership makes significant resources available to address poverty in the lives of families with children. With these resources, TANF has provided a basic safety net to many families, triggered a focus on work in the nation's welfare offices while helping many parents step into jobs, and provided states flexibility to help families in ways they believe will help prevent dependence on public assistance and improve the lives of children. At the same time, it does raise questions about the strength and breadth of the TANF safety net. Are some eligible families falling through? The emphasis on work participation rates as a measure of program performance has helped change the culture of state welfare programs to focus on moving families into employment, but weaknesses in the measure undercut its effectiveness. Are the work participation rates providing the right incentive to states to engage parents, including those difficult to serve, and help them achieve self-sufficiency? The flexibility of the TANF block grant has allowed states to shift their spending away from cash assistance and toward other programs and services for low-income families, potentially expanding the ability of states to combat poverty in new ways. However, we do not have enough information about the use of these funds to determine whether this flexibility is resulting in the most efficient and effective strategies at this time of scarce government resources and great need among the nation's low-income families. Chairman Baucus, Ranking Member Hatch, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. For questions about this statement, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Alexander G. Galuten, Gale C. Harris, Sara S. Kelly, Kathryn A. Larin, and Theresa Lo. 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 hearing is on combating poverty and understanding new challenges for families. The testimony focuses on the role of the Temporary Assistance for Needy Families (TANF) block grant in helping low-income families with children. As you know, the federal government significantly changed federal welfare policy in 1996 when it created TANF, a $16.5 billion annual block grant provided to states to operate their own welfare programs within federal guidelines. States are also required to maintain a specified level of their own spending to receive TANF funds. Over the past 15 years, the federal government and states have spent a total of $406 billion for TANF, about 60 percent of which were federal funds. This federal-state partnership has undergone multiple program and fiscal changes, including a dramatic drop in the number of families receiving monthly cash assistance benefits, as well as two economic recessions. According to the Bureau of the Census, poverty among children fell from about 21 percent in 1995 to about 16 percent in 2000, rising again to 22 percent in 2010. Examining TANF's past performance can help shed light on the challenges facing low-income families and the role of the federal government in combating poverty. This testimony-based primarily on reports issued by GAO from 2010 to 2012 on TANF and related issues--will focus on TANF's performance in three areas: (1) as a cash safety net for families in need, (2) as a welfare-to-work program that promotes employment, and (3) as a funding source for various services that address families' needs. The federal-state TANF partnership makes significant resources available to address poverty in the lives of families with children. With these resources, TANF has provided a basic safety net to many families and helped many parents step into jobs. At the same time, there are questions about the strength and breadth of the TANF safety net. Many eligible families--some of whom have very low incomes--are not receiving TANF cash assistance. Regarding TANF as a welfare-to-work program, the emphasis on work participation rates as a measure of state program performance has helped change the culture of state welfare programs to focus on moving families into employment. However, features of the work participation rates as currently implemented undercut their effectiveness as a way to encourage states to engage parents, including those difficult to serve, and help them achieve self-sufficiency. Finally, states have used TANF funds to support a variety of programs other than cash assistance as allowed by law. Yet, we do not know enough about this spending or whether this flexibility is resulting in the most efficient and effective use of funds at this time.

DOD's primary medical mission is to maintain the health of 1.6 million active duty service personnel and to provide health care during military operations. Also, DOD offers health care to 6.6 million non-active duty beneficiaries, including dependents of active duty personnel, military retirees, and dependents of retirees. Most care is provided in about 115 hospitals and 470 clinics worldwide--collectively referred to as military treatment facilities (MTF)--operated by the Army, Navy, and Air Force. The DOD direct care system is supplemented by care that is mostly paid for by DOD but is provided by civilian physicians under the CHAMPUS program. DOD is currently transitioning to a nationwide managed care program called TRICARE, under which the CHAMPUS program is now offered as one of three health care options called TRICARE Standard. In response to the rapid escalation of CHAMPUS costs in the 1980s, the Congress urged DOD, beginning with the Appropriations Act for Fiscal Year 1991 (P.L. 101-511), that physician payments under CHAMPUS be gradually brought in line with payments under Medicare, with reductions not to exceed 15 percent in a given year. Starting with the DOD Appropriations Act for Fiscal Year 1993 (P.L. 102-396), the Congress also enacted provisions (1) directing DOD, through regulations, to limit beneficiaries' out-of-pocket costs through balance billing limits and (2) authorizing waivers to "freeze" CMAC rates at current levels if DOD determines that further rate reductions would impair beneficiaries' adequate access to health care. DOD set balance billing limits for nonparticipating physicians at 115 percent of CMAC, which is the same limitation used for the Medicare program. By basing physician reimbursement on the Medicare fee schedule, DOD estimates that beneficiaries will save about $155 million in out-of-pocket costs in fiscal year 1998. To further contain rising health care costs, the Congress directed DOD in the National Defense Authorization Act for Fiscal Year 1994 (P.L. 103-160) to prescribe and implement a nationwide managed health care benefit program modeled on HMOs. Drawing from its experience with demonstrations of alternative health care delivery approaches, DOD designed TRICARE. As a triple-option benefit program, TRICARE is designed to give beneficiaries a choice among an HMO, a preferred provider organization (PPO), and a fee-for-service benefit. The HMO option, called TRICARE Prime, is the only option for which beneficiaries must enroll. TRICARE Extra is the PPO option, and TRICARE Standard is the fee-for-service option, which remains identical in structure to the previous CHAMPUS program. Regional MCSCs help administer the TRICARE program. The MCSCs' many responsibilities include claims processing, customer service, and developing and maintaining an adequate network of civilian physicians. CMAC rates serve as the maximum level of reimbursement under each of TRICARE's three options. To treat military beneficiaries under the Prime and Extra options, civilian physicians must join a network through the MCSC. The MCSC individually contracts with physicians or physician groups at a negotiated reimbursement rate, which is usually discounted from the CMAC rate. Network physicians are reimbursed at their negotiated rate regardless of whether they are providing care to enrollees under Prime or nonenrollees under the Extra option. Network physicians must accept their negotiated rate as payment in full. Physicians who do not join the network may still provide care to military beneficiaries under TRICARE Standard, for which they are reimbursed up to the full CMAC rate. Under this option, physicians may choose, on a case-by-case basis, whether to participate on a claim, that is, accept the CMAC rate as payment in full, less any applicable copayment. By law, physicians who decide not to participate on a particular claim under TRICARE Standard will receive the full CMAC rate and can balance bill the beneficiary for up to an additional 15 percent above that rate. The methodology DOD uses to set and transition CMAC rates to the Medicare level of payment complies with statutory requirements established under section 1079(h) of title 10 U.S.C. and generally conforms with accepted actuarial practice. Since 1991, DOD has annually adjusted and set CMAC rates on the basis of the Medicare fee schedule, which will result in a savings of about $770 million in fiscal year 1998. The methodology used to adjust CMAC rates is described in appendix II. As of March 1997, the most recent available CMAC rate update, approximately 80 percent of the national CMAC rates were at the same level as Medicare and about 20 percent were higher than Medicare because the transition for these rates is not yet complete. Only the rates for 61 of about 7,000 procedures--less than 1 percent--were below the Medicare level of payment. DOD has proposed a new rule (62 Fed. Reg. 61058 (1997)) to increase the payment amounts for the 61 procedures to the Medicare fee schedule amounts. The proposed rule is expected to be finalized in March 1998 after comments are received and analyzed. See appendix III for a list of these procedures. While CMAC rates are initially set at the national level, adjustments are made for each procedure code for 225 different localities within the United States. The locality-adjusted CMAC rates are the rates actually used to reimburse physicians. We found that the selected high-volume CMAC rates at each of the four locations were generally consistent with Medicare rates. DOD began using CMAC rates to reimburse civilian physicians on May 1, 1992. During the initial CMAC transition process to the Medicare level of payment, some physicians expressed concern about the low level of payment for certain obstetric and pediatric procedures, but payment levels for these procedures have since been addressed by DOD and HHS' Health Care Financing Administration (HCFA). Current physician complaints about the CMAC level of reimbursement are primarily directed at the discounted CMAC rates paid to TRICARE network physicians under the Prime and Extra options rather than the full CMAC rate used to reimburse nonnetwork physicians under the Standard option. DOD reports that the vast majority of physicians who accept military beneficiaries as patients under the Standard option agree to accept the CMAC rate as payment in full for their services and do not balance bill for additional payment. During the transition of CMAC rates, physicians initially complained about the CMAC reimbursement levels for obstetric and pediatric procedures. In response to complaints about obstetric rates, HCFA reexamined and adjusted the Medicare fee schedule's obstetric cost components and increased the reimbursement rates for some obstetrical delivery procedures. DOD, in turn, made corresponding adjustments to obstetric fees during its yearly CMAC revision. DOD did not, however, adjust pediatric rates. Physicians argued that CMAC rates for pediatric procedures should not be set at the same levels as services provided to adults because physician costs for caring for children are higher. To determine the validity of this concern, DOD commissioned a study, which concluded that only 12.3 percent of all payments would be for services for which there is a higher cost for children, and 56.2 percent of all payments would be for services for which there is a lower cost for children. The study found that 31.5 percent of payments were the same for children and adults. Consequently, DOD concluded that no payment differential was needed. According to the actuaries, DOD's decision conforms with common insurance industry practice. Because most CMAC rates are equivalent to Medicare rates, the discounted CMAC rates that TRICARE network physicians agree to accept are typically below the Medicare level of payment. The American Medical Association and some medical society members we interviewed told us that they considered the discounted CMAC rates network physicians were being asked to accept by the MCSCs to be too low, but that the full CMAC rate paid under Standard, though not desirable, is acceptable. Because of this, some physicians told us that they would not join the TRICARE network but would continue to see military beneficiaries under the Standard option. In the four locations, we found that the differences in the discounted CMAC rates physicians are willing to accept depend largely upon local health care market conditions such as the degree of HMO penetration as well as the dependence of the local physicians on the military beneficiary population. Physicians whose practices include a large percentage of military beneficiaries are more likely to join the network and accept the discounted rates offered by the MCSCs to maintain their patient base. For example, in Ozark, Alabama, one of the two rural, low-HMO-penetration locations we selected, the median discount rate physicians were willing to accept to maintain their patient base was 10 percent. In Abilene, Texas, the other rural, low-HMO-penetration location we visited, most physicians said that they did not need to join the network to maintain their patient base, and consequently, many of those who did agree to join did so only on the condition that their fee would not be discounted. In each of these locations, DOD and MCSC officials told us that the local physicians also tended to be unfamiliar with and averse to managed care. In contrast, however, network physicians in the two urban, high-HMO-penetration locations--San Diego, California, and Jacksonville, Florida--accepted higher median discounts of 15 and 20 percent, respectively. According to the actuaries, in areas with significant competition among managed care plans such as the states of Florida, California, Minnesota, and Massachusetts, physician reimbursement is approaching the Medicare level of payment, and in some of these areas, typical reimbursement is based on 80 percent of the Medicare level of payment. Likewise, a study conducted by Milliman and Robertson concluded that HMO reimbursement rates are approaching those of the Medicare fee schedule in many states.For example, an analysis of HMO payments as a percentage of Medicare showed that HMOs in California pay at 105 percent of Medicare and those in Florida pay at 95 percent of Medicare, on average. DOD reported in April 1997 a physician participation rate of 86 percent for the TRICARE Standard option, based on an analysis of claims submitted from July 1995 through June 1996. This participation rate means that the vast majority of physicians accepted the allowed charges as payment in full and did not balance bill beneficiaries for services rendered. As a safeguard to ensure participation, DOD also monitors participation for individual procedures for each locality during the yearly CMAC update process. If participation on claims falls below 60 percent for a particular procedure for which there are at least 50 claims, DOD uses a waiver to automatically "freeze" the rate for that procedure at the current level with no downward adjustments for that year. During 1997, 167 automatic waivers for physician payments were in effect, which represents less than 1 percent of the approximately 1.6 million locality-specific CMAC rates. Waivers can also be requested through written petitions. To date, DOD has received about 20 waiver petitions but has approved only 1 on the basis of the information provided. Our discussions with physician groups, physicians, and physician office staff revealed considerable concern with several other aspects of TRICARE administration--all of which negatively affected their opinion of the program. The administrative concerns range from slow claims payment to unreliable customer telephone service. And while these concerns resulted in some physicians dropping out of the network or not joining, these physicians told us that they continue to treat military beneficiaries as nonnetwork physicians under the Standard option. DOD and MCSC officials acknowledged these complaints and told us they are in the process of addressing them. Consequently, the success of these efforts will not be known for some time. Slow reimbursement was a common physician complaint about TRICARE and, when combined with discounted payment levels, has resulted in some physicians dropping out of the TRICARE network and others choosing not to join. During the start-up phase of health care delivery, the MCSCs for the four selected locations experienced to varying degrees some problems regionwide in meeting their contractual timeliness requirement that 75 percent of claims be processed within 21 days, primarily because of higher-than-expected claims volume. To begin meeting claims processing timeliness standards, the MCSC for Abilene, Texas, told us it closed its understaffed claims processing center for DOD's Southwest region and subcontracted with a company that specializes in claims processing to clear a backlog of about 200,000 claims. In addition, it sent a team of claims adjudicators to Abilene to resolve physicians' individual claims. The MCSC's claims processing center for the regions encompassing Ozark, Alabama, and Jacksonville, Florida, hired an additional 200 staff to adjudicate the larger-than-expected workload. The MCSC responsible for these regions also told us that it has teams of claims processors that can be sent to specific locations when needed. Although the MCSCs for the four locations reported to DOD that they are now meeting the contractual claims processing requirements, physicians in all four locations still complained to us about slow and cumbersome reimbursement. Physicians and their office staffs told us they spend considerable time refiling and appealing TRICARE claims as a result of denials and partial payments. Physicians and their office staffs also complained that there seem to be no distinct or specific TRICARE requirements on how a treatment should be coded on a claim to receive payment. DOD and MCSC officials responded that although the MCSCs use national Current Procedural Terminology coding standards, some of the coding confusion is due to the use of Claim Check, a software program that DOD requires all MCSCs to use for claims review. Claim Check performs an initial claim review and edits the procedure codes to eliminate nonreimbursable and duplicate procedures to prevent overpayment. According to DOD, all Claim Check determinations are considered final and, as such, are not appealable. These edits may result in the denial or recoding of submitted procedure codes, which may cause physicians to receive lower-than-expected payments. DOD and MCSC officials also said that payments are delayed for other reasons, such as the lack of preauthorization for treatment. To help remedy this, MCSC officials told us that they are conducting educational seminars on proper claims submission techniques for physicians and their office staffs. Contributing to physicians' discouragement with the TRICARE program is that they are not routinely provided with fee schedules, and as a result, they do not always know what they should be paid. MCSC officials responded that physicians can request fee information up front for their high-use procedures and that CMAC rates are available on the Internet.They also told us that physicians may request fee information for specific procedures through a toll-free customer service telephone line. In addition, fee information can be purchased from the federal government in hard copy for $75 or as an electronic file for $152. These sources contain over 1.6 million CMAC rates--representing approximately 7,000 procedure codes for each of the 225 localities. However, some physician offices may be unwilling to pay these prices for information they believe should be provided by the MCSC or DOD--especially since physicians would only be interested in the rates for their specific locality. Furthermore, we were told by physician office staff that not every physician's office has access to the Internet and that repeatedly requesting specific fees by telephone is time consuming. Physicians complained that other administrative problems, such as slow preauthorizations for care and unreliable customer service telephone lines, have also resulted in increased paperwork and staff time, which is not cost-effective. Physicians at each of the locations we examined cited the slow and paperwork-intensive preauthorization process, which is used to approve certain types of care for reimbursement. Some of the physicians told us they have had to delay treatment to obtain preauthorization, and some said that they went ahead and treated patients who, in their opinion, needed immediate attention, thereby running the risk of not being reimbursed for their services. DOD and MCSC officials responded that the preauthorization process takes time because it is a two-level review. The local MTF must review the request to determine whether the care could be provided within that facility, then MCSC officials must perform a medical necessity review. MCSC officials also stated that incomplete information could require resubmission and thus a delayed determination. Recognizing physicians' concerns, MCSC officials are working on ways to streamline and improve the preauthorization process. For example, in Ozark, Alabama, local MCSC personnel rerouted preauthorization requests to first obtain the medical necessity decision, thus giving the MTF staff information necessary to make a faster determination as to whether the care could be provided at the MTF. And in Abilene, Texas, a team of military and MCSC officials evaluated the preauthorization process. Their review resulted in the retraining of civilian network physicians and their staffs on a case-by-case basis to ensure complete initial submissions of patient identification and clinical data. Some physicians also complained that their office staffs spent inordinate amounts of time trying to get through to customer service on the telephone, and once connected, they had a long wait for a representative. In one location, some office staff told us that they called the customer service line repeatedly over a 2-day period trying to get through to a representative. Other office staff told us that they typically stayed on hold 30 to 45 minutes for a representative after being connected. The MCSC told us they are trying various approaches to address these problems. For example, the MCSC for Abilene, Texas, responded that the telephone system at the TRICARE Service Center had been improved by adding more telephone lines, modifying the automated telephone menu, and streamlining the rerouting process. The MCSC in San Diego, California, installed an additional toll-free telephone line dedicated solely for physician use, and the MCSC for Ozark, Alabama, and Jacksonville, Florida, more than doubled the staff at its central telephone center. On the basis of congressional direction, DOD limited beneficiaries' out-of-pocket costs by setting balance billing limits for nonparticipating physicians at 115 percent of the CMAC rate, which is the same limitation used for the Medicare program. This provision became effective for all care provided on and after November 1, 1993. An infraction of this requirement will result in a physician possibly losing his or her status as a TRICARE authorized provider. DOD has proposed a new rule (62 Fed. Reg. 61058 (1997)) that noncompliant physicians also be excluded from other federal health care and benefit programs such as Medicare and Medicaid.According to a recent DOD analysis of claims submitted under the TRICARE Standard option, physicians who did not participate balance billed for 14 percent of claims filed during the period of July 1, 1995, through June 30, 1996. For these nonparticipating claims, beneficiaries saved approximately $78.6 million dollars as a result of balance billing limits. DOD and MCSC officials told us they were aware of only a very small number of balance billing infractions--all of which were easily resolved. However, MCSC officials told us that after adjudicating the claim and paying the physician, they did not receive notice of any bill the physician may have subsequently sent to the beneficiary. Consequently, the MCSC does not know whether physicians are balance billing beneficiaries in excess of the 115 percent limit unless beneficiaries complain. While the MCSCs have attempted to educate beneficiaries about balance billing limits through briefings and written materials such as benefit booklets, the explanation of benefits statement, which contains information on claim adjudication, does not contain information on the balance billing limits for TRICARE Standard claims submitted by nonparticipating physicians. Including this information on the explanation of benefits statements for both beneficiaries and physicians, as Medicare does, would educate both parties about the amount that can be balance billed. For the few cases in which beneficiaries notified DOD and the MCSCs that physician charges exceeded the balance billing limits, DOD and the MCSCs reported that these excess charges were due to either billing mistakes or ignorance of procedures rather than deliberate intent. Each of the MCSCs has procedures in place on how to resolve excessive balance billing through a series of notifications to the physician and the beneficiary. To date, all of the identified infractions have been easily resolved, and, according to DOD officials, no physicians have been sanctioned under TRICARE for excessive balance billing practices. By lowering CMAC rates to levels comparable to rates paid under the Medicare program, DOD will save nearly three-quarters of a billion dollars in fiscal year 1998 in health care expenditures. And throughout the nearly complete transition process, DOD has appropriately set and adjusted CMAC rates in compliance with statutory requirements using a methodology that also generally complies with accepted actuarial practice. Although physicians complained about the level of reimbursement under TRICARE, their complaints are focused on the discounted rates paid to network physicians under TRICARE Prime and Extra--rates that are typically lower than Medicare. However, it is the combination of low payments and administrative impediments associated with untimely payments and slow authorizations for treatment that has negatively affected many physicians' opinions of the TRICARE program. Furthermore, when physicians are reimbursed, they do not always know how much to expect or whether they are being paid correctly because written or published fee schedules are not routinely furnished by the MCSCs. While most of the physicians we spoke with continue to treat military beneficiaries, addressing physicians' concerns is crucial to the development and maintenance of TRICARE networks. Because of administrative and cost issues, physicians are becoming disillusioned with the program. Although DOD and MCSCs are addressing these problems, if they are not resolved, DOD could face increasing problems in the future attracting the number of physicians necessary to ensure that beneficiaries have adequate access to care. While balance billing limits under the Standard option are intended to protect beneficiaries from excessive out-of-pocket costs, DOD, MCSCs, and beneficiaries do not always know when physicians charge above the 115 percent limit. Although the MCSCs attempt to educate beneficiaries on balance billing limits, this information could be easily communicated by following Medicare's practice of including balance billing information on explanation of benefits statements sent to both the beneficiaries and physicians. To improve the administration of the TRICARE program, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs to require MCSCs to provide to physicians written or published locality-specific fee schedules after each yearly CMAC update to help eliminate confusion about CMAC reimbursement rate amounts and require MCSCs to notify beneficiaries and physicians of balance billing limits on the explanation of benefits statements for all TRICARE Standard claims submitted by nonparticipating physicians. In commenting on a draft of our report, the Deputy Assistant Secretary of Defense (Health Services Financing) concurred with our findings and stated that the draft fairly and thoroughly addresses a complex set of issues related to the reimbursement of physicians. In response to our first recommendation, DOD agreed to seek additional, cost-effective methods to ensure that all physicians have access to accurate, timely information about CMAC rates. In response to our second recommendation, DOD agreed to develop balance billing information statements for inclusion on the explanation of benefits forms. We incorporated several technical revisions as suggested by DOD. DOD's comments are presented in their entirety in appendix IV. As agreed with your offices, we are sending copies of this report to the Secretary of Defense and will make copies available to others upon request. Please contact me on (202) 512-7101 or Michael T. Blair, Jr., Assistant Director, on (404) 679-1944 if you or your staff have any questions concerning this report. Other major contributors to this report include Cynthia M. Fagnoni, Associate Director; Bonnie W. Anderson, Evaluator-in-Charge; Jonathan Ratner, Senior Health Economist; and Dayna K. Shah, Assistant General Counsel. To evaluate the compliance of DOD's rate-setting methodology with statutory requirements, we obtained assistance from an actuarial consulting firm. It reviewed documentation of the methodology used in developing CHAMPUS maximum allowable charges (CMAC) along with the requirements of section 1079(h) of title 10, U.S.C. In addition to assessing compliance, the actuary made a determination of whether DOD's methodology is generally consistent with accepted actuarial practice and reviewed and provided observations on DOD's approach for setting pediatric rates. We reviewed and discussed with DOD officials the changes made to obstetric procedure fees by the Health Care Financing Administration (HCFA). We obtained information from DOD officials regarding the status of the CMAC transition process. To determine whether reimbursement levels differed between CMAC and Medicare rates, we compared a number of high-volume procedures for the following four selected locations: (1) Abilene, Texas; (2) Jacksonville, Florida; (3) Ozark, Alabama; and (4) San Diego, California. In addition, we obtained the discounted rates paid to network physicians in each of the four locations. We used specific criteria to select the locations to ensure that they were representative of the various health care markets where military beneficiaries reside, within regions with the most extensive TRICARE experience. Our selection criteria included the level of HMO penetration, whether the area was rural or urban, the military facility branch of service, and the size and mix of the beneficiary population. These four locations also served as the focus for our evaluation of physician complaints and balance billing enforcement. We selected the high-volume procedures on the basis of an analysis of claim data for each location for the time period of July 1995 through June 1996. For each location, we used the top five high-use specialties in addition to obstetrics and pediatrics for a total of seven specialties. For each specialty, we then used the top procedures on the basis of the frequency, or volume, of claims received for the service. For each procedure, we calculated the CMAC rate as a percentage of Medicare. To determine the basis of physician complaints about CMAC rates and to identify other physician complaints about TRICARE, we spoke with members of the local medical societies for each of the four locations. To obtain an overall perspective of physician concerns, we met with officials from the American Medical Association. We also interviewed officials from the National Military Family Association and The Retired Officers Association. To determine whether and how physicians' concerns were being addressed, we interviewed local military and MCSC officials for each of the locations as well as DOD officials at the Office of the Assistant Secretary of Defense for Health Affairs. We also reviewed DOD's physician participation report to determine the extent to which physicians were willing to accept the CMAC rate as full payment. We discussed the report's methodology with DOD officials along with DOD's use of participation rates to waive rate reductions for procedures in locations where participation is low. To determine the extent and difficulty of balance billing enforcement, we interviewed the local military and MCSC officials for the four locations. We met with officials at the TRICARE Support Office to discuss the methods of enforcement and the extent of infractions. We also met with officials at HCFA to determine how they enforce Medicare's balance billing limits. We performed our work between March 1997 and January 1998 in accordance with generally accepted government auditing standards. CMAC rates for a particular year are calculated using actual charge data submitted on DOD claims for service dates during a 12-month period starting July 1 and ending June 30. A national prevailing charge for each procedure is then calculated at the 80th percentile of these actual billed charges. For each procedure, the previous year's national CMAC is then compared with the lesser of the current-year prevailing charge or the current-year Medicare fee schedule amount. Depending on the outcome, one of the following three scenarios applies: If the current-year prevailing charge is lower than the Medicare fee schedule amount, the prevailing charge becomes the new CMAC rate. If the current-year prevailing charge is above the Medicare amount, the previous year's CMAC is cut the lesser of 15 percent or the amount necessary to reach the Medicare amount, and thus becomes the new CMAC rate. If the previous year's CMAC is below the Medicare amount, it is updated by the Medicare Economic Index (MEI), either in full or by the amount necessary to reach the Medicare level of payment. After CMAC rates are calculated at the national level, locality-specific adjustments are made for each procedure code. Injection for elbow X ray Remove cataract, insert lens (continued) Preventive visit, new, infant Preventive visit, new, age 1-4 Preventive visit, new, age 5-11 Preventive visit, new, age 12-17 Preventive visit, new, age 40-64 Preventive visit, established, infant Preventive visit, established, age 1-4 Preventive visit, established, age 5-11 Preventive visit, established, age 12-17 Preventive visit, established, age 18-39 Preventive visit, established, age 40-64 (continued) 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 examined: (1) whether the Department of Defense's (DOD) methodology for setting the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) maximum allowable charge (CMAC) rates complies with statutory requirements and how current CMAC rates compare with Medicare rates for similar services; (2) the basis for physicians' concerns about CMAC rates and how these concerns affect physicians' willingness to treat military beneficiaries; (3) the basis for other concerns physicians have about TRICARE that could also affect their willingness to treat military beneficiaries; and (4) how balance billing limits are being enforced. GAO noted that: (1) the methodology used by DOD to transition CMAC rates to the Medicare level of payment complies with statutory requirements and generally conforms with accepted actuarial practice; (2) these adjustments will result in DOD saving about three-quarters of a billion dollars in fiscal year 1998 in health care expenditures; (3) as of the most recent available CMAC rate adjustment in March 1997, 80 percent of CMAC rates nationwide were at the same level as Medicare, with about 20 percent higher and less than 1 percent below the Medicare level of payment; (4) the CMAC rates at the four locations GAO selected were generally consistent with Medicare rates; (5) while physicians' initial concerns about low obstetric and pediatric rates have been addressed by DOD, current physician complaints about reimbursement levels are focused on the discounted CMAC rates paid to network physicians under DOD's TRICARE program; (6) because most CMAC rates are now equivalent to Medicare rates, the discounted CMAC rates that TRICARE network physicians agree to accept are typically below the Medicare level of payment; (7) some physicians told GAO that they considered the discounts unacceptable, and they would not join the TRICARE network but would continue to treat military beneficiaries as nonnetwork physicians; (8) the discount rates physicians were willing to accept in the four locations were largely dependent on local health care market factors such as the degree of health maintenance organization penetration and the dependence of local physicians on the military beneficiary population; (9) physicians GAO met with also expressed concerns about administrative hassles, which contributed to their frustration with the TRICARE program; (10) in many cases, physicians said that while they would be willing to accept discounted CMAC rates, the administrative impediments provided significant disincentives to joining the TRICARE network; (11) DOD and managed care support contractors (MCSC) officials acknowledged these complaints and are making efforts to address them and alleviate physicians' concerns; (12) DOD and MCSC officials told GAO that they were aware of only a very small number of balance billing infractions--all of which had been easily resolved; (13) while the MCSCs attempt to educate beneficiaries about balance billing limits, the explanation of benefits statement does not include information on the balance billing limits; and (14) Medicare, which has the same balance billing limit, sends notice of balance billing limitations on the statements it provides to beneficiaries and physicians.

When the WTC buildings collapsed on September 11, 2001, an estimated 250,000 to 400,000 people were immediately exposed to a noxious mixture of dust, debris, smoke, and potentially toxic contaminants in the air and on the ground, such as pulverized concrete, fibrous glass, particulate matter, and asbestos. Those affected included people residing, working, or attending school in the vicinity of the WTC and thousands of emergency response workers. Also affected were the estimated 40,000 responders who were involved in some capacity in the days, weeks, and months that followed, including personnel from many government agencies and private organizations as well as other workers and volunteers. A wide variety of physical and mental health effects have been observed and reported among people who were involved in rescue, recovery, and cleanup operations and among those who lived and worked in the vicinity of the WTC. Physical health effects included injuries and respiratory conditions, such as sinusitis; asthma; and a new syndrome called WTC cough, which consists of persistent coughing accompanied by severe respiratory symptoms. Almost all firefighters who responded to the attack experienced respiratory effects, including WTC cough, and hundreds had to end their firefighting careers because of WTC-related respiratory illnesses. The most commonly reported mental health effects among responders and others were symptoms associated with posttraumatic stress disorder--an often debilitating disorder that can develop after a person experiences or witnesses a traumatic event, and which may not develop for months or years after the event. Behavioral effects such as alcohol and tobacco use and difficulty coping with daily responsibilities were also reported. Several federally funded programs monitor the health of people who were exposed to the WTC attack and its aftermath. The monitoring programs vary in such aspects as eligibility requirements, methods used for collecting information about people's health, and approaches for offering referrals. Of the four programs that offer medical examinations to WTC responders, the only one that is open to federal workers who responded to the disaster in an official capacity is the one implemented by HHS. (See table 1.) None of the monitoring programs receives federal funds to provide clinical treatment for health problems that are identified. The majority of federal funding for these monitoring programs was provided by DHS's Federal Emergency Management Agency (FEMA), as part of the approximately $8.8 billion in federal assistance that the Congress appropriated to FEMA for response and recovery activities after the WTC disaster. One appropriation in 2003 specifically authorized FEMA to use a portion of its WTC-related funding for screening and long- term monitoring of emergency services and rescue and recovery personnel. Generally, however, FEMA may fund only short-term care after a disaster, such as emergency medical services, and not ongoing clinical treatment. FEMA entered into interagency agreements with HHS to fund most of these health monitoring programs. HHS is the designated lead agency for the public health and medical support function under the National Response Plan and is responsible for coordinating the medical resources of all federal departments and agencies. HHS's OPHEP coordinates and directs HHS's emergency preparedness and response program. Three federally funded programs implemented by state and local governments or private organizations, with total federal funding of about $104 million--the FDNY WTC Medical Monitoring Program, WTC Medical Monitoring Program (worker and volunteer program), and New York State responder screening program--have made progress in monitoring the physical and mental health of people affected by the WTC attack. Federal employees who responded to the WTC disaster in an official capacity were not eligible for these programs because it was expected that another program would be developed for them. The New York State program stopped providing health screening examinations in November 2003, and in February 2004 state workers became eligible for initial or continued monitoring through the worker and volunteer program. The state program, in general, did not inform state responders that they were eligible to participate in the worker and volunteer program. Worker and volunteer program officials are working with state employee unions to inform state workers of their eligibility. All three programs and the WTC Health Registry, with total federal funding of $23 million, have collected information that could contribute to better understanding of the health consequences of the attack and improve health care for affected individuals. Officials from the FDNY, worker and volunteer, and WTC Health Registry programs are concerned that federal funding for their programs could end before sufficient monitoring occurs to identify all long-term health problems related to the WTC disaster. In January 2006, CDC received a $75 million appropriation to fund baseline health screening, long-term monitoring, and treatment for WTC responders. CDC officials are in the process of deciding how they are going to allocate these funds among programs and how long the allocated funds will be available for each program that receives funding. Three federally funded programs implemented by state and local governments or private organizations, with total funding of about $104 million, have provided medical examinations to identify physical and mental health problems related to the WTC attack. (See table 2.) Two of these programs--the FDNY WTC Medical Monitoring Program and the worker and volunteer program--are tracking the health of WTC rescue, recovery, and cleanup workers and volunteers over time. The third program, the New York State responder screening program, offered one- time screening examinations to state employees, including National Guard personnel, who participated in WTC rescue, recovery, and cleanup work. Federal employees who responded to the WTC disaster in an official capacity were not eligible for any of these programs because it was expected that another program would be developed for them. The FDNY program completed initial screening for over 15,000 firefighters and emergency medical service personnel, and the worker and volunteer program completed initial screening for over 14,000 other responders. In both programs, screenings include physical examinations, pulmonary function tests, blood and urine analysis, a chest Xray, and questionnaires on exposures and mental health issues. Both programs have begun to conduct follow-up examinations of participants and continue to accept new enrollees who desire initial screening. Current plans are to conduct a total of three follow-up examinations for each participant by 2009. As part of their federally funded activities, both programs provide referrals for participants who require treatment. FDNY employees and retirees can obtain treatment and counseling services from the FDNY Bureau of Health Services and the FDNY Counseling Services Unit, or they can use their health insurance to obtain treatment and counseling services elsewhere. The worker and volunteer program also provides referrals for its participants, including referrals to programs funded by the American Red Cross and other nonprofit organizations. The New York State program provided health screenings to about 1,700 of the estimated 9,800 state workers and National Guard personnel who responded to the WTC disaster. Officials sent letters to all state responders to inform them about the program and their eligibility for it. For each participant, the screening included a health and exposure questionnaire and physical and pulmonary examinations. Participants who required further evaluation or treatment after screening were told to follow up with their personal physician or a specialist. The program stopped screening participants in November 2003, in part because the number of responders requesting examinations was dwindling, and no follow-up examinations are planned. In February 2004, worker and volunteer program officials began to allow New York State responders to participate in that monitoring program. The officials determined that the worker and volunteer program would have sufficient funding to accommodate state workers who want to join the program. The state program did not notify the 9,800 state responders, including the approximately 1,700 workers it had screened that they were now eligible for continued monitoring from the worker and volunteer program. State program officials relayed this development only to those state responders who inquired about screening or monitoring examinations following the decision to permit state responders to participate in the worker and volunteer program. However, officials from the worker and volunteer program told us that they are working with state employee unions to inform state workers about their eligibility for the worker and volunteer program. For example, starting in November 2005, letters have been sent to union members telling them about the program and how they can enroll in it. According to worker and volunteer program officials, as of February 2006, 13 state workers who responded to the WTC disaster in an official capacity had received examinations from the worker and volunteer program, and as of mid-February 2006, 9 additional state workers had registered to obtain examinations through this program. Worker and volunteer program officials told us that any state worker that had been screened by the state program would need to receive a new baseline examination through the worker and volunteer program, because the screening data collected by the state program differ from the data collected by the worker and volunteer program. For example, the worker and volunteer program offers a breathing test not provided by the state program. In addition to providing medical examinations, these three programs--the FDNY program, the worker and volunteer program, and the New York State program--have collected information for use in scientific research to better understand the health consequences of the WTC attack and other disasters. A fourth program, the WTC Health Registry, includes health and exposure information obtained through interviews with participants; it is designed to track participants' health for 20 years and to provide data on the long-term health consequences of the disaster (see table 2). Physicians who evaluate and treat WTC responders told us they expect that research on health effects from the disaster will not only help researchers understand the health consequences, but also provide information on appropriate treatment options for affected individuals. Both the FDNY program and the worker and volunteer program have been the basis for published research articles on the health of WTC responders. For example, the FDNY program reported on the injuries and illnesses experienced by firefighters and emergency medical service workers after responding to the attack. In addition, the worker and volunteer program published information on the physical and mental health of responders in 2004. Officials from both programs plan to publish additional findings as they track participants' health over time. Although the New York State program has stopped offering examinations, program officials are continuing to analyze data from the program with plans for eventual publication. The WTC Health Registry program has collected health information through interviews with responders, people living or attending school in the vicinity of the WTC site, and people working or present in the vicinity on September 11, 2001. The registry program, with total federal funding of $23 million, completed enrollment and conducted interviews with over 71,000 participants by November 2004. Officials updated contact information for all participants in 2005, and they plan to start conducting the first follow-up health survey of participants in late March 2006. Registry officials would like to conduct subsequent follow-up surveys every 2 years until about 2023--20 years after the program began in 2003-- but have not yet secured funding for long-term monitoring. The registry is designed to provide a basis for research to evaluate the long-term health consequences of the disaster. It includes contact information for people affected by the WTC attack, information on individuals' experiences and exposures during the disaster, and information on their health. In November 2004, registry officials published preliminary results on the health status of registry participants, and officials expect to submit several research papers for publication within the next year. In addition, in May 2005, registry officials published guidelines for allowing registry information to be used in scientific research, and as of February 2006, they approved three proposals for external research projects that use registry information. These proposals include two studies of building evacuations and a study of psychological responses to terrorism. Officials from the FDNY, worker and volunteer, and WTC Health Registry programs are concerned that current time frames for federal funding arrangements for programs designed to track participants' health over time may be too short to allow for identification of all the health effects that may eventually develop. ATSDR's 5-year cooperative agreement with the New York City Department of Health and Mental Hygiene to support the WTC Health Registry went into effect April 30, 2003, and extends through April 29, 2008. Similarly, NIOSH awarded 5-year grants in July 2004 to continue the FDNY and worker and volunteer programs through mid-2009; the programs had begun in 2001 and 2002, respectively. Health experts involved in these monitoring programs, however, cite the need for long-term monitoring of affected groups because some possible health effects, such as cancer, may not appear until decades after a person has been exposed to a harmful agent. They noted that long-term monitoring could result in earlier detection and treatment of cancers that might develop. Health experts also told us that monitoring is important for identifying and assessing the occurrence of newly identified conditions, such as WTC cough, and chronic conditions, such as asthma. In January 2006, CDC received a $75 million appropriation for purposes related to the September 11, 2001, terrorist attacks. It is available to fund baseline screening, long-term monitoring, and health care treatment of emergency services and recovery personnel who responded to the WTC disaster. CDC is required to give first priority to funding baseline, follow- up screening, long-term medical health monitoring, or treatment programs implemented by the worker and volunteer program, the FDNY Medical Monitoring Program, the WTC Health Registry, the New York Police Foundation's Project COPE, and the Police Organization Providing Peer Assistance of New York City. CDC is required to give second priority to funding similar programs that are coordinated by other organizations that are working with New York State and New York City. The programs that may qualify for secondary consideration are not specified in the law. In mid-February 2006, CDC officials told us that they were engaged in discussions with congressional stakeholders and the organizations specified in the law to help the agency decide how to spend the appropriated funds. Officials said that to aid their decisionmaking they were also consulting with private philanthropic organizations, including the American Red Cross, to learn more about the grant funds the organizations have provided to support the recovery needs of people affected by the WTC attack. CDC officials told us that they plan to first decide how they will allocate funds among screening, monitoring, and treatment programs and then make other decisions, such as how long the allocated funds will be available for each program. They said that they anticipated reaching a decision about the allocation of the funds by the end of February 2006, but did not know when they would reach other decisions. HHS's OPHEP established the WTC Federal Responder Screening Program to provide medical screening examinations for an estimated 10,000 federal workers who responded to the WTC disaster in an official capacity and were not eligible for any other medical monitoring program. OPHEP did not initially develop a comprehensive list of federal responders who were eligible for the program. The program began in June 2003--about a year later than other monitoring programs--and had completed screenings for 394 workers through March 2004. No additional examinations were provided until the program resumed in December 2005, because OPHEP officials had temporarily suspended new examinations until they could resolve several operational issues. The program resumed conducting examinations for current federal workers in December 2005, and completed 133 additional examinations for current federal workers as of early February 2006. The examination process has not resumed for WTC responders who are no longer federal employees, but OPHEP recently executed an agreement with NIOSH to arrange for the worker and volunteer program to provide examinations to these WTC responders. We also identified two additional federal agencies that established screening programs for their own personnel who responded to the disaster. HHS's WTC Federal Responder Screening Program was established to provide free voluntary medical screening examinations for an estimated 10,000 federal workers whom their agencies sent to respond to the WTC disaster from September 11, 2001, through September 10, 2002, and who were not eligible for any other monitoring program. FEMA provided $3.74 million through an interagency agreement with HHS's OPHEP for the purpose of developing and implementing the program. OPHEP entered into an agreement with HHS's FOH to schedule and conduct the screening examinations. The launching of the federal responder screening program lagged behind the implementation of other federally funded monitoring programs for WTC responders. For example, the medical screening program for New York State employees and the worker and volunteer program started conducting screening examinations in May 2002 and July 2002, respectively. However, OPHEP did not launch its program until June 2003. (Figure 1 highlights key actions in developing and implementing the program.) Initially, OPHEP did not develop a plan for identifying all federal agencies and their personnel that responded to the WTC disaster or for contacting all federal personnel eligible for the screening program. Although OPHEP and FEMA developed a partial list of federal responders--consisting primarily of HHS and FEMA personnel--OPHEP did not have a comprehensive list of agencies and personnel, and so could not inform all eligible federal responders about the WTC screening program. The program's principal action to communicate with the federal responders was to place program information and registration forms on FEMA's National Disaster Medical System (NDMS) Web site. The screening program had operated for about 6 months when OPHEP officials decided in January 2004 to place it on hold by temporarily suspending examinations. FOH officials told us that after examinations were suspended, 35 additional people requested examinations and they were placed on a waiting list. FOH officials told us that they completed 394 screening examinations from June 2003 through March 2004, with most completed by the end of September 2003. According to FOH, a total of $177,967 was spent on examinations through March 2004. OPHEP officials told us that three operational issues contributed to the decision to suspend the program. First, OPHEP could not inform all eligible federal responders about the program because it lacked a comprehensive list of eligible federal responders. Second, there were concerns about what actions FOH clinicians could take when screening examinations identified problems. Based on the examinations that had been completed before the program was placed on hold, FOH clinicians determined that many participants needed additional diagnostic testing and follow-up care, primarily in the areas of respiratory functioning and mental health. However, under the existing interagency agreement there was no provision for providing follow-up care and no direction for clinicians on how to handle the provision of further diagnostic tests, treatment, or referrals. FOH officials told us that they were concerned about continuing to provide screening examinations without the ability to provide participants with additional needed services. Third, although the screening program had been established to provide examinations to all federal responders regardless of their current federal employment status, HHS officials told us that the department determined that FOH does not have the authority to provide examinations to people who are no longer in federal service. In April 2005, OPHEP began to prepare for resuming the examination program by enlisting the assistance of ATSDR--which had successfully developed the WTC Health Registry--to establish a database containing the names of federal responders, develop a new registration Web site, and develop and implement recruitment and enrollment plans for current and former federal workers. OPHEP executed an agreement with ATSDR allocating about $491,000 of the funds remaining from FEMA for these activities. OPHEP officials told us that, as part of the program's recruitment and enrollment efforts, in mid-October 2005, a letter was sent to about 1,700 people identified as having responded to the WTC disaster to inform them about the program. According to OPHEP, the new registration Web site was activated in October 2005, and through early February 2006, 345 additional current federal workers and 32 former workers had registered to obtain an examination. In July 2005, OPHEP and FOH executed a new agreement for providing examinations to WTC responders who are current federal workers. Under this agreement, FOH clinicians can now make referrals for follow-up care. For example, they can refer participants with mental health symptoms to an FOH employee assistance program for a telephone assessment. If appropriate, the participant can then be referred to an employee assistance program counselor for up to six in-person sessions. If the assessment indicates that longer treatment is necessary, the participant can instead be advised to use health insurance to obtain care or to contact a local Department of Labor Office of Workers' Compensation to file a claim, receive further evaluation, and possibly obtain compensation for mental health services. The new agreement between OPHEP and FOH also allows FOH clinicians to order additional clinical tests, such as special pulmonary and breathing tests. FOH officials told us that they resumed providing examinations in December 2005 and that 133 examinations have since been completed. The examination process has not resumed for WTC responders who are no longer federal employees, but in late February 2006, OPHEP executed an agreement with NIOSH to arrange for the worker and volunteer program to provide examinations to these WTC responders. Under this agreement, former federal workers will receive a one-time examination comparable to the type of examination that FOH is now providing to current federal workers. Patients with eligible conditions will be referred to the treatment programs supported by the American Red Cross or other available programs. In addition to the OPHEP program, we identified two federal agencies that established medical screening programs to assess the health of the personnel they had sent to respond to the WTC disaster. One agency, the Army, established two screening programs--one specifically for Army Corps of Engineers personnel and one that also included other Army responders. The Army Corps of Engineers established a voluntary program to assess the health of 356 employees it had sent to respond to the disaster. The program, initiated in November 2001, consists of sending employees an initial medical screening questionnaire covering physical health issues. If questionnaire results indicate symptoms or concerns that need further evaluation, the employee is offered a medical examination. As of August 2004, 92 Corps of Engineers employees had participated in the program, with 40 receiving follow-up examinations. The Army's Center for Health Promotion and Preventive Medicine initiated a program--the World Trade Center Support Health Assessment Survey--in January 2002. It was designed as a voluntary medical screening for Army military and civilian personnel, including contractors. From January 2002 through September 2003, questionnaires were sent to 256 employees. According to DOD, 162 employees completed and returned their questionnaires. In addition, the U.S. Marshals Service, within the Department of Justice, modified an existing agreement with FOH in 2003 for FOH to screen approximately 200 U.S. Marshals Service employees assigned to the WTC or Pentagon recovery sites. The one-time assessment includes a screening questionnaire and a medical examination. FOH officials said that as of August 2005, 88 of the 200 U.S. Marshals Service employees had requested and obtained examinations. Officials involved in the WTC health monitoring programs implemented by state and local governments or private organizations--including officials from the federal administering agencies--derived lessons from their experiences that could help officials design such programs in the future. They include the need to quickly identify and contact people affected by a disaster, the value of a centrally coordinated approach for assessing individuals' health, the importance of monitoring both physical and mental health, and the need to plan for providing referrals for treatment when screening examinations identify health problems. Officials involved in the monitoring programs emphasized the importance of quickly identifying and contacting people affected by a disaster. They said that potential monitoring program participants can become more difficult to locate as time passes. In addition, potential participants' ability to recall the events of a disaster may decrease over time, making it more difficult to collect accurate information about their experiences and health. However, the time it takes to design, fund, approve, and implement monitoring programs can lead to delays in contacting the people who were affected. For example, the WTC Health Registry received funding in July 2002 but did not begin collecting data until September 2003--2 years after the disaster. From July 2002 through September 2003, the program's activities included developing the registry protocol, testing the questionnaire, and obtaining approval from institutional review boards. To expedite such information collection during the response to future disasters, ATSDR officials have developed a model data collection instrument, known as the Rapid Response Registry, to allow officials to identify and locate potentially affected individuals immediately after a disaster and collect basic preliminary information, such as their current contact information and their location during the disaster. ATSDR officials expect that using this instrument would reduce delays in collecting time- sensitive information while officials take the time necessary to develop a monitoring program for disaster-related health effects. According to ATSDR officials, state and local agencies can request the instrument and adapt it to their specific needs, and ATSDR can provide technical assistance on how to use the instrument. To date, 14 states have requested the Rapid Response Registry from ATSDR. Furthermore, officials told us that health monitoring for future disasters could benefit from additional centrally coordinated planning. Such planning could facilitate the collection of compatible data among monitoring efforts, to the extent that this is appropriate. Collecting compatible data could allow information from different programs to be integrated and contribute to improved data analysis and more useful research. In addition, centrally coordinated planning could help officials determine whether separate programs are necessary to serve different groups of people. For example, worker and volunteer program officials indicated that it might have been possible for that program to serve federal workers who responded to the disaster in an official capacity, which might have eliminated the need to organize and administer a separate program for them. Officials also stated that screening and monitoring programs should be comprehensive, encompassing both physical and mental health evaluations. This observation is supported by CDC's recent report that about half of the adults that CDC assessed in areas heavily affected by Hurricane Katrina exhibited levels of emotional distress that indicated a potential need for mental health services. Officials from the WTC worker and volunteer medical monitoring program told us that the initial planning for their program had focused primarily on screening participants' physical health, and that they did not originally budget for extensive mental health screening. Subsequently, they recognized a need for more extensive mental health screening, including greater participation of mental health professionals, but the program's federal funding was not sufficient to cover such screening. By collaborating with the Mount Sinai School of Medicine Department of Psychiatry, program officials were able to obtain philanthropic funding to develop a more comprehensive mental health questionnaire; provide on-site psychiatric screening; and when necessary, provide more extensive evaluations. Many participants in the monitoring programs required additional testing or needed treatment for health problems that were identified during screening examinations. Officials told us that finding treatment sources for such participants is an important, but challenging, part of the programs' responsibility. For example, officials from the worker and volunteer program stated that identifying providers available to treat participants became a major part of their operations, and was especially difficult when participants lacked health insurance. The officials said that planning for future monitoring programs should include a determination of how best to help participants obtain needed treatment. Federally funded programs implemented by state and local governments or private organizations to monitor the health effects of the WTC attack on thousands of people who responded to the disaster have made progress. However, the program HHS established to screen the federal employees whose agencies sent them to the WTC after the attack has accomplished little, completing screenings of 527 of the thousands of federal responders. Moreover, no examinations occurred for a period of almost 2 years, and examinations for former federal workers have not yet resumed. Because of this program's limited activity, and the inability of federal workers to participate in other monitoring programs because of the assumption that they would have the opportunity to receive screening examinations through the HHS program, many federal responders may not have had an opportunity to identify and seek treatment for health problems related to the WTC disaster. Based on their experiences, officials involved in the monitoring programs have made a number of useful observations that will apply to future terrorist attacks and natural disasters, such as Hurricane Katrina. For example, screening for mental as well as physical health problems in New Orleans and along the Gulf Coast will be critical to the recovery of survivors of Hurricane Katrina and the responders to the disaster, as indicated by CDC's early assessment of the extent of mental health distress among people affected by Hurricane Katrina. Another observation was the importance of quickly identifying and contacting people affected by a disaster. The model data collection instrument developed by ATSDR has the potential to enable officials to quickly and systematically identify people involved in future disasters, a necessary first step in conducting health monitoring. Finally, officials noted the value of centrally coordinated planning of health monitoring, which could improve the underlying database for research and eliminate the need for separate and sometimes incompatible monitoring programs for different populations. 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 testimony, please contact Cynthia A. Bascetta at (202) 512-7101 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Helene F. Toiv, Assistant Director; George H. Bogart; Alice L. London; Roseanne Price; and William R. Simerl made key contributions to this statement. Through our work, we identified the following agencies that sent employees to respond to the World Trade Center attack of September 11, 2001. 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After the 2001 attack on the World Trade Center (WTC), nearly 3,000 people died and an estimated 250,000 to 400,000 people in the vicinity were affected. An estimated 40,000 people who responded to the disaster--including New York City Fire Department (FDNY) personnel and other government and private-sector workers and volunteers--were exposed to physical and mental health hazards. Concerns remain about the long-term health effects of the attack and about the nation's capacity to plan for and respond to health effects resulting from future disasters. Several federally funded programs have monitored the physical and mental health effects of the WTC attack. These monitoring programs include one-time screening programs and programs that also conduct follow-up monitoring. GAO was asked to assess the progress of these programs and examined (1) federally funded programs implemented by state and local government agencies or private institutions, (2) federally administered programs to monitor the health of federal workers who responded to the disaster in an official capacity, and (3) lessons learned from WTC monitoring programs. GAO reviewed program documents and interviewed federal, state, and local officials and others involved in WTC monitoring programs. This statement updates information GAO provided to Congress on September 10, 2005. Three federally funded monitoring programs implemented by state and local governments or private organizations after the WTC attack, with total funding of about $104 million, have provided initial medical examinations--and in some cases follow-up examinations--to thousands of affected responders to screen for health problems. For example, the FDNY medical monitoring program completed initial screening for over 15,000 firefighters and emergency medical service personnel, and the worker and volunteer program screened over 14,000 other responders. The New York State responder screening program screened about 1,700 state responders before ending its examinations in 2003. These monitoring programs and the WTC Health Registry, with total federal funding of $23 million, have collected information that program officials believe researchers could use to help better understand the health consequences of the attack and improve treatment. Program officials expressed concern, however, that current time frames for federal funding arrangements may be too short to allow for identification of all future health effects. CDC recently received a $75 million appropriation to fund health screening, long-term monitoring, and treatment for WTC responders and is deciding how to allocate these funds. In contrast to the progress made by other federally funded programs, the Department of Health and Human Services' (HHS) program to screen federal workers who were sent by their agencies to respond to the WTC disaster has accomplished little and lags behind. The program--which started in June 2003, about one year later than other WTC monitoring programs--completed screening of 527 of the estimated 10,000 federal workers who responded in an official capacity to the disaster, and in early 2004, examinations were suspended for almost 2 years. The program's limited activity and the exclusion of federal workers from other monitoring programs because of the assumption that they could receive screening examinations through the HHS program may have resulted in many federal responders losing the opportunity to identify and seek treatment for their WTC-related health problems. Officials involved in WTC health monitoring programs cited lessons from their experiences that could help others who may be responsible for designing and implementing health monitoring efforts that follow other disasters, such as Hurricane Katrina. These include the need to quickly identify and contact people affected by a disaster; to monitor for mental health effects, as well as physical injuries and illnesses; and to anticipate when designing disaster-related monitoring efforts that there will likely be many people who require referrals for follow-up care and that handling the referral process may require substantial effort.

The loss of lives and property resulting from commercial motor vehicle accidents has been a focus of public concern for several years. In 2006, about 5,300 people died as a result of crashes involving large commercial trucks or buses, and about 126,000 more were injured. A recent study performed by DOT showed that a significant number of commercial driver crashes were due to a physical impairment of the driver. Specifically, DOT found that about 12 percent of the crashes where the crash cause could be identified were due to drivers falling asleep, being disabled by a heart attack or seizure, or other physical impairments. The Federal Motor Carrier Safety Administration (FMCSA) within DOT shoulders the primary federal responsibility for reducing crashes, injuries, and fatalities involving large trucks and buses. FMCSA's primary means of preventing these crashes is to develop and enforce regulations to help ensure that drivers and motor carriers are operating in a safe manner. FMCSA's regulations, among other things, require that drivers of commercial motor vehicles are 21 years old, can read and speak the English language, have a current and valid commercial motor vehicle operator's license, have successfully completed a driver's road test, and are physically qualified to drive. As part of these regulations, FMCSA established standards for the physical qualifications of commercial drivers, including the requirement of a medical certification from a medical examiner stating that the commercial driver is physically qualified to operate a commercial motor vehicle. See appendix II for a description of the federal medical requirements. The National Transportation Safety Board (NTSB), an independent federal agency that investigates transportation accidents, considers the medical fitness of commercial drivers a major concern. Over the past several years, NTSB has reported on serious flaws in the medical certification process of commercial drivers. NTSB stated that these flaws can lead to increased highway fatalities and injuries for commercial vehicle drivers, their passengers, and the motoring public. In 2001 NTSB recommended eight safety actions to improve the oversight of the medical certification process, in response to a bus crash that killed 22 people in Louisiana. According to NTSB, currently all eight of the recommendations remain open. In response to FMCSA's failure to adequately address NTSB's recommendations, NTSB placed the oversight of medical fitness on its "Most Wanted" list in 2003. Table 1 details each of NTSB's recommendations. Several fatality crashes highlight the need for and the importance of having an effective medical certificate process. For example, In July 2000, a truck collided with a Tennessee Highway Patrol vehicle protecting a highway work zone. The patrol car exploded at impact, killing the state trooper. The driver of the truck had previously been diagnosed with sleep apnea and hypothyroidism, and had a similar crash in 1997, when he struck the rear of a patrol car in Utah. NTSB stated that it believes that if a comprehensive medical oversight program been in place at the time of the accident, this driver, with known and potentially incapacitating medical conditions, would have been less likely to have been operating a commercial vehicle. This accident, the NTSB said, "demonstrates how easily unfit drivers are able to take advantage of the inadequacies of the current medical system, resulting in potentially fatal consequences." In May 2005, a truck collided with a sports utility vehicle in Kansas killing a mother and her 10-month-old baby. Prior to the accident, a physician diagnosed the truck driver with a severe form of sleep apnea. The truck driver subsequently went to another physician who issued the medical certificate because the driver did not disclose this illness. The truck driver was found guilty of two counts of vehicular manslaughter. In August 2005 in New York, a truck collided with a motor vehicle, killing the occupants. The truck driver admitted to forging a medical certificate required to get his CDL license because he had been diagnosed with a seizure disorder. The truck driver recently pled guilty of two counts of manslaughter. Commercial drivers with serious medical conditions can still meet DOT medical fitness requirements to safely operate a commercial vehicle and thus hold CDLs. However, there is general agreement that careful medical evaluations are necessary to ensure that serious medical conditions do not preclude the safe operation of a commercial vehicle. It is impossible to determine from data analysis which commercial drivers receiving disability benefits have a medical condition that precludes them from safely driving a commercial vehicle because medical determinations are largely based on subjective factors that are not captured in databases. As such our analysis provides a starting point for exploring the effectiveness of the current CDL medical certification process. Our analysis of DOT data and disability data from the four selected federal agencies, SSA, VA, OPM, and DOL, found that about 563,000 individuals had been issued CDLs and were receiving full medical disability benefits. This represented over 4 percent of all CDLs in the DOT database. However, because DOT's database does include drivers that had suspended, revoked, or lapsed licenses, the actual number of active commercial drivers that receive full federal disability benefits cannot be determined. Also, our analysis does not include drivers with severe medical conditions that are not in the specific disability programs we selected. The majority of the individuals with serious medical conditions from our 12 selected states had an active CDL. Specifically, as shown in figure 1, of the 563,000 CDL holders receiving full disability benefits, about 135,000 of those individuals were from our 12 selected states. About 114,000 of these 135,000 individuals, or about 85 percent, had an active CDL according to CDL data provided by the 12 selected states. Further, our analysis of the state CDL data indicates that most of the licenses were issued after the commercial driver was found to be eligible for full disability benefits. Specifically, about 85,000 of the 135,000 individuals, or about 63 percent, had their CDL issued after the federal agency determined that the individual met the federal requirements for full disability benefits according to data from our four selected federal agencies. See appendix III for details for each selected state for the number of (1) commercial drivers with active CDLs, (2) commercial drivers with an active CDL even though they had a medical condition from which they received full federal disability benefits, and (3) commercial drivers that were issued a CDL after the driver was approved for full federal disability benefit payments. Because much of the determination of the medical fitness of commercial drivers relies on subjective factors, and because there are ways to circumvent the process (as shown below), it is impossible to determine the extent to which these commercial drivers have a medical condition that would preclude them from safely driving a commercial vehicle. As such our analysis provides a starting point for exploring the effectiveness of the current CDL medical certification process. However, because these individuals are receiving full disability benefits, it is likely that these medical conditions are severe. Further, our analysis also showed that over 1,000 of these drivers are diagnosed with vision, hearing, or seizure disorders, which are medical conditions that would routinely deny the granting of a CDL. Our investigations detail examples of 15 cases where careful medical evaluations did not occur on commercial drivers who were receiving full medical disability benefits. The case studies were selected from approximately 30,000 individuals from Florida, Maryland, Minnesota, and Virginia that had their CDL issued after the federal agency determined that the individual met the federal requirements for full medical disability benefits. For all 15 cases, we found that the states renewed the drivers' CDLs after the drivers were found by the federal government to be eligible for full disability benefits. For more detailed information on criteria for selection of the 15 cases, see appendix I. On the basis of our investigation of these 15 cases, we identified instances where careful medical examinations did not occur. Most states do not require commercial drivers to provide medical certifications to be issued a CDL. Instead, many states only require individuals to self-certify that a medical examiner granted them a medical certification allowing them to operate commercial vehicles, thus meeting the minimum federal requirements. As a result, we found several commercial drivers who made false assertions on their self-certification that they received a medical certification when in fact no certification was made. For more information on state requirements for medical certifications, see appendix IV. In addition, our investigations found that commercial drivers produced fraudulent documentation regarding their medical certification. Specifically, we found instances where commercial drivers forged a medical examiner's signature on a medical certification form. In addition, we also found a driver who failed to disclose to the medical examiner that another doctor had prescribed him morphine for his back pain. Finally, our investigations found certain medical examiners did not follow the federal requirements in the determination of medical fitness of commercial drivers. For example, one medical examiner represented to GAO that she did not know that a driver's deafness would disqualify the individual from receiving a medical certification. Table 2 highlights 5 of the 15 drivers we investigated. For all cases we investigated, the CDL was issued after the driver's disability benefits started. Appendix V provides details on the other 10 cases we examined. We are referring all 15 cases to the respective state driver license agency for further investigation. The following provides illustrative detailed information on three of the cases we examined. Case 1: A bus driver in Maryland has been receiving Social Security disability benefits since March 2006 due to his heart conditions. Specifically, the driver had open heart surgery in 2003 to repair a ruptured aorta, had a stroke in 2005, and shortly thereafter had another surgery to replace a heart valve. In June 2006, approximately 3 months after Social Security determined the driver was fully disabled; the Maryland driver license agency renewed his CDL for 5 years with a "Passenger" endorsement. The bus driver provided our investigator a forged medical certificate. Specifically, we found that the medical certificate did not have the required medical license number, the physician did not have any record that the bus driver underwent a medical examination for a CDL, and the physician denied conducting a CDL medical exam or signing the medical certificate. Surprisingly, the medical practice also had a copy of the forged medical certificate in its files. The medical practice's staff stated, however, that it is not uncommon for a patient to bring documents to the office and ask that they be stored in their medical records. The driver's CDL does not expire until 2011. Case 2: A Virginia truck driver has received SSA disability benefits for over 10 years. The driver's disability records indicate that that driver had multiple medical conditions, including complications due to an amputation, and that the driver is "also essentially illiterate." The truck driver has a prosthetic right leg resulting from a farm accident. Although the driver possesses a current medical certificate, the medical examiner did not specify on the medical certificate that it is only valid when accompanied with a Skills Performance Evaluation (SPE) certificate. To test his prosthetic leg, the truck driver stated that he was asked to push the medical examiner across the room in a rolling chair with the prosthetic leg. In our investigation, we attempted to contact the medical examiner but discovered that he is no longer employed by that clinic. The state revoked his medical license due to illegally distributing controlled substances. In 2006, the truck driver was involved in a single vehicle accident when the load in his truck shifted when making a turn and the truck overturned. Prior to October 2007, the truck driver had a CDL with both "Tanker" and "Hazmat" endorsements. In October 2007, the state driver license agency renewed his CDL with a "Tanker" endorsement, which will not expire until 2012. Case 3: A bus driver has been receiving Social Security disability benefits since 1994 for chronic obstructive pulmonary disorder (COPD). The bus driver currently uses three daily inhalers to control his breathing and has a breathing test conducted every 6 months. The bus driver stated that he "gets winded" when he walks to his mailbox and he "occasionally blacks out and forgets things." However, the driver stated that he has no problem driving a bus, however, he cannot handle luggage or perform any other strenuous duties. Despite not possessing a valid medical certificate, companies continue to hire him as a bus driver on an ad hoc basis. For example, the driver drove a passenger bus as recently as 1 month prior to the time of our interview. The driver stated that the companies have not asked to see his medical certificate. He further stated that because most companies are "hurting for drivers," they "don't ask a lot of questions" and pay many of their drivers in cash. The driver's CDL expires in 2010. We provided a draft of our report to DOT for review and comment. We received e-mail comments on the draft on June 16, 2008, from FMCSA's Office of Medical Programs. In FMCSA's response, FMCSA stated that our first objective implies that individuals who are fully disabled have severe medical conditions that may also prevent safe driving. FMCSA stated the following: Disability, even full disability associated with a diagnosis, does not necessarily mean that an individual is medically unfit to operate a commercial vehicle. Disability is not related necessarily to when a medical condition occurred or recurs. The onset of a disease or disabling medical condition is more relevant to medical fitness than when the disability benefits and payments began. As an example, a fully disabled individual may have accommodated to the disability and may improve with treatment while receiving lifelong disability payments. In general, a medical diagnosis alone is not adequate to determine medical fitness to operate a commercial vehicle safely. As an example, multiple sclerosis, while disabling, has several progressive phases, and is not necessarily disqualifying. In addition, FMCSA did not believe that we accurately characterized the 15 cases where careful medical evaluations did not occur. FMCSA stated that this implies these drivers were evaluated by someone for medical fitness for duty, but in 9 cases, the driver was not certified or not evaluated by a medical examiner. We believe our report clearly acknowledges that it is impossible to determine the extent to which these commercial drivers have medical conditions that would preclude them from safely driving a commercial vehicle. In the report, we state that commercial drivers with serious medical conditions can still meet DOT medical fitness requirements to safely operate a commercial vehicle and thus hold CDLs. Further, our report acknowledged that because medical determinations rely in large part on subjective factors that are not captured in databases, it is impossible to determine from data mining and matching the extent to which commercial drivers have a medical condition that precludes them from safely driving a commercial vehicle and therefore if the certification process is effective. Thus, our analysis provides a starting point for exploring the effectiveness of the current CDL medical certification process. We also believe that we fairly characterize that all 15 cases did not have a careful medical evaluation. For all 15 cases that we reviewed, we found that the medical evaluation was not adequate or did not occur. Thus, we conclude that a careful medical evaluation did not occur for all 15 drivers in our case studies. FMCSA also provided us a technical comment which we incorporated in the report. As agreed with your offices, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of Transportation. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-6722 or [email protected] if you have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. To determine to the extent possible the number of individuals holding a current commercial driver license (CDL) who have serious medical conditions, we presumed that individuals receiving full federal disability benefits were eligible for these benefits because of the seriousness of their medical conditions. As such, we obtained and analyzed the Department of Transportation's (DOT) Commercial Driver License Information System (CDLIS) database as of May 2007. For the Social Security Administration (SSA) and the Department of Veterans Affairs (VA) we provided the CDLIS commercial driver information to those agencies. SSA and VA then matched the commercial drivers to the individuals receiving benefits for their disability programs and provided us those results. We also obtained and analyzed the recipient files for four additional federal disability programs. These include the Office of Personnel Management's (OPM) civil service retirement program and the three programs administered by the Department of Labor: Black Lung, Federal Employee Compensation Act, and the Energy Employees Occupational Illness Compensation Program. We matched the CDL holders from CDLIS to the four federal disability recipient files based on social security number, name, and date of birth. We further analyzed the CDL and disability data to ensure that the commercial drivers met the following criteria: the individual must be currently receiving disability benefits, and the individual must be identified as 100 percent disabled according to the program's criteria. Because CDLIS is an archival database, the CDLIS data contain information on expired CDLs. To identify the active drivers within CDLIS, we obtained CDL data from a nonrepresentative selection of 12 states. The 12 selected states, representing about 42 percent of all CDLs contained in CDLIS, are: California, Florida, Illinois, Kentucky, Maryland, Michigan, Minnesota, Montana, Tennessee, Texas, Virginia, and Wisconsin. The 12 states were selected primarily based on the size of the CDL population. Because commercial drivers may contract a serious medical condition after the issuance of the CDL, we also determined the number of individuals that received their CDL subsequent to when the federal agencies determined the individual to be eligible for full disability benefits. Our estimate does not include drivers with severe medical conditions that are not in the selected programs we analyzed. We matched the 12 state CDL files to the six CDLIS-disability match files based on driver license number, and identified those CDLs that were current based on license status. To provide case-study examples of commercial drivers who hold active CDLs while also receiving federal disability payments for a disqualifying medical condition, we focused on four states--Florida, Maryland, Minnesota, and Virginia. From these four states, we selected, in a nonrepresentative fashion, 15 commercial drivers for detailed investigation. We identified these driver cases based on our data analysis and mining. For each case, we interviewed, as appropriate, the commercial driver, the driver's employer, and the driver's physician to determine whether the medical condition should have precluded the driver from holding a valid CDL. For these 15 cases, we also reviewed state department of motor vehicle reports, police reports, and other public records. To determine the reliability of DOT's CDLIS data, we used SSA's Enumeration and Verification System to verify key data elements in the database that were used to perform our work. For the federal disability databases, we assessed the reliability of the data from SSA and VA, which comprise 99 percent of the CDLIS-disability matches. To verify its reliability, we reviewed program logic used by the agencies to match the CDLIS data with their federal disability recipients. We also reviewed the current Performance and Accountability Reports for the agencies to verify that their systems had successfully undergone the required stewardship reviews. For the 12 selected states' CDL databases, we performed electronic testing of the specific data elements in the database that were used to perform our work. In addition, for 5 of the 12 states we verified the query logic used to create the CDL extract files. For the other 7 states we were unable to obtain the query logic. We performed our investigative work from May 2007 to June 2008 in accordance with standards prescribed by the President's Council on Integrity and Efficiency. Federal regulations require that commercial drivers be examined and certified by a licensed medical examiner, such as licensed physician, physician's assistant, and nurse practitioner, to ensure they meet minimum physical qualifications prior to driving. It is the responsibility of both drivers and motor carriers employing drivers to ensure that drivers' medical certificates are current. According to federal regulations, the medical examiner must be knowledgeable about the regulatory physical qualifications and guidelines as well as the driver's responsibilities and work environment. In general, the medical certification procedures include the following steps: The driver completes and certifies a medical certification form that includes information about the driver's health history. The form is provided to the medical examiner as part of the examination. The medical examiner discusses the driver's health history and the side effects of prescribed medication and common over-the-counter medications. The medical examiner tests the driver's vision, hearing, blood pressure, pulse rate, and urine specimen (for testing sugar and protein levels). The medical examiner conducts a physical examination and makes a determination on driver fitness. If the medical examiner determines the driver is fit to drive, he/she signs the medical certificate, which the driver must carry with his/her license. The certificate must be dated. The medical examiner keeps a copy in his/her records, and provides a copy to the driver's employer. When the medical examiner finds medical conditions that prevent certification of the physical condition of the driver and this finding is in conflict with the findings of another medical examiner or the driver's personal physician, the driver can apply to the Federal Motor Carrier Safety Administration (FMCSA) for a determination. Federal regulations and the accompanying medical guidance provide criteria to the medical examiners for determining the physical condition of commercial drivers. Although the medical examiner makes the determination as to whether the driver is medically fit to operate a commercial vehicle, the following provides a general overview of the nature of the physical qualifications: no loss of physical limbs, including a foot, a leg, a hand, or an arm; no impairment of limbs that would interfere with grasping or their ability to perform normal tasks; no established medical history or clinical diagnosis of diabetes currently requiring insulin for control, respiratory dysfunction, or high blood pressure that would affect their ability to control or drive a commercial motor vehicle; no current diagnosis of a variety of coronary conditions and cardiovascular disease including congestive heart failure; no mental disease or psychiatric disorder that would interfere with their ability to drive a commercial vehicle safely; has distant visual acuity and hearing ability that meets stated does not use a controlled substance or habit-forming drug; and has no current clinical diagnosis of alcoholism. When operating a commercial motor vehicle, drivers must have a copy of the medical examiner's certificate in their possession. Motor carriers, in turn, are required to maintain a copy of the certificate in their files. When drivers are stopped for a roadside inspection, state inspectors can review the medical examiner's certificate. During compliance reviews of motor carriers, FMCSA investigators may also verify the validity of medical certifications on file with the motor carrier. In the main portion of the report, we state that from the 12 selected states 114,000 commercial drivers had a current commercial driver license (CDL) even though they had a medical condition from which they received full federal disability benefits. Further, approximately 85,000, or about 63 percent of the active commercial drivers, were issued a CDL after the driver was approved for full federal disability benefit payments. Table 3 below provides details by each selected state on the number of (1) commercial drivers with active CDLs, (2) commercial drivers with an active CDL even though they had a medical condition from which they received full federal disability benefits, and (3) commercial drivers that were issued a CDL after the driver was approved for full federal disability benefit payments. The states have adopted different levels of control to verify that commercial driver license applicants meet the Department of Transportation (DOT) medical certification requirements. As shown in figure 2, 25 states, or 50 percent, allow drivers to self-certify that they meet the requirements. The self-certification is often simply a check-box on the application. Eighteen states, or 36 percent, require that the commercial driver show the DOT medical certificate to the driver licensing agency at the time of application. Further, 6 states, or 12 percent, not only require that the driver show the DOT medical certificate at the time of application but also maintain a copy of the certificate in the driving records of the applicant. Finally, 1 state did not respond to the inquiries. Table 2 in the main portion of the report provides information on five detailed case studies. Table 4 shows the remaining case studies that we investigated. As with the five cases discussed in the body of this testimony, we found drivers with a valid commercial driver license (CDL) who also had serious medical conditions. GAO staff who made major contributions to this report include Matthew Valenta, Assistant Director; Sunny Chang; Paul DeSaulniers; Craig Fischer; John V. Kelly; Jeffrey McDermott; Andrew McIntosh; Andrew O'Connell; Philip Reiff; Nathaniel Taylor; and Lindsay Welter.

Millions of drivers hold commercial driver licenses (CDL), allowing them to operate commercial vehicles. The Department of Transportation (DOT) established regulations requiring medical examiners to certify that these drivers are medically fit to operate their vehicles and provides oversight of their implementation. Little is known on the extent to which individuals with serious medical conditions hold CDLs. GAO was asked to (1) examine the extent to which individuals holding a current CDL have serious medical conditions and (2) provide examples of commercial drivers with medical conditions that should disqualify them from receiving a CDL. To examine the extent to which individuals holding CDLs have serious medical conditions, GAO identified those who were in both DOT's CDL database and selected federal disability databases of the Social Security Administration, Office of Personnel Management, and Departments of Veterans Affairs and Labor and have been identified as 100 percent disabled according to the program's criteria. Because DOT's data also include inactive licenses, GAO obtained current CDL data from 12 selected states based primarily on the size of CDL population. To provide case study examples, GAO focused on four states--Florida, Maryland, Minnesota, and Virginia. For 15 drivers identified from data mining, GAO interviewed, as appropriate, the driver, driver's employer, and driver's physician. GAO is not making any recommendations. Commercial drivers with serious medical conditions can still meet DOT medical fitness requirements to safely operate a commercial vehicle and thus hold CDLs. However, there is general agreement that careful medical evaluations are necessary to ensure that serious medical conditions do not preclude the safe operation of a commercial vehicle. Because medical determinations rely in large part on subjective factors that are not captured in databases, it is impossible to determine from data matching and mining alone the extent to which commercial drivers have medical conditions that preclude them from safely driving a commercial vehicle and therefore if the certification process is effective. GAO's analysis provides a starting point for exploring the effectiveness of the current CDL medical certification process. Our analysis of commercial license data from DOT and medical disability data from the Social Security Administration, Office of Personnel Management, and Departments of Veterans Affairs and Labor found that about 563,000 of such individuals had commercial driver licenses and were determined by the federal government to be eligible for full disability benefits. This represented over 4 percent of all commercial driver licenses in the DOT database. Our analysis of 12 selected states indicates that most of these commercial drivers still have active licenses. Specifically, for these 12 selected states, about 85 percent had a current CDL even though they had a medical condition from which they received full federal disability benefits. The majority of these drivers were issued a CDL after the driver was approved for full federal disability benefit. Our investigations detail examples of 15 cases where careful medical evaluations did not occur on commercial drivers who were receiving full disability benefits for serious medical conditions.

With the agreement between Congress and the administration to balance the federal budget and the widespread demands by the American people for a less costly government, agencies are being challenged as never before to ensure that their operations are as efficient as possible. Efforts by Congress and the administration are leading or have led to a broader focus on results, significant reductions in the size of the federal workforce, simplified administrative and management procedures, and additional mechanisms to improve efficiency. Within this context, interest has grown over the last several years in using contracting out as one of the central tools available to agencies to reduce costs in a balanced budget environment. have relied from the start on contracting out much of their work rather than performing it directly. Contractors also have almost completely replaced federal employees in some functions, such as cleaning services, travel management, and most recently personnel security investigations. As an indication of the degree to which the federal government uses the private sector, total civilian personnel costs for fiscal year 1997 were about $113 billion, as compared with about $110 billion that federal agencies spent on commercial service contracts. The issue of whether to contract out federal functions has always been challenging. In an effort to help agencies make better decisions in this regard, OMB issued Circular A-76 in 1966 and updated it several times, most recently in 1983. A-76 provides federal policy for the government's performance of commercial activities. OMB issued a supplemental handbook to the circular in 1979 that included detailed procedures for competitively determining whether commercial activities should be performed in-house; by another federal agency, through an interservice support agreement; or by the private sector. OMB updated this handbook in 1983 and again in March 1996. This latest revision was intended to streamline the cost comparison process and reduce the A-76 administrative burden and thereby ease the use of A-76 within the executive branch. According to OMB, the purpose of A-76 is not to convert work to or from in-house, contract, or interservice support agreement performance. Thus, a senior OMB official stressed, OMB does not view its role as requiring agencies to undertake A-76 cost comparisons. Rather, OMB encourages agencies to understand and use A-76 as one of a series of tools federal managers can employ to make sound business decisions and to enhance federal performance through competition and choice. procedures for the most efficient and effective in-house performance of the commercial activity, referred to as the Most Efficient Organization or MEO; and (3) accepting formal bids and conducting a cost comparison between the private sector and the government's Most Efficient Organization in order to make a decision on whether an activity will be performed by the government or the private sector. Agencies' experiences with A-76 suggest that competition is a key to realizing savings, whether functions are eventually performed by private sector sources or remain in-house. We have found that savings achieved through the A-76 competitive process were largely personnel savings, the result of closely examining the work to be done and reengineering the activities in order to perform them with fewer personnel, whether in-house or by contractor. OMB has reported that savings from reviewing an agency's operations and making changes to implement the Most Efficient Organization have averaged 20 percent from original costs. We have noted in past work that such reported savings must be viewed with caution because statements about savings have often been heavily premised on initial estimates that were not later updated to reflect actual amounts. However, there appears to be a clear consensus, which we share, that savings are possible when agencies undertake a disciplined approach, such as that called for under A-76, to review their operations and implement the changes to become more efficient themselves or contract with the private sector for services. In fact, in DOD's case, about half of the competitions were won by federal employees. revision to the A-76 Supplemental Handbook would make A-76 a more attractive vehicle for agencies to use, no significant increase in efforts under A-76 among civilian agencies are readily evident. As shown in table 1, for fiscal year 1997, DOD was the only federal agency that reported to OMB that it had completed any A-76 studies of federal positions. For the future, DOD projected that it can save about $6 billion by 2003 and $2.5 billion each year thereafter by subjecting more of its business and support activities to competition using the A-76 process. Currently, DOD plans to subject over 220,000 positions to the A-76 process. DOD has not fully achieved estimated savings in the past, and we question DOD's ability to achieve all estimated savings in the future. However, if DOD is able to complete its ambitious A-76 plans, significant savings are likely. then, A-76 efforts at Commerce and Interior have dwindled along with those at other federal agencies. The Department of Commerce has not done a complete update of its inventory of commercial activities since 1983 and recently completed what had been its only ongoing study. That study covered the operation and support of a National Oceanic and Atmospheric Administration (NOAA) ship. NOAA officials told us that the study was done because of pressure from Congress, OMB, and the Department's Inspector General to explore alternatives to an agency-designed, -owned, and -operated fleet for acquiring marine data. However, the study did not result in any commercial offers in response to NOAA's solicitation. In addition, the study took almost 19 months and required nearly 10 staff years to complete. It would have required even more resources if NOAA had received offers to perform the work. The Department of the Interior has a current inventory which it updates periodically, and has identified over 5,000 FTEs as devoted to commercial activities. These activities include such functions as administrative support services and automated data processing-related services. The Department reports that although it has not conducted many formal A-76 studies in recent years, it has undertaken a number of A-76 cost comparisons of its aircraft services, including examinations of aircraft maintenance and decisions on whether to lease or purchase aircraft. However, most of these studies did not involve any federal positions, and therefore are not reflected in OMB's governmentwide data on FTEs studied. Officials at the Departments of Commerce and the Interior provided similar explanations for the limited effort under A-76. They said that they perceived that the priorities in management reform initiatives had changed and that greater emphasis was being given to implementation of more fundamental, mission-based initiatives arising from the National Partnership for Reinventing Government, formerly know as the National Performance Review (NPR) and the Government Performance and Results Act (the Results Act), among others. According to the officials, these shifting management priorities, along with the significant time and money needed to do the studies under A-76 and the need for sufficient staff with the necessary technical skills, have all contributed to reduce A-76 efforts. studies. This supplement was issued subsequent to the expiration of several legislative provisions that temporarily limited agencies' A-76 efforts, particularly those of DOD. OMB's revision of the supplement had the potential to re-focus attention on A-76. However, since issuing the revision, OMB has not consistently worked with agencies to ensure that the provisions of A-76 are being effectively implemented. For example, OMB made only limited efforts to gather and use the commercial activities inventories that agencies are to develop under A-76. In June 1996, OMB requested that agencies submit not later than September 13, 1996, a summary of their updated inventory of commercial activities as required by A-76. According to OMB, it did not receive inventories from all agencies, and of those that it did receive, many were based largely on previous inventory efforts. In June 1997, after not receiving responses from several agencies, OMB followed up with another request for the commercial inventory information. Several months later, in April 1998, we found that 6 of the 24 largest agencies still had not complied with OMB's initial and follow-up requests to provide updated commercial activities inventories. OMB also has not systematically reviewed the inventories of commercial activities that it did receive to determine whether agencies are missing opportunities to generate savings. OMB generally has not attempted to determine whether agencies have inappropriately omitted some commercial activities. OMB also does not compare commercial activities among agencies to identify inconsistent application of A-76 guidance across the federal government. As a result, some agencies may not be identifying commercial activities that are similar to those included in other agencies' commercial activities inventories, thereby missing opportunities to use the A-76 process to achieve cost savings. these paragraphs instruct agencies that their savings estimates should reflect the probable results generated by cost comparisons or conversions. OMB officials stated that they rely primarily on program examiners in the OMB Resource Management Offices (RMO) to review agencies' A-76 efforts in conjunction with the budget review and approval process. In 1996, the OMB Deputy Director for Management asked the RMOs to examine competition initiatives, such as A-76, as part of their continuing program management and budget reviews. The Deputy Director highlighted agencies' strategic plans and streamlining plans as being especially appropriate vehicles for examining agencies' efforts to compete their support service requirements. However, since then, OMB has not provided its program examiners with more recent written requirements or guidance on the need to review agencies' A-76 efforts. OMB officials said that, despite the lack of current guidance, some review has been done on an ad hoc basis in conjunction with budget reviews. According to these officials, examiners were given copies of agencies' commercial activities inventories where they existed and were instructed to keep in mind all reinvention efforts, including A-76, as they reviewed agency budget requests. However, given the absence of inventory information for several of the largest federal agencies and the absence of ongoing studies in virtually all agencies other than DOD, the effect of examiners' efforts, if any, is questionable. and functions, these inventories can be valuable not only for A-76 purposes, but also for identifying other reinvention opportunities. This plan for renewed OMB commitment, if effectively implemented, is an important and noteworthy development that could lay the groundwork for a reinvigorated A-76 program. Given OMB's past experience with requesting and using inventories of commercial activities from agencies, it is clear that sustained OMB commitment and follow-through will be vital to the success of the effort. We plan to continue to monitor OMB's and the agencies' efforts in this area. Over the last couple of years, there has been interest in Congress in establishing a statutory basis for A-76 and for making other changes intended to expand the degree to which agencies compete their commercial activities. We have been pleased that Congress has turned to us for assistance as it has considered various legislative proposals.Irrespective of any decisions that Congress may make about the A-76 program, our work suggests that several elements are needed for a successful A-76 effort across federal agencies. Today, I will highlight four elements that I believe merit special attention. The sustained commitment of agency and administration leadership is a necessary element to ensure the success of any management improvement effort, including A-76. As the current level of activity suggests, consistent and forceful leadership from OMB may be needed to create incentives for agencies' managers to subject themselves to the rigors of the A-76 process. By comparison with the rest of the federal government, DOD has maintained much larger levels of activity because it has incentives to generate savings through A-76 to fund its modernization efforts. goals the agency will pursue and the strategies the agency will use to achieve those goals. The first of these strategic plans were provided to Congress last fall. Each agency is then to develop annual performance plans that identify the agency's annual goals and strategies and the resources that will be used to achieve those yearly goals. The first of these plans, to cover fiscal year 1999, were submitted to Congress this spring. An agency's efforts on its annual performance plans provides the opportunity to consider A-76 within the broader context of what the agency is trying to achieve and how best to achieve it. At the request of congressional leaders and to assist Congress in using annual performance plans for making decisions, we issued a guide in February 1998 for Congress to use in assessing annual performance plans. In that guide, we noted that Congress could examine the plans from the standpoint of whether they show evidence that various approaches, such as establishing partnerships with other organizations and contracting, were considered in determining how best to deliver products and services. More directly, the annual performance plans can provide a ready-made, annual vehicle for Congress to use to inquire about agencies' efforts to ensure that the most cost-effective strategies are in place to achieve agencies' goals. As part of this inquiry, Congress can ask agencies about the tools the agencies are using to increase effectiveness, including the status of A-76 programs, and the specific choices the agencies have made about whether to keep a commercial activity in-house or contract it out. deficiencies affect the government's ability to accurately measure the full cost and financial performance of programs and to efficiently manage its operations. For example, in January 1998, we reported that DOD has no reliable means of accumulating actual cost data to account for and manage resources. Moreover, in a February 1998 report, we noted that it will likely be many years before DOD is capable of providing accurate and reliable cost data. Efforts are under way to improve government cost data and supporting systems, but for some agencies it could be several years before significant improvements are made. Continuing efforts to implement the Chief Financial Officers Act are central to ensuring that agencies resolve their long-standing problems in generating vital information for decisionmakers. In that regard, the Federal Accounting Standards Advisory Board (FASAB) has developed a new set of accounting concepts and standards that underpin OMB's guidance to agencies on the form and content of their agencywide financial statements. As part of that effort, FASAB developed managerial cost accounting standards. These managerial cost accounting concepts and standards require that federal agencies provide reliable and timely information on the full cost of federal programs and on their activities and outputs. Specifically identified in the standards is the need for information to help guide decisions involving economic choices, such as whether to do a project in-house or contract it out. Such information would allow agencies to develop appropriate overhead rates for specific operations. These cost accounting standards became effective for fiscal year 1998. Some agencies' Chief Financial Officers have expressed concern about their agencies' ability to comply with the cost accounting standards this year. privatization, the need for aggressive monitoring and oversight grows.Oversight was needed not only to evaluate compliance with the terms of the privatization agreement, but also to evaluate performance in delivering goods and services to help ensure that the government's interests were fully protected. Officials from most state and local governments said that the monitoring of contractor performance was the weakest link in their privatization processes. Oversight and monitoring have been consistent weaknesses in federal efforts as well. In numerous past reports on governmentwide contract management, we have identified major problem areas, such as ineffective contract administration, insufficient oversight of contract auditing, and lack of high-level management attention to and accountability for contract management. For example, long-standing contractor oversight problems at several agencies, including DOD, the Department of Energy, and the National Aeronautics and Space Administration have, in our view, put these agencies at high risk for waste, fraud, abuse, and mismanagement.Although each of these agencies have taken actions to improve their contractor oversight and monitoring functions, these remain high-risk areas that we continue to monitor closely. In summary, Mr. Chairman, A-76 has shown itself to be an effective management tool in increasing the efficiency of the federal government and saving scarce funds. However, despite its proven track record, A-76 is seldom used in civilian agencies. OMB has not consistently sent strong messages to the agencies that A-76 is a priority management initiative. While OMB's May 12, 1998, memorandum is an encouraging first step, thorough implementation and follow-through will be needed to get A-76 on track. In addition, agencies will need to continue their efforts to ensure both that they have the sound program cost data needed to make comparisons and that mechanisms are in place to monitor and oversee contracts. Finally, we believe that agencies' development and Congress' use of annual performance plans under the Results Act provide an opportunity to consider A-76 and other competition issues within the context of the most efficient means to achieve agency goals. 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. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed: (1) the purpose and usefulness of the Office of Management and Budget's (OMB) Circular A-76 in the current federal environment; (2) why A-76 is not being used extensively by civilian agencies; (3) the effectiveness of OMB's efforts to lead the implementation of A-76, which, in GAO's view, could be enhanced; and (4) observations regarding the necessary elements of a more active A-76 program. GAO noted that: (1) OMB Circular A-76 has shown itself to be an effective management tool in increasing the efficiency of the federal government and saving scarce funds; (2) despite its proven track record, A-76 is seldom used in civilian agencies; (3) OMB has not consistently sent strong messages to the agencies that A-76 is a priority management initiative; (4) while OMB's May 12, 1998, memorandum is an encouraging first step, thorough implementation and follow-through will be needed to get A-76 on track; (5) in addition, agencies will need to continue their efforts to ensure both that they have the sound program cost data needed to make comparisons and that mechanisms are in place to monitor and oversee contracts; and (6) agencies' development and Congress' use of annual performance plans under the Government Performance and Results Act provide an opportunity to consider A-76 and other competition issues within the context of the most efficient means to achieve agency goals.

The use of IT to electronically collect, store, retrieve, and transfer clinical, administrative, and financial health information has great potential to help improve the quality and efficiency of health care and is critical to improving the performance of the U.S. health care system. Historically, patient health information has been scattered across paper records kept by many different caregivers in many different locations, making it difficult for a clinician to access all of a patient's health information at the time of care. Lacking access to these critical data, a clinician may be challenged to make the most informed decisions on treatment options, potentially putting the patient's health at greater risk. The use of electronic health records can help provide this access and improve clinical decisions. Electronic health records are particularly crucial for optimizing the health care provided to military personnel and veterans. While in military status and later as veterans, many VA and DOD patients tend to be highly mobile and may have health records residing at multiple medical facilities within and outside the United States. Making such records electronic can help ensure that complete health care information is available for most military service members and veterans at the time and place of care, no matter where it originates. VA and DOD have been working to exchange patient health data electronically since 1998. As we have previously noted, their efforts have included both short-term initiatives to share information in existing (legacy) systems, as well as a long-term initiative to develop modernized health information systems--replacing their legacy systems--that would be able to share data and, ultimately, use interoperable electronic health records. In their short-term initiatives to share information from existing systems, the departments began from different positions. VA has one integrated medical information system--the Veterans Health Information Systems and Technology Architecture (VistA)--which uses all electronic records and was developed in-house by VA clinicians and IT personnel. All VA medical facilities have access to all VistA information. In contrast, DOD uses multiple legacy medical information systems, all of which are commercial software products that are customized for specific uses. For example, the Composite Health Care System (CHCS) which was formerly DOD's primary health information system, is still in use to capture pharmacy, radiology, and laboratory information. In addition, the Clinical Information System (CIS), a commercial health information system customized for DOD, is used to support inpatient treatment at military medical facilities. The departments' short-term initiatives to share information in their existing systems have included several projects. Most notable are two information exchange projects: * The Federal Health Information Exchange (FHIE), completed in 2004, enables DOD to electronically transfer service members' electronic health information to VA when the members leave active duty. * The Bidirectional Health Information Exchange (BHIE), also established in 2004, was aimed at allowing clinicians at both departments viewable access to records on shared patients (that is, those who receive care from both departments--veterans may receive outpatient care from VA clinicians and be hospitalized at a military treatment facility). The interface also allows DOD sites to see previously inaccessible data at other DOD sites. As part of the long-term initiative, each of the departments aims to develop a modernized system in the context of a common health information architecture that would allow a two-way exchange of health information. The common architecture is to include standardized, computable data; communications; security; and high- performance health information systems: DOD's AHLTA and VA's HealtheVet. The departments' modernized systems are to store information (in standardized, computable form) in separate data repositories: DOD's Clinical Data Repository (CDR) and VA's Health Data Repository (HDR). For the two-way exchange of health information, in September 2006 the departments implemented an interface named CHDR, to link the two repositories. Beyond these initiatives, in January 2007, the departments announced their intention to jointly determine an approach for inpatient health records. On July 31, 2007, they awarded a contract for a feasibility study and exploration of alternatives. In December 2008, the contractor provided the departments with a recommended strategy for jointly developing an inpatient solution. VA and DOD have increased their ability to share and use health information, sharing both computable and viewable data. This achievement has required years of effort by the two departments, involving, among other things, agreeing on standards and setting priorities for the kind of information to be shared and the appropriate level of interoperability to work toward. Interoperability--the ability to share data among health care providers--is key to sharing health care information electronically. Interoperability enables different information systems or components to exchange information and to use the information that has been exchanged. This capability is important because it allows patients' electronic health information to move with them from provider to provider, regardless of where the information originated. If electronic health records conform to interoperability standards, they can be created, managed, and consulted by authorized clinicians and staff across more than one health care organization, thus providing patients and their caregivers the necessary information required for optimal care. (Paper-based health records--if available--also provide necessary information, but unlike electronic health records, do not provide decision support capabilities, such as automatic alerts about a particular patient's health, or other advantages of automation.) Interoperability can be achieved at different levels. At the highest level, electronic data are computable (that is, in a format that a computer can understand and act on to, for example, provide alerts to clinicians on drug allergies). At a lower level, electronic data are structured and viewable, but not computable. The value of data at this level is that they are structured so that data of interest to users are easier to find. At still a lower level, electronic data are unstructured and viewable, but not computable. With unstructured electronic data, a user would have to find needed or relevant information by searching uncategorized data. Beyond these, paper records can also be considered interoperable (at the lowest level) because they allow data to be shared, read, and interpreted by human beings. Figure 1 shows the distinction between the various levels of interoperability and examples of the types of data that can be shared at each level. VA and DOD have adopted a classification framework like the one in the figure to define what level of interoperability they are aiming to achieve in various information areas. For example, in their initial efforts to implement computable data, VA and DOD focused on outpatient pharmacy and drug allergy data because clinicians gave priority to the need for automated alerts to help medical personnel avoid administering inappropriate drugs to patients. As of January 31, 2009, the departments were exchanging computable outpatient pharmacy and drug allergy data through the CHDR interface on over 27,000 shared patients--an increase of about 9,000 patients since June 2008. However, according to VA and DOD officials, not all data require the same level of interoperability, nor is interoperability at the highest level achievable in all cases. For example, unstructured, viewable data may be sufficient for such narrative information as clinical notes. According to the departments, much of the information being shared today is currently at the structured, viewable level. For example, through BHIE, the departments exchange surgical pathology reports, microbiology results, cytology reports, chemistry and hematology reports, laboratory orders, vital signs, and other data in structured, viewable form. Some of this information is from scanned documents that are viewable but unstructured. With this format, a clinician would have to find needed or relevant information by scanning uncategorized information. The value of viewable data is increased if the data are structured so that information is categorized and easier to find. Nonetheless, achieving even a minimal level of electronic interoperability is valuable for potentially making all relevant information available to clinicians. However, the departments have more to do: not all electronic health information is yet shared. In addition, although VA's health data are all captured electronically, information is still captured on paper at many DOD medical facilities. Any level of interoperability depends on the use of agreed-upon standards to ensure that information can be shared and used. In the health IT field, standards may govern areas ranging from technical issues, such as file types and interchange systems, to content issues, such as medical terminology. * For example, vocabulary standards provide common definitions and codes for medical terms and determine how information will be documented for diagnoses and procedures. These standards are intended to lead to consistent descriptions of a patient's medical condition by all practitioners. Without such standards, the terms used to describe the same diagnoses and procedures may vary (the condition known as hepatitis, for example, may be described as a liver inflammation). The use of different terms to indicate the same condition or treatment complicates retrieval and reduces the reliability and consistency of data. * Another example is messaging standards, which establish the order and sequence of data during transmission and provide for the uniform and predictable electronic exchange of data. For example, they might require the first segment to include the patient's name, hospital number, and birth date. A series of subsequent segments might transmit the results of a complete blood count, dictating one result (e.g., iron content) per segment. Messaging standards can be adopted to enable intelligible communication between organizations via the Internet or some other communications pathway. Without them, the interoperability of health IT systems may be limited, reducing the data that can be shared. VA and DOD have agreed upon numerous common standards that allow them to share health data. These are listed in a jointly published common set of interoperability standards called the Target DOD/VA Health Standards Profile, updated annually. The profile includes federal standards (such as data standards established by the Food and Drug Administration and security standards established by the National Institute of Standards and Technology); industry standards (such as wireless communications standards established by the Institute of Electrical and Electronics Engineers and Web file sharing standards established by the American National Standards Institute); and international standards (such as the Systematized Nomenclature of Medicine Clinical Terms, or SNOMED CT, and security standards established by the International Organization for Standardization). For the two kinds of data now being exchanged in computable form through CHDR (pharmacy and drug allergy data), VA and DOD adopted the National Library of Medicine data standards for medications and drug allergies, as well as the SNOMED CT codes for allergy reactions. This standardization was a prerequisite for exchanging computable medical information--an accomplishment that, according to the Department of Health and Human Services' National Coordinator for Health IT, has not been widely achieved. Further, VA and DOD are continuing their historical involvement in efforts to agree upon standards for the electronic exchange of clinical health information by participating in ongoing initiatives led by the Office of the National Coordinator under the direction of HHS. These initiatives have included the designation of standards- setting organizations tasked to reach consensus on the definition and use of standards. For example, these organizations have been responsible for, among other things, * developing use cases, which provide the context in which standards would be applicable; identifying competing standards for the use cases and harmonizing the standards; * developing interoperability specifications that are needed for implementing the standards; and * creating certification criteria to determine whether health IT systems meet standards accepted or recognized by the Secretary of HHS, and then certifying systems that meet those criteria. The involvement of the two departments in these initiatives is important both because of the experience that the departments can offer the national effort, and also because their involvement helps ensure that the standards they adopt are consistent with the emerging federal standards. DOD and VA have made progress toward adopting health data interoperability standards that are newly recognized and accepted by the Secretary of HHS. The departments have identified these new standards, which relate to three HHS-recognized use cases, in their most recent Target Standards Profile. Nonetheless, the need to be consistent with the emerging federal standards adds complexity to the task faced by the two departments of extending their standards efforts to additional types of health information. The National Coordinator recognized the importance of their participation and stated it would not be advisable for VA and DOD to move significantly ahead of the national standards initiative; if they did, the departments might have to change the way their systems share information by adjusting them to the national standards later, as the standards continue to evolve. Using interoperable health IT to help improve the efficiency and quality of health care is a complex goal that requires the involvement of multiple stakeholders in both departments, as well as numerous activities taking place over an expanse of time. In view of this complexity, it is important to develop comprehensive plans that cover the full scope of the activities needed to reach the goal of interoperable health capabilities or systems. To be effective, these plans should be grounded in results-oriented goals and performance measures that allow the results of the activities to be monitored and assessed, so that the departments can take corrective action if needed. In the course of their health IT efforts, VA and DOD have faced considerable challenges in project planning and management. As far back as 2001 and 2002, we reported management weaknesses, such as inadequate accountability and poor planning and oversight, and recommended that the departments apply principles of sound project management. The departments' efforts to meet the recent requirements of the National Defense Authorization Act for Fiscal Year 2008 provide additional examples of such challenges, raising concerns regarding their ability to most effectively meet the September 2009 deadline for developing and implementing interoperable electronic health record systems or capabilities. The departments have identified key documents as defining their planned efforts to meet this deadline: the November 2007 VA/DOD Joint Executive Council Strategic Plan for Fiscal Years 2008-2010 (known as the VA/DOD Joint Strategic Plan) and the September 2008 DOD/VA Information Interoperability Plan (Version 1.0). These plans identify various objectives and activities that, according to the departments, are aimed at increasing health information sharing and achieving full interoperability. However, of the 45 objectives and activities identified in their plans, we previously reported that only 4 were documented with results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures that are characteristic of effective planning. * An example of an objective, quantifiable, and measurable performance goal is DOD's objective of increasing the percentage for inpatient discharge summaries that it shares with VA from 51 percent as of March 2009, to 70 percent by September 30, 2009. * However, other goals in the plans are not measurable: For example, one objective is the development of a plan for interagency sharing of essential health images. Another objective is to review national health IT standards. In neither case are tangible deliverables described that would permit the departments to determine progress in achieving these goals. In view of the complexity and scale of the tasks required for the two departments to develop interoperable electronic health records, the lack of documented results-oriented performance goals and measures hinder their ability to measure and report their progress toward delivering new capabilities. Both departments agreed with our January 2009 recommendation that they develop results- oriented goals and associated performance measures to help them manage this effort. Until they develop these goals and measures, the departments will be challenged to effectively assess their progress. In addition, we previously reported that the departments had not fully set up the interagency program office that was established in the National Defense Authorization Act for Fiscal Year 2008. According to department officials, this office will play a crucial role in coordinating the departments' efforts to accelerate their interoperability efforts. These officials stated that having a centralized office to take on this role will be a primary benefit. Further, defining results-oriented performance goals and ensuring that these are met would be an important part of the task of the program office. However, the effort to set up the program office was still in its early stages. The departments had taken steps to set up the program office, such as developing descriptions for key positions and beginning to hire personnel, but they had not completed all necessary activities to meet their December 2008 deadline for the office to be fully operational. Both departments agreed with our July 2008 recommendation that the departments give priority to fully establishing the interagency program office. Since we last reported, the departments have continued their efforts to hire staff for the office with 18 of 30 positions filled as of March 5, 2009, but the positions of Director and Deputy Director are not yet filled with permanent hires. Until the departments complete key activities to set up the program office, it will not be positioned to be fully functional, or accountable for fulfilling the departments' interoperability plans. Coupled with the lack of results-oriented plans that establish program commitments in measurable terms, the absence of a fully operational interagency program office leaves VA and DOD without a clearly established approach for ensuring that their actions will achieve the desired purpose of the act. In closing, Mr. Chairman, VA and DOD have made important progress in achieving electronic health records that are interoperable, but the departments continue to face challenges in managing the activities required to achieve this inherently complex goal. These include the need to continue to agree on standards for their own systems while ensuring that they maintain compliance with federal standards, which are still emerging as part of the effort to promote the nationwide adoption of health IT. In addition, the departments' efforts face managerial challenges in defining goals and measures and setting up the interagency program office. Until these challenges are addressed, the risk is increased that the departments will not achieve the ability to share interoperable electronic health information to the extent and in the manner that most effectively serves military service members and veterans. This concludes my statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have. If you have any questions on matters discussed in this testimony, please contact Valerie C. Melvin, Director, Information Management and Human Capital Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions to this testimony are Mark Bird, Assistant Director; Barbara Collier; Neil Doherty; Rebecca LaPaze; J. Michael Resser; Kelly Shaw; and Eric Trout. 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For over a decade, the Department of Veterans Affairs (VA) and the Department of Defense (DOD) have been engaged in efforts to improve their ability to share electronic health information. These efforts are vital for making patient information readily available to health care providers in both departments, reducing medical errors, and streamlining administrative functions. In addition, Congress has mandated that VA and DOD jointly develop and implement, by September 30, 2009, electronic health record systems or capabilities that are fully interoperable and compliant with applicable federal interoperability standards. (Interoperability is the ability of two or more systems or components to exchange information and to use the information that has been exchanged.) The experience of VA and DOD in this area is also relevant to broader efforts to advance the nationwide use of health information technology (IT) in both the public and private health care sectors--a goal of both current and past administrations. In this statement, GAO describes VA's and DOD's achievements and challenges in developing interoperable electronic health records, including brief comments on how these apply to the broader national health IT effort. Through their long-running electronic health information sharing initiatives, VA and DOD have succeeded in increasing their ability to share and use health information. In particular, they are sharing certain clinical information (pharmacy and drug allergy data) in computable form--that is, in a format that a computer can understand and act on. This permits health information systems to provide alerts to clinicians on drug allergies, an important feature that was given priority by the departments' clinicians. The departments are now exchanging this type of data on over 27,000 shared patients--an increase of about 9,000 patients between June 2008 and January 2009. Sharing computable data is considered the highest level of interoperability, but other levels also have value. That is, data that are only viewable still provide important information to clinicians, and much of the departments' shared information is of this type. However, the departments have more to do: not all electronic health information is yet shared, and although VA's health data are all captured electronically, information is still captured on paper at many DOD medical facilities. To share and use health data has required, among other things, that VA and DOD agree on standards. At the same time, they are participating in federal standards-related initiatives, which is important both because of the experience that the departments bring to the national effort, and also because their involvement helps ensure that their adopted standards are compliant with federal standards. However, these federal standards are still emerging, which could complicate the departments' efforts to maintain compliance. Finally, the departments' efforts face management challenges. Specifically, the effectiveness of the departments' planning for meeting the deadline for fully interoperable electronic health records is reduced because their plans did not consistently identify results-oriented performance goals (i.e., goals that are objective, quantifiable, and measurable) or measures that would permit progress toward the goals to be assessed. Further constraining VA's and DOD's planning effectiveness is their inability to complete all necessary activities to set up the interagency program office, which is intended to be accountable for fulfilling the departments' interoperability plans. Defining goals and ensuring that these are met would be an important part of the task of the program office. Without a fully established office that can manage the effort to meet these goals, the departments increase the risk that they will not be able to share interoperable electronic health information to the extent and in the manner that most effectively serves military service members and veterans. Accordingly, GAO has recommended that the departments give priority to fully establishing the interagency program office and develop results-oriented performance goals and measures to be used as the basis for reporting interoperability progress. The departments concurred with these recommendations.

The Comanche helicopter program began in 1983 to provide a family of high technology, low-cost aircraft that would replace the Army's light helicopter fleet, which includes the AH-1 Cobra, OH-58 Kiowa, OH-6 Cayuse, and the UH-1 Iroquois (Huey). The Army subsequently decided to develop only a single Comanche aircraft capable of conducting either armed reconnaissance or attack missions. The Army intends for the Comanche to be part of its future or "objective" force. The Comanche is designed to have improved speed, agility, aircrew visibility, reliability, availability, and maintainability over current reconnaissance and attack helicopters. The helicopter is also designed for low observability (stealth) and is expected to be capable of deploying over long ranges without refueling. Lastly, the Comanche is being designed to provide enemy information to force commanders at all levels. Critical to achieving the Comanche's desired capabilities is the successful development and integration of advanced technologies, especially for the mission equipment package. The mission equipment package includes an integrated communication system, piloting system, target acquisition system, navigation system, helmet-mounted display, survivability and early warning equipment, mission computer, and weapon management system. The Comanche program started in 1983 and is currently projected to continue through fiscal year 2028. A timeline of the Comanche's acquisition history and schedule is provided below. Since our August 1999 review, the Comanche program's estimated cost has increased significantly--from $43.3 billion to $48.1 billion--and costs are expected to increase further. In addition, the Comanche continues to experience scheduling delays and performance risks. These problems are due to a range of factors, such as understated acquisition program cost estimates; ambitious flight test schedules with substantial concurrency in test events; delays in another DOD program which had been counted on to develop a critical component of the aircraft; inadequate facilities to fully test and integrate system hardware and software; and considerable growth in aircraft weight. The Army has not updated the Comanche's cost or schedule estimates since April 2000 and does not plan such an update until its in-progress program review in January 2003. The Comanche program's latest cost estimate, in April 2000, shows estimated costs have increased by almost $4.8 billion--from $43.3 billion to $48.1 billion--since our last report. Table 2 identifies where the cost estimate has changed. The $75.3 million increase in research, development, testing, and evaluation resulted from added testing for the Comanche program. During the Milestone II decision process, the Defense Acquisition Executive directed that the Comanche testing program be expanded by adding more testing to fully demonstrate the aircraft's reliability before completion of its engineering and manufacturing development phase. The $4.777 billion increase in estimated production cost was to address DOD concerns about the long-term affordability and stability of the Comanche program. Specifically, DOD directed the Army to add 10 percent to Comanche's production unit cost estimate in order to ensure that annual planned procurement funding would be sufficient to cover planned procurement quantities. To reduce the annual funding increase resulting from this directive, the Army reduced Comanche's peak annual production rate from 72 aircraft per year to 62 per year, which extended the planned delivery schedule by 3 years. The $67.5 million reduction in estimated military construction costs reflects changes in anticipated needs for operating and maintenance facilities. In January 2001, DOD added about $504 million in funding to the Comanche program over the next few years. About $84 million of the additional funds are earmarked for research, development, test, and evaluation, and the remaining $420 million for production. These additional funds have not yet been reflected in the program's official cost estimates. The program office plans to use the additional development funding to at least partially address what had been unfunded requirements in three areas considered to be high risk: (1) developing and integrating the mission equipment package; (2) developing the technology to detect and isolate equipment problems (automatic fault isolation); and (3) developing and integrating satellite communication capabilities. The section on performance discusses these areas in more detail. The Comanche's most recent cost estimate was made in April 2000, when DOD approved the program for entry into the engineering and manufacturing development phase. At that time, DOD's Cost Analysis Improvement Group estimated that the Comanche program would need an additional $180 million for its engineering and manufacturing development phase. However, the higher costs estimated by the Cost Analysis Group were not included in the cost estimate when the program office established a new baseline for the Comanche program in April 2000. The Comanche program is scheduled for an in-progress program review in January 2003 to review, among other things, its cost estimate. DOD believes that this January 2003 review, along with other major program reviews and oversight processes will permit successful management of program risks. The Deputy Program Manager acknowledged that the Army's cost estimate for the Comanche may need to be revised at this point. The Comanche program office also maintains a list of unfunded requirements. The additional funds recently added to the program have reduced these funding requirements, but the revised list still has unfunded requirements in the amount of $68 million. The program office acknowledges that, unless additional funds are obtained, some yet-to-be- determined program performance requirements could be impacted. We have reported that when development work and low-rate initial production are done concurrently, significant schedule delays that cause cost increases and other problems are not uncommon in early production. Also, production processes are often not able to consistently yield output of high quality when full-rate production begins. DOD's guidance also states that programs in which development work and low-rate initial production are done concurrently typically have a higher risk of production items having to be retrofitted to make them work properly and of system design not being thoroughly tested. We have also reported that the discovery of problems in testing conducted late in development is a fairly common occurrence on DOD programs, as is the attendant "late cycle churn", that is, the unanticipated effort that must be invested to overcome such problems. Further, these problems could be exacerbated if the program plans to produce a significant number of systems during the low-rate initial production period, before design and testing are completed. In August 1999, we reported that the Army would experience a 19-month delay in testing because the first pre-production aircraft for testing were expected to be delivered 19 months later than planned. We noted that, by retaining the December 2006 initial operating capability date, the delay in acquiring test aircraft would compress the majority of Comanche's flight- test schedule into the last 3 years of development. The compressed flight- test schedule would, in turn, shorten the available time for completing all test events and taking necessary corrective actions before the full-rate production decision. Since our last report, the first pre-production aircraft to be used for development testing is now scheduled for delivery in January 2004, adding an additional 3-month delay to the 19-month delay we reported in August 1999. As shown in figure 1 below, the delivery of pre-production Comanche aircraft has been delayed and, because the Army has retained the December 2006 full-rate production decision, the time available for testing, assessing, and correcting problems has been reduced. Many critical test events are now scheduled late in the development stages--during the low-rate initial production phase of the program--and, as shown in figure 2, many developmental and operational test events are scheduled to be conducted concurrently. The combination of compressing the development schedule and undertaking developmental and operational testing activities concurrently leaves the Army with little room to accommodate any delays that may result from assessing, correcting, and retesting problems found during testing. In Comanche's case, several critical subsystems--to be included in the mission equipment package--may not be available until the development flight-testing is well underway. These subsystems are very complex, state-of-the-art systems that have not been demonstrated on a helicopter platform like Comanche. As testing proceeds, any problems found will need to be analyzed, fixed, and retested. However, with the ambitious test schedule, there may not be time available between test events to correct problems and prepare properly for the next event. Further, the Army's schedule for developing and testing software for the Comanche may not be completed prior to the full-rate production decision. The contractor is experiencing a shortage of software engineers available to work on the Comanche contract. In addition, only about 1.4 million of the projected 1.9 million lines of computer code for the Comanche's mission equipment package will be completed by the time the package is to be tested on the initial pre-production aircraft. Additional segments of computer code for the mission equipment package will be introduced as developmental testing is underway. At this point, it is uncertain if all of the computer code for the full mission equipment package will be completed by the time the Army is scheduled to make a full-rate production decision for Comanche in late 2006. Finally, the Army plans to use pre-production aircraft that it considers production-representative for operational flight-testing. Before this testing is complete, the Army plans to begin producing a total of 84 low-rate initial production aircraft. These aircraft are to be used to equip Army helicopter units and to ramp-up production. To produce that many aircraft during low-rate initial production, the Army will have to ramp-up its production capabilities rapidly and at a time when the aircraft design is still evolving as new subsystems are introduced and test results are evaluated. Specifically, the Army does not plan to freeze Comanche's design configuration until January 2006, or six months after the low-rate initial production decision point. Making design changes and retrofits to a large number of aircraft already produced could be costly. In our last report, we noted that the Army was making modifications to the Comanche that would adversely impact some of the Comanche's planned performance capabilities; for example, some modifications have added weight and drag to the aircraft. While their exact impacts are still unknown, these changes increase the risk that the Comanche's planned performance goals may not be achieved. The Comanche continues to have several areas of high technical risk that jeopardize the achievement of several critical performance requirements. The Comanche's ability to climb at a rate of 500 feet per minute is a key performance requirement for the aircraft. Since we last reported on the Comanche program, the aircraft's projected empty weight has increased by 653 pounds--from 8,822 pounds to 9,475 pounds. At the current projected design weight of 9,475 pounds, the Comanche program office has acknowledged that the helicopter cannot achieve the required vertical rate of climb of 500 feet per minute without increasing the horsepower of the current engine. Consequently, the program office has assessed its achievement of the weight requirement as high risk. The Army offered its prime contractor for Comanche's development, Boeing-Sirkosky, an award fee of $1.4 million to reduce its projected weight to 9,250 pounds. However, the contractor did not achieve the first iteration of weight reduction in December 2000. The program office is considering increasing the incentive fee to $5 million for the contractor to reduce the projected weight to 9,300 pounds in December 2001. The program office believes that it can achieve its vertical rate of climb, even with the increase in Comanche's weight, by increasing the horsepower of Comanche's T-801 engine from its current horsepower rating of 1131 to 1201. The program office estimates that the increase in the engine's power can be obtained at a cost of about $13 million, and this approach will be less costly than other weight reduction efforts. However, an increase in engine performance could adversely affect the expected life of the engine since it will have to perform about 47 degrees hotter than is normally required. According to the program office, this increased performance may not have an appreciable impact on the engine's life. As noted earlier in this report, the successful development and integration of the mission equipment package is critical to meeting Comanche's performance requirements. This package includes an integrated communications system, piloting system, target acquisition system, navigation system, helmet-mounted display, survivability and early warning equipment, mission computer, and weapons management system. The program office has assessed the achievement of this portion of its development effort as high risk. In order to reduce this risk, the Army had planned to develop a mobile integration laboratory, called a hotbench, which simulates Comanche's hardware, to integrate and test mission equipment package software before installing the software on the flight test aircraft. However, due to a shortage of development funds, the Army had listed the hotbench as an unfunded requirement. DOD recently provided additional funding to the Comanche program, which the program office plans to use to fully fund the hotbench. Despite the additional funding for the hotbench, the program office continues to acknowledge that integration of Comanche's mission equipment package as an area of high technical risk. A critical Comanche requirement is an on-board fault detection system that can rapidly and accurately provide information about equipment problems. With an on-board fault isolation system, the Army would be able to promptly identify and correct potential problems in advance, according to the Comanche's operational requirements document. Additionally, without the system, the time and cost of maintaining the aircraft will likely increase. According to the Army, this system needs to be 75 to 95 percent accurate--75 percent for mechanical and electrical equipment and 95 percent for avionics and electronics equipment. The Comanche program office has concluded that this requirement will be difficult to achieve within the current cost, weight, and packaging constraints, and does not expect to achieve a mature fault detection and fault isolation capability until 2 years after initial fielding. According to the program office, this system depends, in part, on a database built on flight data and equipment failure experience; therefore, the system becomes better with additional flight hours. The program office anticipates that after 2 years of flight testing, the system should meet the full level of predictability required. Although some of the recently provided development funding will be used by the Army in this area, the Comanche program has identified an additional $20 million unfunded requirement for the fault isolation capability. In some battle situations, the Army plans to use Comanche as a deep reconnaissance aircraft to provide critical information and situational awareness to joint forces. Satellite communication technology is necessary for the helicopter to be able to achieve the "beyond-line-of- sight" capability needed to carry out this function, according to the Comanche operational requirement document. To meet this need, the Army was planning to rely on satellite communication technology being developed and miniaturized as part of the Joint Strike Fighter program, which is being developed jointly by the Air Force, Navy, and Marines. However, in May 2000, Congress provided that the Joint Strike Fighter program could not enter into the engineering and manufacturing development phase until the Secretary of Defense certified the technological maturity of its critical technologies. This has delayed the Joint Strike Fighter program's schedule for beginning its engineering and manufacturing development phase. When assessing the risk of its dependency on the Joint Strike Fighter's program, the Comanche program office concluded that the helicopters in low-rate initial production would not have the beyond-line-of-sight communication capability if the Joint Strike Fighter program was delayed. The program office now believes that it must develop its own satellite communication capability. However, the development schedule remains high-risk for the timely inclusion of this capability on the initially fielded Comanche helicopters. The Army has estimated that it will require about $58 million to develop this capability and plans to fully fund this effort with additional funds recently provided by DOD. Our work on best practices has found that product development in successful commercial firms is a clearly defined undertaking for which firms insist on having in hand the technology that meets customers' needs before starting. The firms demand--and receive--specific knowledge about a new product before production begins. And, they do not go forward unless a strong business case on which the program was originally justified continues to hold true. Such a knowledge-based process is essential to commercial firms getting better cost, schedule, and performance outcomes. It enables decision-makers to be reasonably certain about critical facets of the product under development when they need it. At the point of going into production, successful firms will already know that (1) technologies match customer requirements, that is, they can fit onto a product and function as expected, (2) the product's design meets performance requirements, and (3) the product can be produced within cost, schedule, and quality targets. The Comanche program does not yet have this knowledge and is not likely to have this knowledge when it plans to begin low-rate initial production in June 2005. First, the Army does not yet know and it will not know until well after its low-rate initial production decision whether certain technologies being developed will fit on the helicopter and function as expected. Our reporton incorporating new technologies into programs indicated that demonstrating a high level of maturity before new technologies are incorporated into product development programs puts those programs into a better position to succeed. Further, technologies that were included in a product development before they were mature later contributed to cost increases and schedule delays to those products. While the Comanche program has made progress in the technology readiness level of its critical components, integration of those components into subsystems, such as the mission equipment package, and the helicopter as a whole remains high-risk. In addition, the integration, development, and configuration of key satellite communication technology for inclusion in the integrated communication, navigation, and identification avionics has also been assessed as high risk. Finally, some of the technologies have not been developed to meet Comanche's specific configuration requirements. For instance, the Comanche's second generation forward-looking infrared sensor has been tested and proven on the Black Hawk helicopter by the Army's night vision laboratory but not on the Comanche itself. Such testing needs to be done to ensure that the system can work together with other unique systems being developed for the Comanche, including the piloting, target acquisition, and navigation systems, which work as one unit. Comanche's contractor has maintained that its mission equipment package technology is challenging because some key components have not been developed and configured in the required manner for the helicopter's intended mission. Second, as discussed earlier, the Army does not yet know and may not know until well after the start of low-rate initial production, whether performance requirements can be met--including vertical rate of climb, on-board fault isolation, and beyond-line-of-sight communication requirements. The Army plans to conduct a limited user test before it begins low-rate initial production but it is a rudimentary test and not a complete operational test that fully demonstrates the aircraft's capabilities. By compressing many key events late in the development schedule and conducting developmental and operational testing activities concurrently, the Army is running the risk of not fully demonstrating many of its critical capabilities before its planned full-rate production decision. Under current plans, for example, the Army will not complete a full demonstration of its integrated mission equipment package until December 2006--over a full year after its low-rate initial production decision and within the same month that the Army plans to make its decision on Comanche full-rate production. Third, as noted earlier, it is still uncertain whether the Comanche can be developed within cost and scheduling estimates. Although additional costs have been identified for the Comanche since it was last restructured, the full development cost will not be known until critical technology is fully developed, integrated, and tested. This will not occur until well after a low- rate initial production decision has been made in June 2005. The program office believes that it will know the cost of the initial production aircraft, which will have been negotiated prior to the low-rate initial production decision. However, at that time, the program office and the contractor will have limited experience and data relative to producing the fully developed Comanche helicopter. Until more experience and data is available, there is not a high level of confidence in the Army's production cost estimate. Further, the Director of Operational Test and Evaluation in assessing the results of the Comanche milestone II test data indicated that it is highly unlikely that the Army can deliver the expected system performance within the current budget and schedule. The Director's assessment revealed that, without an operational assessment of an integrated system, it is difficult to predict with any degree of confidence whether (1) the individual subsystems can be successfully integrated, (2) the subsystems will function properly in an operational environment, or (3) the subsystems, in concert, will provide the anticipated benefits in operational performance. In 1999, we reported that the Army started the Comanche's program development too early in terms of technology readiness, which is contrary to best commercial practices. Further, in approving the program for engineering and manufacturing development, the Army accelerated the development of some components, reduced the number of test aircraft, and compressed the test schedule. Two years later, the program is confronted with rising development costs, a compressed development schedule, and several major areas of high technical risk. The Army plans to proceed to low-rate initial production in June 2005 and full-rate production in December 2006, both of which could be well in advance of attaining sufficient knowledge of the helicopter's technical maturity, demonstrated performance capabilities, and production costs. With such a scenario, the potential for adverse program outcomes is high--higher than expected costs, longer than expected schedules, and uncertain performance. DOD and Army officials acknowledge that the current program cost and schedule objectives are not achievable and should be changed to reflect more realistic objectives, but they believe that the planned January 2003 review for the Comanche program is the appropriate time to address such changes. Such a delay in revising the program's cost and schedule estimate limits the visibility and knowledge that Army and DOD management as well as the Congress needs to (1) provide program oversight and direction; (2) make effective cost, schedule, and performance trade-off decisions; and (3) assess affordability and annual funding requirements. To improve management oversight and direction and achieve more favorable program outcomes, this report recommends that the Secretary of the Army reassess the program's cost, schedule, and performance objectives, and revise those objectives to more achievable levels prior to submitting its next fiscal year budget. In commenting on a draft of this report, DOD partially concurred with our recommendation. DOD noted that it agrees with some of our concerns and recognizes there are risks in the currently planned Comanche engineering and manufacturing development program. DOD noted that these risks were understood during the Comanche milestone II review. At that time, the Defense Acquisition Executive directed that the program proceed as planned, but that interim decision reviews be conducted in January 2003 and June 2005 to review program status. DOD stated that these reviews, along with other major program review and oversight processes, will permit successful management of program risks. Nevertheless, DOD stated that it is currently examining whether any of Comanche's requirements should be deferred, in order to reduce the risk of not meeting cost and schedule objectives. DOD's examination of Comanche's requirements is consistent with our recommendation. We continue to believe that DOD should report on the results of this examination and any revisions to the program's objectives to the defense committees of the Congress with its next budget request. DOD disagreed with a reference to our previous Comanche report stating that current program risks are caused by, among other things, the program being allowed to enter engineering and manufacturing development prior to maturation of key technologies. DOD maintains that the Comanche program successfully demonstrated its exit criteria prior to entering engineering and manufacturing development. However, the Comanche program's demonstration of its exit criteria was not sufficient as a basis to move forward in the acquisition process. For example, the exit criteria did not require that the technologies used in Comanche be at or above specific levels of demonstrated readiness. As we previously reported, the Army's own assessments clearly indicated that several key areas of technology were not at those levels called for in commercial best practices guidelines. DOD's comments are reprinted in appendix I. Other comments provided by DOD were incorporated in the report as appropriate. To evaluate changes in the Comanche's status with regard to cost, schedule, and performance and assess whether the Army has the certainty it needs to proceed with beginning production, we examined and compared program schedules, pertinent cost documents, and acquisition strategies, and discussed potential changes and causative factors with cognizant Comanche program officials. We analyzed flight-test plans, schedules, and reports and discussed significant issues with program officials. We reviewed program documents related to risk and analyzed program risks and development problems by comparing them with various test schedules and plans. To assess performance capabilities before beginning with production, we analyzed required and projected performance and compared it with the Comanche's operational requirements. We relied on previous GAO best practices work to examine Comanche's technological readiness levels for key program technologies. Our analyses focused on the impact of Comanche's cost, schedule, and performance on the Army's ability to field a Comanche helicopter that would meet its requirements and incorporate technological upgrades in its helicopter fleet. In performing our work, we obtained pertinent program documents and interviewed officials from the offices of the Secretary of Defense and the Army, Washington, D.C.; the Program Executive Office-Aviation and Comanche Program Office, Redstone Arsenal, Alabama; the U.S. Army Training and Doctrine Command, Fort Rucker, Alabama; the Comanche Joint Project Office, Huntsville, Alabama; and the Aviation Test and Evaluation Command, Alexandria, Virginia. We conducted our review from September 2000 through March 2001 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute this report until 5 days from its date. At that time, we will send copies of this report to the Honorable Donald H. Rumsfeld, Secretary of Defense; the Honorable Thomas White, Secretary of the Army; Director, Office of Management and Budget; and other interested congressional committees and parties. We will also make copies available to others upon request. If you have any questions regarding this report, please contact me on (202) 512-4530. GAO contacts and major contributors to this report are listed in appendix II. In addition to those named above, Leon S. Gill, Wendy Smythe, Gary Middleton, and Cristina Chaplain made key contributions to this report.

As of August 1, 1999, the Army's Comanche helicopter program faced significant risks related to cost overruns, scheduling delays, and degraded performance. GAO concluded that proceeding to the next development phase with high levels of uncertainty was not in accordance with best practices followed by successful commercial firms. This report evaluates changes since 1999 in the Comanche's cost, schedule, and performance, and assesses whether the Army will have the knowledge it needs to proceed with its current production plans. GAO found that the Comanche program's total development and production cost estimate has increased by almost $4.8 billion. However, areas of high technical risks and unfunded requirements could further increase the program's costs. The program office does not plan to update its April 2000 current estimate to reflect these increases until January 2003. The Comanche's December 2006 full rate production decision date has not changed even though the risks of not meeting this date have increased. The Army continues to face the risk that critical performance requirements may not be met--at least for the helicopters it will initially produce. The Department of Defense (DOD) recently provided $84 million in additional development funding to help reduce some of these high-risk areas. Additionally, the Army is not likely to have the knowledge it needs to begin production when scheduled. It is also not likely to know whether some technologies being developed, such as those used for the mission equipment package, will work on the helicopter and function as expected. DOD is also unlikely to know whether the helicopter can be produced within current cost estimates.

In an effort to promote and achieve various U.S. foreign policy objectives, trade preference programs have expanded in number and scope over the past 3 decades. The purpose of these programs is to foster economic development through increased trade with qualified beneficiary countries while not harming U.S. domestic producers. Trade preference programs extend unilateral tariff reductions to over 130 developing countries. Currently, the United States offers the Generalized System of Preferences (GSP) and three regional programs, the Caribbean Basin Initiative (CBI), the Andean Trade Preference Act (ATPA), and the African Growth and Opportunity Act (AGOA). Special preferences for Haiti became part of CBI with enactment of the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act in December 2006. The regional programs cover additional products but have more extensive criteria for participation than the GSP program. Eight agencies have key roles in administering U.S. trade preference programs. Led by USTR, they include the Departments of Agriculture, Commerce, Homeland Security, Labor, State, and Treasury, as well as the U.S. International Trade Commission (ITC). GSP--the longest standing U.S. preference program--expires December 31, 2008, as do ATPA benefits. At the same time, legislative proposals to provide additional, targeted benefits for the poorest countries are pending. U.S. trade preference programs are widely used, but some economists and others have raised questions about them. Their concerns include the potential for diversion of trade from other countries that these programs can cause; the complexity, scope of coverage, duration, and conditionality of these programs; and the potential opposition to multilateral and bilateral import liberalization preferences can create. U.S. imports from countries benefiting from U.S. preference programs have increased significantly over the past decade. Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006. Most of this growth in U.S. imports from preference countries has taken place since 2000. Whereas total U.S. preference imports grew at an annual rate of 0.5 percent from 1992 to 1996, the growth quickened to an annual rate of 8 percent from 1996 to 2000, and 19 percent since 2000. This accelerated growth suggests an expansionary effect of increased product coverage and liberalized rules of origin for LDCs under GSP in 1996 and for African countries under AGOA in 2000. There is also some evidence that leading suppliers under U.S. preference programs have "arrived" as global exporters. For example, the 3 leading non-fuel suppliers of U.S. preference imports---India, Thailand, and Brazil--were among the top 20 world exporters and U.S. import suppliers in 2007, and their exports in 2007 grew faster than world exports, according to the World Trade Organization (WTO). Preference programs entail three critical policy trade-offs. First, the programs are designed to offer duty-free access to the U.S. market to increase beneficiary trade, but only to the extent it does not harm U.S. industries. U.S. preference programs provide duty-free treatment for over half of the 10,500 U.S. tariff lines, in addition to those that are already duty- free on a most favored nation basis. But, they also exclude many other products from duty-free status, including some that developing countries are capable of producing and exporting. GAO's analysis showed that notable gaps remain, particularly in agricultural and apparel products. For 48 GSP-eligible countries, more than three-fourths of the value of U.S. imports that are subject to duties (i.e., are dutiable) are left out of the programs. For example, just 1 percent of Bangladesh's dutiable exports to the United States and 4 percent of Pakistan's are eligible for GSP. Although regional preference programs tend to have more generous coverage, they sometimes feature "caps" on the amount of imports that can enter duty-free, which may significantly limit market access. Imports subject to caps under AGOA include certain meat products, a large number of dairy products, many sugar products, chocolate, a range of prepared food products, certain tobacco products, and groundnuts (peanuts), the latter being of particular importance to some African countries. The second trade-off is related and involves deciding which developing countries can enjoy particular preferential benefits. A few LDCs in Asia are not included in the U.S. regional preference programs, although they are eligible for GSP-LDC benefits. Two of these countries--Bangladesh and Cambodia--have become major exporters of apparel to the United States and have complained about the lack of duty-free access for their goods. African private-sector spokesmen have raised concerns that giving preferential access to Bangladesh and Cambodia for apparel might endanger the nascent African apparel export industry that has grown up under AGOA. Certain U.S. industries have joined African nations in opposing the idea of extending duty-free access for apparel from these countries, arguing these nations are already so competitive in exporting to the United States that in combination they surpass U.S. FTA partners Mexico and CAFTA, as well as the Andean/AGOA regions, which are the major export market for U.S. producers of textiles. This same trade-off involves decisions regarding the graduation of countries or products from the programs. It relates to the original intention that preference programs would confer temporary trade advantages on particular developing countries, which would eventually become unnecessary as countries became more competitive. Specifically, the GSP program has mechanisms to limit duty-free benefits by "graduating" countries that are no longer considered to need preferential treatment, based on income and competitiveness criteria. Since 1989, 28 countries have been graduated from GSP, mainly as a result of "mandatory" graduation criteria such as high income status or joining the European Union. Five countries in the Central American and Caribbean region were recently removed from GSP and CBI/CBTPA when they entered free trade agreements with the United States. In the GSP program, the United States also pursues an approach of ending duty-free access for individual products from a given country by means of import ceilings--Competitive Needs Limitations (CNL). Over one-third of the trade from GSP beneficiaries--$13 billion in imports in 2006--is no longer eligible for preferences because countries have exceeded CNL ceilings for those products. Although the intent of country and product graduation is to focus benefits on those countries most in need of the competitive margin preferences provide, some U.S. and beneficiary country officials observe that remaining GSP beneficiaries will not necessarily profit from another country's loss of preference benefits. We repeatedly heard concerns that China would be most likely to gain U.S. imports as a result of a beneficiary's loss of preferences. In 2007, the President revoked eight CNL waivers as a result of legislation passed in December 2006. Consequently, over $3.7 billion of trade in 2006 from six GSP beneficiaries--notably Brazil, India, and Thailand--lost duty-free treatment. Members of the business community raised concerns that revocation of these waivers would harm U.S. business interests while failing to provide more opportunities for poorer beneficiaries. GAO's analysis showed that China and Hong Kong were the largest suppliers of the precious metal jewelry formerly eligible under GSP for duty-free import by India and Thailand; Canada, Mexico, Japan, and China were the leading competitors to Brazil's motor parts. Policymakers face a third trade-off in setting the duration of preferential benefits in authorizing legislation. Preference beneficiaries and U.S. businesses that import from them agree that longer and more predictable renewal periods for program benefits are desirable. Private-sector and foreign government representatives have complained that short program renewal periods discourage longer-term productive investments that might be made to take advantage of preferences, such as factories or agribusiness ventures. Members of Congress have recognized this argument with respect to Africa and, in December 2006, Congress renewed AGOA's third-country fabric provisions until 2012 and AGOA's general provisions until 2015. However, some U.S. officials believe that periodic program expirations can be useful as leverage to encourage countries to act in accordance with U.S. interests such as global and bilateral trade liberalization. Furthermore, making preferences permanent may deepen resistance to U.S. calls for developing country recipients to lower barriers to trade in their own markets. Global and bilateral trade liberalization is a primary U.S. trade policy objective, based on the premise that increased trade flows will support economic growth for the United States and other countries. Spokesmen for countries that benefit from trade preferences have told us that any agreement reached under Doha round of global trade talks at the WTO must, at a minimum, provide a significant transition period to allow beneficiary countries to adjust to the loss of preferences. Preference programs have proliferated over time. In response to differing statutory requirements, agencies pursue different approaches to monitoring the various criteria set for programs. The result is a lack of systematic review and little to no reporting on impact. U.S. trade preferences have evolved into an increasingly complex array of programs. Congress generally considers these programs separately, partly because they have disparate termination dates. Many countries participate in more than one of these programs. Of the 137 countries and territories eligible for preference programs, as of January 1, 2007, 78 benefit from more than one program, and 34 were eligible for more than two programs. While there is overlap in various aspects of trade preference programs, each program is currently considered separately by Congress based on its distinct timetable and expiration date. Typically the focus has been on issues relevant to specific programs, such as counternarcotics cooperation efforts in the case of ATPA, or phasing out benefits for advanced developing countries in the case of GSP. As a result, until last year's hearing before this committee, congressional deliberations have not provided for cross-programmatic consideration or oversight. The oversight difficulties associated with this array of preference programs and distinct timetables is compounded by different statutory review and reporting requirements for agencies. Reflecting the relevant statutory requirements, two different approaches--a petition process and periodic reviews--have evolved to monitor compliance with criteria set for various programs. We observed advantages to each approach, but individual program reviews appear disconnected and result in gaps. The petition-driven GSP reviews of country practices and product coverage have the advantage of adapting the programs to changing market conditions and the concerns of businesses, foreign governments, and others. However, the petition process can result in gaps in reviews of country compliance with the criteria for participation: From 2001 to 2006, three-quarters of the countries eligible only for GSP did not get examined at all for their conformity with eligibility criteria. Long periods passed between overall reviews of GSP. USTR completed an overall review of the GSP program in fall 2006. USTR completed the last general review of the program approximately 20 years earlier, in January 1987. The petition-driven review process also fails to systematically incorporate other ongoing monitoring efforts. For example, the lack of review under GSP provisions of any of the 26 preference beneficiary countries cited by USTR in 2006 for having problems related to the adequate and effective protection of U.S. intellectual property rights (IPR) makes it appear no linkage exists between GSP and ongoing monitoring of IPR protection abroad. The periodic reviews under the regional programs offer more timely and consistent evaluations of country performance against the criteria for participation, but may still miss important concerns. For example, 11 countries that are in regional programs were later subject of GSP complaints in the 2001 to 2006 period: Although AGOA has the most intensive evaluation of country performance against the criteria for participation, the GSP process later validated and resulted in further progress in resolving concerns with AGOA beneficiaries Swaziland and Uganda on labor issues. The African country of Equatorial Guinea has been reviewed for AGOA eligibility and found to be ineligible. Yet, Equatorial Guinea has not been subject to a GSP country practice petition or reviewed under GSP. As a result, Equatorial Guinea remains eligible for GSP and exported more than 90 percent of its $1.7 billion in exports duty free to the United States under that program in 2006. Many developing countries have expressed concern about their inability to take advantage of trade preferences because they lack the capacity to participate in international trade. Sub-Saharan Africa has been the primary focus of U.S. trade capacity-building efforts linked to the preference programs, with the United States allocating $394 million in fiscal year 2006 to that continent. Although AGOA authorizing legislation refers to trade capacity assistance, USTR officials noted that Congress has not appropriated funds specifically for that purpose. However, USTR has used the legislative language as leverage with U.S. agencies that have development assistance funding to target greater resources to trade capacity building. In other regions of the world, U.S. trade capacity building assistance has less linkage to preference programs. Separate reporting for the various preference programs makes it difficult to measure progress toward achieving the fundamental and shared goal of promoting economic development. Only one program (CBI) requires agencies to directly report on impact on the beneficiaries. Nevertheless, in response to statutory requirements, several government agencies report on certain economic aspects of the regional trade preference programs. However, different approaches are used, resulting in disparate analyses that are not readily comparable. Agencies do not regularly report on the economic development impact of GSP. Moreover, there is no evaluation of how trade preferences, as a whole, affect economic development in beneficiary countries. To address the concerns I have summarized today, in our March 2008 report, GAO recommended that USTR periodically review beneficiary countries that have not been considered under the GSP or regional programs. Additionally, we recommended that USTR should periodically convene relevant agencies to discuss the programs jointly. In response, USTR is undertaking two actions. First, USTR will conduct a review of the operation and administration of U.S. preference programs to explore practical steps that might improve existing communication and coordination across programs. Second, beginning with the Annual Report of the President of the United States on the Trade Agreements Program to be issued on March 1, 2009, the discussion of the operation of all U.S. trade preference programs will be consolidated into its own section. We also suggested that Congress should consider whether trade preference programs' review and reporting requirements may be better integrated to facilitate evaluating progress in meeting shared economic development goals. We believe that the hearings held by the committee last year and again today are responsive to the need to consider these programs in an integrated fashion and are pleased to be able to contribute to this discussion. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or other members of the committee may have. For further information on this testimony, please contact Loren Yager at (202) 512-4347, or by e-mail at [email protected]. Juan Gobel, Assistant Director; Kim Frankena, Assistant Director; R. Gifford Howland; Karen Deans; Ernie Jackson; and Ken Bombara made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

U.S. trade preference programs promote economic development in poorer nations by providing duty-free export opportunities in the United States. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, two of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. This testimony describes the growth in preference program imports since 1992, identifies policy trade-offs concerning these programs, and evaluates the overall U.S. approach to preference programs. The testimony is based on two recent studies on trade preference programs, issued in September 2007 and March 2008. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six trade preference beneficiary countries. Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006, with most of this growth taking place since 2000. The increases from preference program countries reflect legislation passed by Congress in 1996 and 2000 that enhanced preference programs and added new eligible products. Preference programs give rise to three critical policy trade-offs. First, preferences entail a trade-off to the extent opportunities for beneficiary countries to export products duty free must be balanced against U.S. industry interests. Some products of importance to developing countries, notably agriculture and apparel, are ineligible by statute as a result. Secondly, certain developing countries have been given additional preferential benefits for such import-sensitive products under regional programs. But some of the poorest countries, outside targeted regions, do not qualify. Third, Congress faces a trade-off between longer program renewals, which may encourage investment and undermine support for the likely greater economic benefits of broader trade liberalization, a key U.S. goal, and shorter renewals, which may provide opportunities to leverage the programs to meet evolving priorities. Trade preference programs have proliferated over time, becoming more complex, but neither Congress nor the administration formally considers them as a whole. Responsive to their legal mandates, the Office of the U.S. Trade Representative (USTR) and other agencies use different approaches to monitor compliance with program criteria, resulting in disconnected review processes and gaps in addressing some countries and issues. Disparate reporting makes it difficult to determine progress on programs' contribution to economic development in beneficiary countries.

The 1952 Immigration and Nationality Act, as amended, is the primary body of law governing immigration and visa operations. The Homeland Security Act of 2002 generally grants DHS exclusive authority to issue regulations on, administer, and enforce the Immigration and Nationality Act and all other immigration and nationality laws relating to the functions of U.S. consular officers in connection with the granting or denial of visas. As we reported in July 2005, the act also authorized the assignment of DHS employees to U.S. embassies and consulates to provide expert advice and training to consular officers regarding visa security, among other things. In particular, the act mandated that VSOs on-site in Saudi Arabia review all visa applications prior to final adjudication by consular officers. A September 2003 Memorandum of Understanding between State and DHS further outlines the responsibilities of each agency with respect to visa issuance. State manages the visa process, as well as the consular corps and its functions at 211 visa-issuing posts overseas. In addition, State provides guidance, in consultation with DHS, to consular officers regarding visa policies and procedures. DHS is responsible for establishing visa policy, reviewing implementation of the policy, and providing additional direction. This agreement also broadly defines the DHS officers' responsibilities in reviewing visa applications at consular posts overseas, indicating, among other things, that they will provide expert advice to consular officers regarding specific security threats relating to visa adjudication and will also provide training to consular officers on terrorist threats and applicant fraud. The process for determining who will be issued or refused a visa contains several steps, including documentation reviews, in-person interviews, collection of biometrics (fingerprints), and cross-referencing of the applicant's name against the Consular Lookout and Support System (CLASS) (see fig. 1). In 2002, we recommended actions to strengthen the visa process as an antiterrorism tool, including establishing a clear policy on the priority attached to addressing national security concerns through the visa process; creating more comprehensive, risk-based guidelines and standards on how consular officers should use the visa process to screen against potential terrorists; performing a fundamental reassessment of staffing and language skill requirements for visa operations; and revamping and expanding consular training courses to place more emphasis on detecting potential terrorists. Since 2002, State, DHS, and other agencies have taken numerous steps to strengthen the visa process as an antiterrorism tool and increase its overall efficiency and effectiveness. In particular, the Assistant Secretary in the Bureau of Consular Affairs has taken a leading role in implementing changes to the visa process and promoting its use as a screen against potential terrorists. However, additional actions could enhance the visa process. State has increased and clarified visa policies and guidance, but additional steps are needed to ensure these changes are implemented. Additionally, State has increased resources to strengthen the visa process, including hiring additional consular officers, targeting recruitment, and expanding training efforts; however, staffing limitations remain a concern, posts seek further training, and other gaps remain. Lastly, while interagency information-sharing efforts have increased, consular officers do not have direct access to detailed information from the FBI's criminal records, which would help facilitate the approval of legitimate travelers. We reported in October 2002 that consular officers held differing views on balancing the need for national security and customer service in the visa process. In addition, State had not issued comprehensive policy guidance to posts regarding how consular officers should react to the heightened border security concerns following the September 11 attacks. Over the past three years, State has implemented several changes to address these issues, and consular officials stated that the report and its recommendations provided a framework for these changes. For example, in February 2003, Consular Affairs issued guidance identifying national security as the first priority of the visa process. Consular officers we interviewed said the guidance was generally clear, and officers at all eight posts we visited viewed security as the most critical element of the visa process. In addition, Consular Affairs identified certain areas where additional guidance was needed to streamline visa procedures. State has issued more than 80 standard operating procedures, in consultation with DHS, to inform consular officers on issues such as fingerprinting and special clearance requirements. Despite these improvements, some consular officers we interviewed stated that it has been difficult to synthesize and consistently apply all of the changes to the visa process. The guidance provided to consular officers in the field is voluminous and can change rapidly, according to consular officials. The Consular Affairs Bureau may notify its officers overseas of policy changes through cables, postings on its internal Web site, and informal communications. However, the bureau has not consistently updated the consular and visa chapters of the Foreign Affairs Manual--State's central resource for all regulations, policies, and guidance--to reflect these changes. Throughout 2005, the bureau has updated several portions of the manual, but, as of June 2005, some sections had not been updated since October 2004. Consular officials stated that they are overhauling the standard operating procedures to eliminate those that are obsolete and incorporate current requirements into the manual. However, while the Consular Affairs Bureau's internal Web site contains all of the standard operating procedures, it also links to out-of-date sections in the manual. As a result, there is no single, reliable source for current information. Consular officers also indicated that additional guidance is needed on certain interagency protocols. Specifically, 15 out of 25 visa chiefs we interviewed reported that additional guidance would be helpful regarding the interaction between the Bureau of Consular Affairs and DHS. For example, DHS personnel stationed overseas work on a variety of immigration and border security activities and serve in a regional capacity. However, DHS has not provided guidance to consular officers regarding the roles and geographic responsibilities for its personnel. In 2002, we found that at some posts the demand for visas, combined with increased workload per visa applicant, exceeded the available staff. As a result, we recommended that State perform a fundamental reassessment of staffing requirements for visa operations. In our report issued today, we have noted that State has received funding to address staffing shortfalls, but we continue to see the need for a reassessment of resource needs worldwide. Through the Diplomatic Readiness Initiative and other sources, State has increased its Foreign Service officer consular positions by 364, from 1,037 in fiscal year 2002 to 1,401 in fiscal year 2005. Moreover, a senior human resource official anticipates that many officers hired under the Diplomatic Readiness Initiative will begin to reach promotion eligibility for midlevel positions within the next two years. However, as we have previously reported in 2003, the overall shortage of midlevel Foreign Service officers would remain until approximately 2013. As of April 30, 2005, we found that 26 percent of midlevel consular positions were either vacant or filled by an entry-level officer (see fig. 2). In addition, almost three-quarters of the vacant positions were at the FS-03 level--midlevel officers who generally supervise entry-level staff--which consular officials attribute to low hiring levels prior to the Diplomatic Readiness Initiative and the necessary expansion of entry-level positions to accommodate increasing workload requirements after September 11, 2001. Senior (44) Vacant (58) Midlevel (478) Staffed with entry-level officers (65) Staffed by at least midlevel officers (355) Entry-level (879) During our February 2005 visits to Riyadh, Jeddah, and Cairo, we observed that the consular sections were staffed with entry-level officers on their first assignment with no permanent, midlevel visa chief to provide supervision. Although these posts had other mid- or senior-level consular officers, their availability on visa issues was limited because of their additional responsibilities. For example, the head of the visa section in Jeddah was responsible for managing the entire section as well as services for American citizens due to a midlevel vacancy in that position. At the time of our visit, the Riyadh Embassy did not have a midlevel visa chief. Similarly, in Cairo, there was no permanent midlevel supervisor between the winter of 2004 and the summer of 2005, and Consular Affairs used five temporary staff on a rotating basis during this period to serve in this capacity. Entry-level officers that we spoke with stated that due to the constant turnover, the temporary supervisors were unable to assist them adequately. At the U.S. consulate in Jeddah, entry-level officers expressed concern about the lack of a midlevel supervisor. Officers in Jeddah stated that they relied on the guidance they received from the DHS visa security officer assigned to the post. However, as of July 2005, visa security officers are stationed only at two consular posts in Saudi Arabia--not at any of the other 209 visa-issuing posts overseas. If the Consular Affairs Bureau identifies a need for additional staff in headquarters or overseas, it may request that the Human Resources Bureau establish new positions. In addition, posts can also describe their needs for additional positions through their consular packages--a report submitted annually to the Consular Affairs Bureau that details workload statistics and staffing requirements, among other things. For example, in December 2004, during the course of our work, the consular section in Riyadh reported to Washington that there was an immediate need to create a midlevel visa chief position at post, and State worked with human resource officials to create this position, which, according to State officials, will be filled by summer 2005. However, the current assignment process does not guarantee that all authorized positions will be filled, particularly at hardship posts. Historically, State has rarely directed its employees to serve in locations for which they have not bid on a position, including hardship posts or locations of strategic importance, due to concerns that such staff may be more apt to have poor morale or be less productive. Further, though Consular Affairs can prioritize positions that require immediate staffing, according to a deputy assistant secretary for human resources, it generally does not do so. For example, Consular Affairs could choose not to advertise certain positions of lesser priority during an annual assignment cycle. However, senior Consular Affairs officials acknowledged that they rarely do this. According to these officials, Consular Affairs does not have direct control over the filling of all consular positions and can often face resistance from regional bureaus and chiefs of mission overseas who do not want vacancies at their posts. Therefore, due to State's decision to not force assignments, along with the limited amount of midlevel officers available to apply for them, important positions may remain vacant. In 2002, we found that not all consular officers were proficient enough in their post's language to hold interviews with applicants. We also found that training for new consular officers was focused on detecting intending immigrants through the visa process, with little training given on detecting possible terrorists. Today we are reporting that State has made a number of improvements in its recruitment of language proficient Foreign Service officers, expanded and revamped consular training, and increased the attention paid to fraud prevention. However, we found that additional actions would support ongoing improvements. For example, State has created programs to better target its recruitment of Foreign Service officers who speak critical languages. For example, in March 2004, State created the "Critical Needs Language Program," which increases the opportunities for appointment to the Foreign Service for new hires proficient in Arabic, Chinese, Indic, Korean, Russian, or Turkic, and who have passed the Foreign Service Exam. From March 2004 through May 2005, 172 of the 564 Foreign Service officers hired were proficient in one of these languages. Despite these improvements, additional actions are needed to fill continuing language proficiency shortfalls. As of April 30, 2005, State reported that about 14 percent of consular-coned Foreign Service officers in language designated positions did not meet language requirements for their position. State has revamped and expanded consular training to enhance visa security. For example, in October 2003, the Basic Consular Course was extended from 26 days to 31 days, and classes were added in analytical interviewing and fraud prevention. In addition, in March 2002, State created a new course in advanced name-checking. However, additional training could further assist consular officers. All of the posts we contacted reported that additional training on terrorist travel trends would be helpful, with 16 posts responding that such training would be extremely helpful. Some posts also reported that additional briefings on counterterrorism techniques specific to post and fraud prevention would be helpful. State has taken several steps to increase its focus on preventing and detecting fraud in the visa process. For example, by 2004, State's Bureau of Diplomatic Security had deployed 25 visa fraud investigators to U.S. embassies and consulates. In addition, State's Office of Fraud Prevention Programs has developed several ways for consular officers in the field to learn about fraud prevention, including developing an Internet-based "E-room," with more than 500 members, which serves as a discussion group for consular officers, as well as a place to post cables and lessons learned from prior fraud cases. However, until recently, the department has not used a systematic process to identify consular posts with the highest degree of visa fraud. According to State officials, fraud rankings for consular posts have not been based on an objective analysis using standardized criteria, but have been self- reported by each post. As a result, previous resources for fraud prevention, including the 25 visa fraud investigators assigned in 2004, may not have been allocated to posts with the highest need. We also plan to report later this year on the internal controls that are in place to mitigate the risks of visa malfeasance--the provision of a visa in exchange for money or something else of value--and intend to make several recommendations to help ensure adherence to these controls. The September 11 attacks highlighted the need for comprehensive information sharing. In January 2005, GAO identified effective information sharing to secure the homeland as a high-risk area of the U.S. government due to the formidable challenges the federal government still faces in this area. With cooperation from other federal agencies, State has increased the amount of information available to consular officers in CLASS. Name- check records from the intelligence community have increased fivefold from 48,000 in September 2001 to approximately 260,000 in June 2005, according to consular officials. Moreover, consular officials told us that, as of fall 2004, CLASS contained approximately 8 million records from the FBI. In addition, State has developed more efficient methods of acquiring certain data from law enforcement databases. For example, State established a direct computer link with the FBI to send descriptive information from the FBI's National Crime Information Center (NCIC) to CLASS on a daily basis. While the additional records in CLASS have helped consular officers detect those who might seek to harm the United States, many consular officers we interviewed stated that the increased volume of records and lack of access to other detailed information can lead to visa-processing delays. In particular, consular officers do not have direct access to detailed information in the FBI's criminal history records. Section 403 of the USA PATRIOT Act of 2001 directs the Attorney General and the FBI to provide State with access to extracts of certain files containing descriptive information for the purpose of determining whether a visa applicant has a criminal history record contained in the NCIC Interstate Identification Index (or Index). The USA PATRIOT Act also states that access to an extract does not entitle consular officers to obtain the full contents of the corresponding records. In accordance with this mandate, FBI officials stated that the bureau provides to CLASS extracts that contain all available biographical information, such as the date of birth and height of the person with the criminal record. As a result, when conducting a CLASS name check, consular officers told us they may not be able to determine whether an FBI file matches an applicant because the extracts lack sufficient biographical information. Moreover, in accordance with section 403, the extracts do not contain details such as charges or dispositions of the cases, which are necessary to determine if the applicant might be ineligible for a visa. For example, the information in CLASS does not distinguish between a conviction for a crime such as kidnapping, or an acquittal on charges of driving while intoxicated. Consular officers, therefore, must fingerprint applicants who have a potential match in the Index for positive identification in FBI records to then ascertain whether the information contained in the criminal record would make the applicant ineligible for a visa. In fiscal year 2004, of the more than 40,000 sets of fingerprints consular officers sent to the FBI for verification, about 29 percent were positive matches between the applicant and a criminal record in the Index. State officials we spoke with estimated that of those applicants who were positively identified, only about 10 percent were denied a visa based on the information provided by the FBI. Moreover, fingerprinted applicants are charged an additional $85 processing fee and, as of the spring of 2005, must wait an estimated 4 to 8 weeks for a response from Washington, D.C., before adjudication can proceed. According to FBI and State officials, the processing delays are due to inefficiencies in the way the prints are sent to the FBI for clearance (see fig. 3). To facilitate more efficient fingerprint processing, State and the FBI are implementing an electronic fingerprint system whereby consular officers will scan the applicants' fingerprints at post and submit them directly into the FBI's database. FBI and State officials told us that posts would be notified if the record in question matched the applicant within 24 hours. However, thousands of visa applicants could still face lengthier wait times and additional fingerprinting fees that they would otherwise not have incurred because consular officers lack enough information at the time of the interview to determine if the records in CLASS match the applicant. The FBI and State have discussed several options to help ensure that consular officers can facilitate legitimate travel; however, each would require legislative changes and would entail associated trade-offs. These options include the following: Consular officials told us that access to additional information in a criminal history file, such as the charge and disposition of a case, would allow their officers to determine which crimes are serious enough to require a positive fingerprint match prior to adjudication. However, FBI officials noted that there are some technical limitations on extracting specific pieces of data from the criminal history records. To avoid some of the technical limitations associated with the Index, FBI officials stated that it would be easier to provide visa adjudicators access to the full criminal history records. However, these officials told us that assurances would need to be in place to prevent misuse of the information, given its sensitive nature. Indeed, State and the FBI have already negotiated a Memorandum of Understanding aimed at protecting the information passed from NCIC to CLASS. However, consular officials indicated that their officers may need access only to the criminal charge and disposition of the case to adjudicate a visa case more efficiently. In our report issued today, we are recommending, among other things, that State and DHS, in consultation with appropriate agencies, clarify certain visa policies and procedures and facilitate their implementation, and ensure that consular sections have the necessary tools to enhance national security and promote legitimate travel, including effective human resources and training. In particular, we recommend that State develop a comprehensive plan to address vulnerabilities in consular staffing worldwide, including an analysis of staffing requirements and shortages, foreign language proficiency requirements, and fraud prevention needs, among other things--the plan should systematically determine priority positions that must be filled worldwide based on the relative strategic importance of posts and positions and realistic assumptions of available staff resources. We also suggest that Congress consider requiring State and the FBI to develop and report on a plan to provide visa adjudicators with more efficient access to certain information in the FBI's criminal history records to help facilitate the approval of legitimate travelers. In commenting on a draft of our report, State noted that it is a fair and balanced evaluation of the improvements made to the visa process. State agreed with most of our conclusions, and indicated that it is taking action to implement the majority of our recommendations. However, State disagreed with our recommendation that it prepare a comprehensive plan to address vulnerabilities in consular staffing. State argued that it already had such a plan. Based on our analysis, we continue to believe it is incumbent on the department to conduct a worldwide analysis to identify high-priority posts and positions, such as supervisory consular positions in posts with high-risk applicant pools or those with high workloads and long wait times for applicant interviews. As we note in our report, at the time of our work, the midlevel visa chief positions in Riyadh and Jeddah, Saudi Arabia, and Cairo, Egypt, were not filled with permanent midlevel officers. This was a serious deficiency given that the visa sections were staffed with officers on their first tour. Although State noted that it anticipated addressing this shortage of midlevel consular officers before 2013, it did not indicate when that gap would be filled. Moreover, State's bidding and assignment process does not guarantee that the positions of highest priority will always be filled with qualified officers. Therefore, a further assessment is needed to ensure that State has the right people in the right posts with the necessary skill levels. In September 2003, DHS assigned Visa Security Officers (VSO) to consular posts in Saudi Arabia and plans to assign staff to other posts to strengthen the visa process at these locations. As we addressed in our July 2005 report, according to State Department consular officers, the deputy chief of mission, and DHS officials, VSOs in Saudi Arabia enhance the security of the visa adjudication process at these consular posts, though several issues raise concerns about the VSOs' role and impact. VSOs in Saudi Arabia provide an additional law enforcement capability to the visa adjudication process and have access to and experience using important law enforcement information not readily available to consular officers. Moreover, VSOs' border security and immigration experience can assist consular officers during the visa process. The consular sections in Riyadh and Jeddah have incorporated the VSOs' review of all visa applications into the adjudication process in Saudi Arabia. In addition to reviewing applications, the VSOs may conduct secondary interviews with some visa applicants based either on findings from their application reviews or a consular officer's request. Despite the VSOs' positive effect on visa operations, however, several concerns exist about their role and overall impact. The requirement that VSOs review all visa applications in Saudi Arabia limits the amount of time they can spend on training and other valuable services. We observed that VSOs in Riyadh and Jeddah must spend a significant amount of time reviewing all visa applications, including those of low-risk applicants or individuals who do not pose a threat to national security, as well as those that have preliminarily been refused by consular officers. A Visa Security Program official noted that this mandate is only for visa security operations in Saudi Arabia and not other posts to which DHS plans to expand the program. VSOs, DHS and State officials, and the deputy chief of mission all agreed that the mandate to review all applications was forcing the VSOs to spend time on lower priority tasks, limiting their ability to perform other important activities, such as providing training or conducting additional secondary interviews of applicants. DHS has not maintained measurable data to fully demonstrate the impact of VSOs on the visa process. The VSOs that were stationed in Riyadh during our visit estimated that, based on their review of visa applications, they had recommended that visas be refused after the preliminary decision to issue a visa by consular officers in about 15 cases between October 2004 and February 2005. In addition, the DHS officials in Saudi Arabia and in Washington, D.C., were able to provide anecdotal examples of assistance provided to the consular officers. However, DHS has not developed a system to fully track the results of visa security activities in Saudi Arabia. For example, DHS could not provide data to demonstrate the number of cases for which they have recommended refusal. DHS plans to expand the Visa Security Program to five additional posts in fiscal year 2005; however, the assignments of VSOs were delayed at four of the five selected expansion posts. DHS attributed the delay to resistance by State, as well as funding problems; State and chiefs of mission attributed the delays to various outstanding questions about the program. Following DHS's initial request in June 2004 to assign 21 VSOs to five expansion posts, embassy officials raised questions and concerns, including regarding the criteria used by DHS to select expansion posts, the reasoning for the number of VSOs requested for the posts, and DHS's plans to coordinate with existing law enforcement and border security staff and programs at post. In 2004 and 2005, DHS provided responses, through State's Bureau of Consular Affairs, to the questions raised by the chiefs of mission at four of the expansion posts. According to DHS, the responses were sufficient to answer the concerns. We reviewed DHS's responses to the posts, and identified a number of issues that had not been fully addressed, such as what criteria DHS would use to demonstrate the effectiveness of its officers. Nonetheless, the chiefs of mission at three posts approved DHS's National Security Decision Directive 38 requests in March and June 2005, while, as of June 2005, one post had still not approved the request. Although DHS plans to expand the Visa Security Program in fiscal year 2005 and beyond, it does not a have a strategic plan that defines mission priorities and long-term goals and identifies the outcomes expected at each post. We have identified the development of a strategic plan as an essential component of measuring progress and holding agencies accountable. The development of an overall strategic plan for the Visa Security Program prior to the expansion of the program may have addressed the questions initially raised by State and embassy officials that led to the delay of the assignment of VSOs. Moreover, a strategic plan would provide a framework for DHS to address broader questions regarding the selection criteria for expansion, the roles and responsibilities of VSOs, and the cost of establishing the program at posts. Officials from DHS and State, as well as consular officials we contacted overseas, all agreed that the development of such a plan would be useful to guide visa security operations in Saudi Arabia and other posts. It would also be useful to inform the Congress, as well as State and other agencies who participate in the visa process at consular posts overseas. In our July 2005 report, we recommended that DHS develop a strategic plan to guide the operations of the Visa Security Program in Saudi Arabia and the program's expansion to other embassies and consulates. This plan should define mission priorities and long-term goals and identify expected outcomes. In addition, the strategic plan and supporting documents should include the criteria used to select the locations for expansion, justification for the number of VSOs at each post, costs associated with assigning VSOs overseas, and their roles and responsibilities in relation to other agencies at post. In addition, we recommended that DHS develop and maintain comprehensive performance data that track the results and demonstrate impact of VSO activities. We also proposed that Congress consider amending current legislation, which requires the review of all visa applications in Saudi Arabia, to allow DHS the flexibility to determine which applications VSOs will review prior to final adjudication by consular officers. This would allow VSOs to focus on the applications of those who may pose a risk to national security, providing them time to perform other tasks that could benefit consular officers. In commenting on our report, DHS stated that it was taking actions to implement performance measurements and a strategic plan for the Visa Security Program, as described in our recommendations. DHS indicated that it is expanding the tracking and measurement of performance data to better reflect program results, and is developing a strategic plan that will integrate the key elements described in our recommendation. Regarding the matter for congressional consideration to provide DHS with the flexibility to determine the review of visa applications in Saudi Arabia, DHS noted that a legislative change should maintain the department's authority and discretion in determining the scope of the VSOs' review. DHS agreed that it needed to expand some of the VSOs' activities in Saudi Arabia, such as providing additional training, which we found were not being provided because of the volume of work that resulted from fulfilling the legislative requirement. The visa process presents a balance between facilitating legitimate travel and identifying those who might harm the United States. State, in coordination with other agencies, has made substantial improvements to the visa process to strengthen it as a national security tool. DHS has also taken steps to assign personnel to consular posts to provide an additional layer of security to the visa process in these locations. However, we identified areas where additional management actions are needed by State and DHS to further improve the efficiency and effectiveness of the visa process. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or Members of the Subcommittee may have. For questions regarding this testimony, please call Jess T. Ford, (202) 512- 4128 or [email protected]. Individuals making key contributions to this statement include John Brummet, Assistant Director, and Joseph Carney, Daniel Chen, Kathryn Hartsburg, and John F. Miller. Border Security: Strengthened Visa Process Woud Benefit From Improvements in Saffng and Inormaton Sharng. GAO-05-859. t ifii September 13, 2005. Border Security: Actons Needed to Strengthen Management of Department of Homeland Securiy's Visa Security Program. GAO-05-801. t July 29, 2005. Border Security: Stream ned Visas Man s Program Has Lowered Burden on Foreign Science Students and Schoars, but Further Re nemens fitl Needed. GAO-05-198. February 18, 2005. Border Securiy: State Department Rollou of Biometric Vsas on Schedue, i but Guidance Is Lagging. GAO-04-1001. September 9, 2004. Border Security: Additional Actons Needed to E minate Weaknesses in the Visa Revocation Process. GAO-04-795. July 13, 2004. Visa Operatons at U.S. Posts n Canada. GAO-04-708R. May 18, 2004. Border Security: Improvements Needed to Reduce Time Taken to Adjudicae Visas or Scence Studens and Scholars. GAO-04-371. February tfti 25, 2004. State Departmen: Targets for Hiring, Filling Vacancies Overseas Being Me but Gaps Reman inHard-o-Learn Languages. GAO-04-139. November i t,t 19, 2003. Border Security: New Polcies and Procedures Are Needed to F Gaps in the Visa Revocation Process. GAO-03-798. June 18, 2003. Border Security: Implicaions of Eliminating the Visa Waiver Program. GAO-03-38. November 22, 2002. Technology Assessment: Using Biomerics for Border Securiy. GAO-03- 174. November 15, 2002. Border Securiy: Visa Process Should Be Strengthened as an Ant errorism Tool. GAO-03-132NI. October 21, 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.

In adjudicating a visa application, Department of State (State) consular officers are on the front line of defense against those whose entry would likely be harmful to U.S. national interests. In October 2002, we identified shortcomings and made recommendations on the role of national security in the visa process. This testimony discusses our report issued today on actions taken since our 2002 report to strengthen the visa process, as well as areas that deserve additional management actions. It also discusses our July 2005 report on the status of the assignment of Department of Homeland Security (DHS) personnel to U.S. consular posts overseas. State and DHS have taken many steps to strengthen the visa process as an antiterrorism tool. Consular officers are receiving clear guidance on the importance of addressing national security concerns through the visa process, and State has established clear procedures on visa operations worldwide. State has also increased its hiring of consular officers and language proficient Foreign Service officers, and has enhanced training and fraud prevention efforts. Further, consular officers have access to more information from intelligence and law enforcement agencies. However, some areas require additional attention. For example, officers we spoke with said that guidance is needed on DHS staff's roles and responsibilities overseas. In addition, while State has hired more consular officers, it continues to experience shortages in supervisory staff. As of April 30, 2005, 26 percent of midlevel positions were either vacant or filled by entry-level staff. During our February 2005 visits to three consular posts in Saudi Arabia and Egypt--all of which are of interest to U.S. antiterrorism efforts--the visa sections were staffed with first-tour officers and no permanent midlevel visa chiefs to provide direct oversight. Further improvements are also needed in training and fraud prevention, as well as information sharing with the FBI. In September 2003, DHS assigned visa security personnel to consular posts in Saudi Arabia. According to DHS, State's consular officials, and the deputy chief of mission in Saudi Arabia, the DHS officers in Saudi Arabia strengthen visa security. However, DHS does not maintain comprehensive data on their activities and thus is unable to fully demonstrate the program's impact. Further, DHS has not developed a strategic plan for visa security operations in Saudi Arabia or for the planned future expansion of the program.